Q2 2024 Resideo Technologies Inc Earnings Call
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Operator: Ladies and gentlemen, at this time, I would like to welcome everyone to the Resideo Technologies second quarter 2024 earnings call. Today's call is being recorded, and 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 the call over to Mr. Jason Willey, Vice President of Investor Relations. Mr. Willey, please go ahead.
Speaker Change: Ladies and gentlemen at this time I would like to welcome everyone to the residual Technologies' second quarter 2024 earnings call. Today's call is being recorded and 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 the call over to Mrs.
Jason Willey, Vice President of Investor Relations. Mr. Willey. Please go ahead.
Jason Willey: Good afternoon, everyone, and thank you for joining us for Resideo's second quarter 2024 earnings call. On today's call will be Jay Geldmacher, Resideo's Chief Executive Officer, Tony Trunzo, our Chief Financial Officer, Rob Aarnes, President of Resideo's ADI Global Distribution Business, Tom Surran, President of our Products and Solutions Business, and Mike Carlett, our incoming Chief Financial Officer.
Speaker Change: Good afternoon, everyone and thank you for joining us for video second quarter 2024 earnings call on today's call will be Jay Gal, Makar, <unk>, Chief Executive Officer, Tony Trunzo, Our Chief Financial Officer, Robert as President of videos Adi Global distribution business, Tom Saran, President of our products and solutions business and Mike Carla.
Speaker Change: Incoming 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> video Dot com.
Jason Willey: A copy of our earnings release and related presentation materials are available on the Investor Relations page of our website at investors.residio.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.
Speaker Change: 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 factor.
Jason Willey: The company assumes no obligation to update any such forward-looking statement. 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.
Speaker Change: Including those described from time to time and resilient its filings with the securities understand your question.
Jack: 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 with that I will turn the call over to Jack.
Jay Geldmacher: Thank you, Jason, and thanks to everyone for joining us today. We performed very well in the second quarter with adjusted EBITDA of $175 million, well above the high end of our outlook. Products and Solutions' adjusted EBITDA margin of 24.8% was 460 basis points better than Q2 last year, as gross margin exceeded 41% as we continued to manage operating costs. Our operating improvements translated into another quarter of strong free cash flow, which was $77 million for the period and $325 million for the last 12 months. We achieve these results in a market that remains constrained by higher interest rates and soft existing home sales, but where we see increasing stability in many of our most important markets.
Jack: Thank you, Jason and thanks to everyone for joining us today.
Jack: We performed very well in the second quarter with adjusted EBITDA of 175 million well above the high end of our outlook range.
Jack: Products and solutions adjusted EBITDA margin of 24, 8% was 460 basis points better than Q2 last year as gross margin exceeded 41% as we continued to manage operating costs.
Jack: Our operating improvements translated into another quarter of strong free cash flow, which was $77 million for the period and $325 million for the last 12 months.
Jack: We accomplished these results in a market that remains constrained by higher interest rates and soft existing home sales, but where we see increasing stability in many of our most important markets.
Jay Geldmacher: During the quarter, we completed the acquisition of SNAP1, adding to our product breadth and distribution network in the attractive audiovisual and smart living market. We are excited to welcome the SNAP1 team to ADI and have hit the ground running on bringing the two organizations together. The integration of these two businesses is a top priority for us in the second half of 2024. We continue to target $75 million of annual run rate synergies exiting 2026, of which we expect to achieve $12 million in the year 2024.
Speaker Change: During the quarter, we completed the acquisition of snap, one adding to our product breadth and distribution network in the attractive audio visual and smart living markets. We are excited to welcome the snap one team to Adi and has hit the ground running and bringing the two organizations together.
Jack: The integration of these two businesses is a top priority for us in the second half of 2024.
Jack: We continue to target 75 billion of annual run rate synergies exiting 2026 of which we expect to achieve $12 million in year in 2024.
Jay Geldmacher: We're entering a truly exciting period for Resideo, with strong operational execution, an increasing pipeline of new products, and important value creation opportunities ahead with the SNAP-1 acquisition. I've asked Tom Surran, President of our Products and Solutions business, and Rob Aarnes, President of ADI, to join today's call and to provide greater insight into their respective businesses and the opportunities they see. Before I hand the call over, as you may have seen in our press release, I'm pleased to announce Mike Carlett as Resideo's new Chief Financial Officer, effective tomorrow.
Jack: We are entering a truly exciting period for <unk> with strong operational execution, and increasing pipeline of new products and important value creation opportunities ahead with the snap one acquisition.
Speaker Change: I've asked Tom Saran, President of our products and solutions business and Rob Arent as president of Adi to join today's call and to provide greater insight into their respective businesses and the opportunities they see.
Jay Geldmacher: Mike was the chief financial officer of SNAP1 for the past decade and was instrumental in the growth of the business. He is a talented leader, and I look forward to working with him to help drive Resideo into its next phase of growth. Tony Trunzo will be stepping down as CFO but staying on until March 2025 to ensure a successful transition. Tony's been a tremendous leader and partner in reshaping the business with me over the last four years to a more financially stable, strategically focused, and profitable organization. I appreciate his continued partnership during the transition period. With that, I will turn the call over to Tom.
Speaker Change: Before I hand, the call over as you may have seen in our press release I am pleased to announce Mike Carlin is resilience no chief financial Officer effective Tomorrow, Mike.
Speaker Change: Mike was the Chief financial Officer of Snap won for the past decade and was instrumental in the growth of the business. He is a talented leader and I look forward to working with him to help drive residual into our next phase of growth.
Speaker Change: Tony Trunzo will be stepping down as CFO, but staying on until March 'twenty 'twenty five to ensure a successful transition.
Speaker Change: Tony has been a tremendous leader and partner and reshaping the business with me over the last four years to a more financially stable strategically focused and profitable organization I. Appreciate his continued partnership during the transition period with that I will turn the call over to Tom.
Tom Surran: Thanks, Jay. We continue to make substantial progress within product and solutions in the second quarter. Gross margin reached 41%, our highest level since first quarter 2022 and our fifth consecutive quarter of year-over-year gross margin expansion. Many of our key channels have stabilized, and channel inventory in North America appears to be within a normal range. Our new product introduction pipeline is growing, and we're excited to have a number of significant product releases on target for introduction starting in the fourth quarter of this year.
Tom: Thanks, Jay we continued to make substantial progress within product and solutions in the second quarter.
Tom: Gross margin reached 41% our highest level since first quarter 2022, and our fifth consecutive quarter of year over year gross margin expansion.
Tom: Many of our key channels have stabilized and channel inventory in North America appears to be within a normal range.
Tom: Our new product introduction pipeline is growing and we're excited to have a number of significant product releases on target for introduction.
Speaker Change: Starting in the fourth quarter of this year.
Tom Surran: Demand trends have stabilized in many of our core markets in North America, despite low levels of existing home sales and higher interest. We have seen pockets of demand improvement in the HVAC distribution channel and continued strength with our first alert safety product. Offsetting these positive trends has been slower activity in the European HVAC markets, driven by changes in government incentive programs, as well as continued slower growth in security markets.
Tom: Demand trends have stabilized and many of our core markets in North America, despite low levels of existing home sales and higher interest rates.
Tom: We have seen pockets of demand improvement and the HVAC distribution channel and continued strength with our first alert safety products.
Tom: Offsetting these positive trends has been slower activity in the European HVAC markets driven by changes in government incentive programs as well as continued slower security market sales.
Tom Surran: We continue to deliver strong results in our First Alert safety portfolio. For the second quarter, these sales were up approximately 20% year over year, representing our third straight quarter of double-digit growth. Our position remains strong with our key retail partners, and we continue to drive share gains in the home builder channel with our BARK brand, product, and solutions again delivered strong progress against our goal of structural margin expansion. Gross margin reached 41.3%, up 300 basis points compared to Q2 2023.
Tom: We continued to deliver strong results in our first alert safety portfolio.
Tom: For the second quarter. These sales were up approximately 20% year over year, representing our third straight quarter of double digit growth.
Tom: Our position remains strong with our key retail partners and we continue to drive share gains in the homebuilder channel with our P. A R K brand.
Tom: Product and solutions again delivered strong progress against our goal of structural margin expansion.
Tom: Gross margin reached 41, 3% up 300 basis points compared to Q2 2023.
Tom Surran: We are delivering improvements in our manufacturing and supply chain organizations, and we also benefited in the quarter from better factory utilization in our North American production facility. These results were achieved in a relatively flat overall volume environment, which highlights the significant structural cost reduction and strategic initiatives undertaken over the past several years. The strong gross margin and ongoing focus on OPEC's control translated into an adjusted EBITDA margin of 24.8%, up 460 basis points year over year.
Tom: We are delivering improvements in our manufacturing and supply chain organization and we also benefited in the quarter from better factory utilization in our North American production facilities.
Tom: These results were achieved in a relatively flat overall volume environment, which highlights the significant structural cost reduction and strategic initiatives undertaken over the past several years.
Tom: The strong gross margin and ongoing focus on Opex control translated into adjusted EBITDA margin of 24, 8%.
Tom: Up 460 basis points year over year.
Rob Aarnes: As we look forward with end products and solutions, I am particularly excited by the progress that has been made on the new product front. Since I joined the organization late last year, we have refocused the R&D and product management organizations on critical, high-return projects with the goal of pulling forward the introduction of impactful new products in the key areas of our portfolio. This includes a refresh of our thermostat portfolio and updated offerings in our security portfolio to address the large residential and SMB opportunities.
Speaker Change: As we look forward within product and solutions I am, particularly excited by the progress that has been made on the new product front.
Speaker Change: Since I joined the organization late last year, we have refocused the R&D and product management organizations on critical high return projects with a goal of pulling forward. The introduction of impactful new products in the key areas of our portfolio.
Speaker Change: This includes a refresh of our thermostat portfolio and updated offerings in our security portfolio to address the large residential and SMB opportunities.
Rob Aarnes: Our team has responded enthusiastically to the more focused and accelerated development road map, and I look forward to providing details on these efforts later this year. With that, I'll turn the call over to Rob. Thanks, Tom.
Speaker Change: Our team has responded enthusiastically to the more focused and accelerated development road map and I look forward to providing details on these efforts later this year.
Speaker Change: With that I'll turn the call over to Rob.
Rob Aarnes: Thanks, Tom. The ADI team delivered solid results in the quarter in what remains a choppy market environment. We saw increased daily sales averages in each month of the quarter, highlighted by strength in large accounts, and we're focused on building momentum in the second half of the year. From a category perspective, we saw improved trends across most of our key product areas, including year-over-year growth in commercial fire, residential intrusion, datacom, and professional audio-visual. Offsetting this were headwinds in the video surveillance and residio audio, I'm sorry, residential audio-visual market.
Rob: Thanks, Tom the ATI team delivered solid results in the quarter in what remains a choppy market environment. We saw increased daily sales averages in each month of the quarter highlighted by strength in large accounts and we're focused on building momentum in the second half of 'twenty four.
Speaker Change: From a category perspective, we saw improved trends across most of our key product areas, including year over year growth in commercial fire residential intrusion Datacom and professional audio visual offsetting this was headwinds in the video surveillance and residual audio.
Speaker Change: Sorry, residential audiovisual markets exclusive brand sales not including the impact from step one grew 18% year over year and reached a new quarterly revenue record as we continue to rollout new products and expand our category reach with the addition of snap one and its large exclusive brand portfolio and development expertise we.
Rob Aarnes: Exclusive brand sales, not including the impact from SNAP1, grew 18% year over year and reached a new quarterly revenue record as we continue to roll out new products and expand our category reach. With the addition of SNAP1 and its large exclusive brand portfolio and development expertise, we expect to meaningfully expand this area over the coming period. Wattbox, SnapOne's successful power management solution, was launched at all ADI branches in North America, as well as on the ADI North America e-commerce site within just nine days of close.
Speaker Change: To meaningfully expand this area over the coming periods.
Speaker Change: What box snap one successful power management solution launched into all Adi branches in North America as well as on the ATI North America E. Commerce site within just nine days of close in the third and fourth quarters, we will launch hundreds of additional snap one proprietary products into Adi as well as several Adi exclusive brands brought.
Rob Aarnes: In the third and fourth quarters, we will launch hundreds of additional SnapOne proprietary products into ADI, as well as several ADI exclusive brands into SnapOne's branches and e-commerce channels. For ADI, not including the impact from SNAP1, e-commerce sales grew by 6% compared to Q2 2023, including 10% year-over-year growth in June. Our e-commerce investments continue to drive increased customer adoption, and we expect several significant enhancements to launch in the second half of 2024.
Rob: <unk> into snap ones branches and ecommerce channels.
Speaker Change: For Adi not including the impact from snap one E. Commerce sales grew by 6% compared to Q2, 2023, including 10% year over year growth in June our E. Commerce investments continued to drive increased customer adoption and we expect several significant enhancements to launch in the second half before.
Rob Aarnes: These include improvements to site speed and performance, the integration of a leading AI search technology to aid product discovery, and more accurate estimated delivery dates online for stock and flow orders and projects. We closed the SNAP-1 acquisition in mid-June, and over the past seven weeks, we have come out of the gate strong with initiatives around cross-selling, shared best practices, cost reductions, and sales enablement. We're excited to have both teams working together to drive value for our combined customer.
Speaker Change: These include improvements to site speed and performance.
Speaker Change: The integration of our leading AI search technology to aid product discovery and more accurate estimated delivery dates online for stock and flow orders and projects.
Speaker Change: We closed the snap one acquisition in mid June and over the past seven weeks have come out of the gate strong with initiatives around cross selling shared best practices cost reductions and sales enablement. We're excited to have the teams working together to drive value for our combined customers. The addition of snap one adds to ati's.
Rob Aarnes: The addition of SNAP1 adds to ADI's product breadth in attractive growth categories, expands the mix of higher margin proprietary products and services, and broadens our customer base. The ADI team remains focused on day-to-day execution, serving our customers across our physical locations and increasingly through digital channels, while at the same time working with the SNAP1 team to drive enhanced customer experience and value from the combined business. I will now turn the call over to Tony to discuss our financial results and outlook.
Speaker Change: Product breadth in attractive growth categories expands the mix of higher margin proprietary products and services and broadens our customer base.
Speaker Change: The ATI team remains focused on day to day execution, serving our customers across our physical locations and increasingly through digital channels. While at the same time working with the snap one team to drive enhanced customer experience and value from the combined businesses.
Speaker Change: I will now turn the call over to Tony to discuss our financial results and outlook.
Tony Trunzo: Thank you, Rob, and good afternoon, everyone. Second quarter profitability and cash flow were strong, driven by a more stable demand environment in many of our core markets, gross margin outperformance in products and solutions, and good spending control across the business. Resideo's second quarter revenue of $1.59 billion was 1% lower than Q2 last year and down 2%, excluding the impact of the divestiture of Genesis and 15 days of SNAP-1 results. Adjusted EBITDA was $175 million and $166 million, excluding SNAP-1 impact, compared to $155 million in Q2 2023 and compared to our outlook range of $130 million to $150 million.
Tony: Thank you, Rob and good afternoon, everyone.
Tony: Second quarter profitability and cash flow were strong driven by a more stable demand environment in many of our core markets gross margin outperformance at products and solutions and good spending control across the business.
Speaker Change: Brasilia, a second quarter revenue of $1.59 billion was 1% lower than Q2 last year.
Speaker Change: And down 2%, excluding the impact of the divestiture of Genesis and 15 days of Snapple on results.
Speaker Change: Adjusted EBITDA was $175 million and $166 million, excluding snap on impact compared to $155 million in Q2, 2023, and compared to our outlook range of $130 million to $150 million.
Tony Trunzo: Fully diluted earnings per share were $0.19 and $0.62 on an adjusted basis, compared with $0.34 and $0.48, respectively, last year. Operating cash flow was again strong at $90 billion. Products and Solutions had second quarter revenue of $630 million, 7% lower in Q2 2023, but down only 2% adjusting for the sale of Janus. Within North America, we believe inventory levels have normalized across key channels, and order trends have stabilized in major product areas. Conditions in EMEA remain more challenging, with a reduction in government incentives and political uncertainty causing lower volumes for both gas combustion and heat pump products.
Speaker Change: Fully diluted earnings per share were <unk> 19 cents and 62 on an adjusted basis compared with 34 cents and 48 cents respectively last year.
Speaker Change: Operating cash flow was again strong at $92 million.
Speaker Change: Products and solutions second quarter revenue of $630 million was 7% lower in Q2, 2023, but down only 2% adjusting for the sale of Genesis.
Speaker Change: Within North America, we believe inventory levels have normalized across key channels and order trends have stabilized and major product areas.
Speaker Change: Conditions in EMEA remained more challenging with a reduction in government incentives and political uncertainty, causing lower volumes for both gas combustion and heat pump products.
Tony Trunzo: First Alert Safety Products delivered another strong quarter driven by our BRK branded product; we also delivered better revenue and order activity in our air products with improved performance at major distribution customers. The residential new construction channel remains an area of growth as we continue to increase our content per home, which now exceeds $350 at the top 25 North American homebuilders. Products and Solutions gross margin in Q2 was 41.3%, up 300 basis points compared to last year and the fifth consecutive quarter of year-over-year margin expansion.
Speaker Change: First alert safety products delivered another strong quarter, driven by our B RK branded products. We also deliver better revenue and order activity in our air products with improved performance at major distribution customers.
Speaker Change: The residential new construction channel remains an area of growth as we continue to increase our content per home, which now exceeds $350 at the top 25, North American homebuilders.
Speaker Change: Products and solutions gross margin in Q2 was 41, 3% up 300 basis points compared to last year and the fifth consecutive quarter of year over year margin expansion.
Tony Trunzo: Gross margin benefited from supply chain savings, ongoing labor cost management, and favorable factory utilization. Products and Solutions' second quarter operating expense was down 10% year over year. The cost reduction actions undertaken over the past two years and focus on ongoing expense controls continue to drive costs lower.
Speaker Change: Gross margin benefited from supply chain savings ongoing labor cost management and favorable factory utilization.
Speaker Change: Products and solutions second quarter operating expense was down 10% year over year cost reduction actions undertaken over the past two years and focus on ongoing expense controls continue to drive costs lower.
Tony Trunzo: Products and Solutions Adjusted EBITDA was up $19 million year over year to $156 million, with Adjusted EBITDA margin expanding by 460 basis points to 24.8%. Turning to ADI, Q2 revenue was $959 million, excluding the $45 million of SNAP1 revenue contribution. Although revenue was down 1% versus the prior year, sales trends improved as the quarter progressed, however, and particularly in the last two weeks of the quarter.
Speaker Change: Products and solutions adjusted EBITDA was up $19 million year over year to $156 million with adjusted EBITDA margin expanding by 460 basis points to 24, 8%.
Speaker Change: Turning to Adi Q2 revenue was $959 million.
Speaker Change: Excluding the $45 million of snap one revenue contribution revenue was down 1% versus the prior year.
Speaker Change: Sales trends improved as the quarter progressed, however in particular, particularly in the last two weeks of the quarter.
Tony Trunzo: ADI Adjusted EBITDA of $77 million was down 3% compared with Q2 last year and benefited from $9 million of SNAP1 contribution. Lower gross margin in the pre-acquisition ADI business continues to negatively impact profitability, with operating expenses remaining relatively flat year over year. Corporate costs were $70 million, but essentially flat with Q2 2023, after adjusting for SNAP1 transaction expenses and other unusual items in both periods. Q2 cash from operations was $92 million, compared with $121 million in Q2 last year.
Speaker Change: Adi adjusted EBITDA of $77 million was down 3% compared with Q2 last year and benefited from $9 million of snap one contribution.
Speaker Change: Lower gross margin in the pre acquisition Adi business continues to negatively impact profitability with operating expenses remaining relatively flat year over year.
Speaker Change: Corporate costs were $70 million essentially flat with Q2 2023 after adjusting for snap on transaction expenses and other unusual items in both periods.
Speaker Change: Q2 cash from operations was $92 million compared with $121 million in Q2 last year.
Speaker Change: Excluding the impacts of the snap on transaction costs and stub period results operating cash flow was essentially similar to the prior year period.
Tony Trunzo: Excluding the impacts of the SNAP1 transaction costs and stub period results, operating cash flow was essentially similar to the prior year period. For the trailing 12 months, operating cash flow was $417 million, and free cash flow generation was $325 million.
Speaker Change: For the trailing 12 months operating cash flow was $417 million and free cash flow generation was $325 million.
Tony Trunzo: Working capital trends remain positive, and we anticipate continued strong cash flow for the remainder of 2024. Concurrent with the closing of the SNAP1 acquisition, we closed on a new seven-year, $600 million term loan B offering and completed the previously announced $500 million perpetual convertible preferred stock investment from CD&R. Subsequent to quarter end, we sold $600 million of eight-year senior unsecured notes at an attractive 6.5% interest rate. These notes were used to repay a portion of our $1.1 billion of outstanding 2028 term loans and provide incremental flexibility by translating secured debt to unsecured debt.
Speaker Change: Working capital trends remain positive and we anticipate continued strong cash flow for the remainder of 2024.
Speaker Change: Concurrent with the closing of the snap on acquisition, we closed on a new seven year $600 million term loan b offering.
Speaker Change: <unk> completed the previously announced 500 million dollar perpetual convertible preferred stock investment from C D and R.
Speaker Change: Subsequent to quarter end, we sold $600 million of eight year senior unsecured notes at an attractive 6.5% interest rates.
Speaker Change: These notes were used to repay a portion of our $1 $1 billion of outstanding 2028 term loan.
Speaker Change: And provide incremental flexibility by translating secured debt to unsecured.
Tony Trunzo: Following the acquisition of SNAP1 and these related financing transactions, our net leverage stood at approximately 2.3 times our last 12 months' adjusted EBITDA. As previously communicated, we're targeting to reduce our net leverage to below two times by the middle of 2025. We expect to accomplish this through cash from operations, ongoing growth in adjusted EBITDA, and potential divestiture of non-strategic assets. We remain committed to an investment grade credit profile and strong BB credit rating.
Speaker Change: Following the acquisition of snap one and these related financing transactions, our net leverage stood at approximately two three times, our last 12 months adjusted EBITDA.
Speaker Change: As previously communicated we're targeting to reduce our net leverage to below two times by the middle of 2025.
Speaker Change: We expect to accomplish this through cash from operations ongoing growth in adjusted EBITDA and potential divestiture of non strategic assets.
Speaker Change: We remain committed to an investment grade credit profile and strong double b credit ratings.
Tony Trunzo: Turning to our outlook for the third quarter, we expect revenue to be in the range of $1.79 billion to $1.83 billion, adjusted EBITDA in the range of $170 million to $180 million, and adjusted EPS of $0.49 to $0.59. For the full year 2024, we expect revenue to be in the range of $6.68 billion to $6.76 billion, and adjusted EBITDA to be in the range of $655 million to $695 million Adjusted EPS is expected to be in the range of $2.15 to $2.35.
Speaker Change: Turning to our outlook for the third quarter, we expect revenue to be in the range of $1 79 billion to $183 billion.
Speaker Change: Adjusted EBITDA in the range of $170 million to $180 million.
Speaker Change: And adjusted EPS of 49 to 59 sets.
Speaker Change: For the full year 2024, we expect revenue to be in the range of $6 six 8 billion to $6 seven $6 billion.
Speaker Change: And adjusted EBITDA to be in the range of 655 million to $695 million.
Speaker Change: Adjusted EPS is expected to be in the range of $2.15 to $2.35.
Tony Trunzo: This outlook includes an expected contribution from SNAP1 of approximately $550 million of revenue and $65 million of adjusted EBITDA. We now expect to generate at least $375 million of operating cash flow for the full year 2024, compared to our prior guidance of $320 million.
Speaker Change: This outlook includes expected contribution from snap one of approximately $550 million of revenue and $65 million of adjusted EBITDA.
Speaker Change: We now expect to generate at least $375 million of operating cash flow for the full year 2024 compared to our prior guidance of $320 million.
Tony Trunzo: Before I hand the call back to Jay, I wanted to say how pleased I am that Mike Carlett will serve as our next CFO. Mike is an outstanding leader for the team, and the strategic skills that I've observed working across the table in the SNAP1 transaction and as peers in the industry for the past few years will prove valuable as we continue to shape our business and capitalize on the growth opportunities ahead. Congratulations, Mike! I'll now turn the call back over to Jay for a few concluding remarks. Thank you.
Speaker Change: Before I hand, the call back to Jay I wanted to say, how pleased I am that Mike Carlat will serve as our next CFO.
Jay: Like is that outstanding leader for the team and the strategic skills that I've observed working across the table and the snap one transaction and as peers in the industry for the past few years will prove valuable as we continue to shape, our business and capitalize on the growth opportunities ahead.
Mike: Congratulations Mike.
Speaker Change: I'll now turn the call back over to Jay for a few concluding remarks.
Jay Geldmacher: Thank you, Tony. During the second quarter, we demonstrated continued momentum in our work to structurally improve the foundation of Resideo. This includes driving higher gross margin and profitability within products and solutions while accelerating our innovation and new product art efforts. We also took a major step in driving value through strategic M&A with the acquisition of SNAP1, adding capabilities that expand ADI's offerings and grow our opportunity in smart living across both businesses. Many of our key end markets are showing signs of stabilization, and we continue to deliver profitability expansion despite constrained volume.
Jay: Thank you Tony during the second quarter, we demonstrated continued momentum on our work to structurally improve the foundation of residual this includes driving higher gross margin and profitability within products and solutions, while accelerating our innovation and new product efforts.
Jay: We also took a major step in driving value through strategic M&A with the excellent acquisition of snap, one adding capabilities that expand adi's offerings and grow our opportunity in smart living across both businesses.
Jay: Many of our key end markets are showing signs of stabilization and we continue to deliver profitability expansion. Despite constrained volumes as we look forward I am extremely excited about our near term new product pipeline within products and solutions.
Operator: As we look forward, I'm extremely excited about our near-term new product pipeline within products and solutions; planned releases in both our thermostat and security product categories have the potential to be the most impactful since I joined Resideo in early 2020. Just as exciting is the opportunity we see for creating value and bringing the SNAP One organization together with Resideo. While less than two months into the combination, we have already made significant progress in enabling cross-selling, validating cost reduction opportunities, and sharing best practices across the team.
Speaker Change: Planned releases in both our thermostat and security product categories have the potential to be the most impactful since I joined residual in early 2020.
Jay: Just as exciting is the opportunity, we see for creating value in bringing the snap one organization together with residual.
Jay: While less than two months into the combination we have already made significant progress in enabling cross selling validating cost reduction opportunities and sharing best practices across the teams.
Operator: It's been a busy period at Resideo, and the rest of 2024 is positioned to deliver continued progress. I want to thank the entire Resideo employee base for their efforts. I'm excited to continue to build on the momentum together as we move through 2024. Operator, we are now ready for questions.
Jay: It's been a busy period of residual and the rest of 'twenty 'twenty four is positioned to deliver continued progress.
Speaker Change: Want to thank the entire residual employee base for their efforts I am excited to continue to build on the momentum together as we move through 2020 for.
Jay: Operator, we are now ready for questions.
Operator: Thank you. The floor is now open for questions. If you would like to ask a question, please press star and the number one on your telephone keypad to raise your hand and join the conversation.
Speaker Change: Thank you the floor is now open for questions. If you would like to ask a question. Please press star and the number one on your telephone keypad to raise your hand and join the queue.
Speaker Change: If you are called upon to ask your question. Please ensure that your phone is on muted when asking your question.
Speaker Change: Please standby as we pause for just a moment to compile the list.
Speaker Change: Thank you your first call or your first question comes from the line of Erik Woodring from Morgan Stanley. Your line is now open.
Unknown Executive: Great, thanks so much for taking my question, congrats on the quarter guys, Tony, we'll miss you. I guess we're stuck with you for the rest of the year and into early next year, but it's been a pleasure.
Erik Woodring: Great. Thanks, so much for taking my question and congrats on the quarter guys. Tony We'll Miss you I guess, we're stuck with you for the rest of the year and into early next year, but it's been a pleasure and a little bit longer and Michael.
Speaker Change: And Mike, obviously, I get too excited to work with you again.
Speaker Change: I think maybe my first question maybe.
Speaker Change: Maybe I guess that's for you. It's for you Jay is just as I as I look at the back half of the year and think about the way that you're guiding the pms business. It does improve or it does imply that declines in the business improve.
Speaker Change: You laugh Genesis I believe in for Q. The date that the Genesis divestiture in <unk> can you maybe help us dig a little a little bit deeper and understand is that a reflection of market trends.
Unknown Executive: Ladies and gentlemen, at this time, I would like to welcome everyone to the Residio Technologies 2nd quarter, 2024 earnings call. Today's call is being recorded, and all participants will be in a listen-only mode until the formal question and answer portion of the call.
Speaker Change: Is that a reflection of the products you guys are talking about in your prepared remarks, maybe it's a little bit of both but maybe just help us understand the moving pieces for PFS as we look into the second half from a top line perspective, and then I just have a follow up thanks.
Jason Willey: It is now my pleasure to turn the call over to Mr. Jason Willey, Vice President of Investor Relations.
Jay Geldmacher: Yeah, thanks for the question. As both myself and Tony indicated, as well as Tom, in our remarks, I mean, you know, the residential housing market still is a little challenging, you know, and we have to be careful with that, still a really normal major change from recent trends. The interest rates are where they are for the ability to constrain housing turnover and discretionary repair and return, or repair and remodel. But at the same time, we know, I think we read the press in terms of what we think is going to happen with interest rates, with the Fed changing most possibly here in the coming months.
Speaker Change: Yeah. Thanks for the question.
Speaker Change: Both myself and Tony indicated as well as Tom and our remarks.
Jason Willey: Mr. Willey, please go ahead. Good afternoon, everyone, and thank you for joining us for Residio's 2nd quarter, 2024 earnings call.
Speaker Change: The residential housing market still is little challenging you know and we have to be careful with that.
Jason Willey: On today's call will be Jay Geldmacher, Residio's Chief Executive Officer, Tony Trunzo, our Chief Financial Officer, Rob Arnes, President of Residio's ADI Global Distribution Business, Tom Surran, President of our Products and Solutions Business, and Mike Carlet, incoming Chief Financial Officer. A copy of our earnings release and related presentation materials are available on the Investor Relations page of our website and investors.residio.com. We would like to remind you that this afternoon's presentation contains forward-looking statements.
Speaker Change: No really no real major change from recent trends the interest rates are where they are or affordability of constrained housing turnover and discretionary discretionary repair and return repair and remodel but.
Speaker Change: At the same time, we know I think we've all read the press and in terms of what we think is going to happen with interest rates with.
Speaker Change: With the fed changing most most possibly here in the coming months. So I think we've I think done a really good job from an operational cost standpoint, as we've indicated over the last 18 months to position the business as we've gone through this change in the market and so I think we feel pretty strongly that is.
Jay Geldmacher: So I think we've done a really good job from an operational cost standpoint, as we've indicated over the last 18 months to position the business as we've gone through this change in the market. And so I think we feel pretty strongly that when the markets do change and the strength comes back in these areas, you know, I think that's going to be very beneficial to the company. You heard me talk about MPI, as well as Tom, and I think, you know, my excitement is very strong in terms of what's going on in products and solutions in terms of MPI velocity.
Jason Willey: Statements other than historical facts made during this call may constitute forward-looking statements and are not guarantees a 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 Residio's filings with the Securities and Extension 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 10K and other SEC filings.
Speaker Change: When the markets do change.
Speaker Change: The strength comes back in these areas.
Tom: <unk> is going to be very beneficial to the company you want me to talk about NPI as well as Tom and I think Mike My excitement is very strong in terms of what's going on in products and solutions in terms of NPI velocity.
Jay Geldmacher: And I think, you know, we won't see a big step up this calendar year in that, but I think it brings a really, you know, really, really positive and exciting future into 2025. And I'll let Tom give any further comments from his side on that, too. So our current alpha back half of the year is just kind of, we know there's still some headwinds out there. But I'm excited about the future, you know, as we finish up 24 into 25. Tom, do you have any additional comments?
Tom: And I think you know that we won't see a.
Tom: A big step up this calendar year and that but I think it brings a really really really positive and exciting future getting into 2025 and I'll, let Tom give it any further comments from his side on that too. So you are current out for the back half of the year is just got we know there's still some headwinds out there but.
Jay Geldmacher: With that, I will turn the call over to Jay. Thank you, Jason, and thanks to everyone for joining us today. We perform very well in the quarter with adjusted EBITDA of 175 million well above the high end of our outlook range. Products and solutions adjusted EBITDA margin of 24.8% was 460 basis points better than Q2 last year as gross margin exceeded 41% as we continue to manage operating costs. Our operating improvements translated into another quarter of strong free cash flow, which was 77 million for the period and 325 million for the last 12 months.
Tom: I'm excited about that.
Tom: Future growth.
Tom: Finish up 24% to 25, Tom do you have any additional comments, yes, I think the MTI that you're referring to you. We'll just start at the end of Q4. So that's really something you'll see more in 2025 that said, we're very pleased with the progress we're making in the residential new construction market and we continue we expect to continue to see improvement in that market as we expand.
Tom Surran: Yeah, I think the MPI that you're referring to will just start at the end of Q4, so that's really something you'll see more of in 2025. That said, we're very pleased with the progress we're making in the residential new construction market, and we expect to continue to see improvement in that market as we expand our content per home. So those are two things to watch.
Jay Geldmacher: We accomplished these results in a market that remains constrained by higher interest rates and soft existing home sales, but where we see increasing stability in many of our most important markets. During the quarter, we completed the acquisition of SNAP-1, adding to our product breadth and distribution network in the attractive audiovisual and smart living markets. We are excited to welcome the SNAP-1 team to ADI and have hit the ground running and bringing the two organizations together.
Tom: And our content per home. So those are two things to watch great. Thanks.
Unknown Executive: That's very helpful, thanks. Mortgage rates are at 15-year lows, so cross your fingers here.
Speaker Change: That's very helpful. Thanks, and mortgage rates at 15 year lows. So cross your fingers here.
Unknown Executive: A little different, yeah. Maybe a second question, and this is Tony, Jay, Mike, or any of you guys, it's just, you know, as we work towards the integration of SNAP1, can you maybe talk about, you told us that it's a priority for you. Where within that is, what is the kind of key priority? Is it, you know, product integration of the private label into ADI? Is it go-
Speaker Change: Excuse me I think.
Speaker Change: Sure.
Speaker Change: 15 months not years.
Speaker Change: Wow.
Speaker Change: A little different yeah.
Speaker Change: Maybe second question and this is.
Speaker Change: Tony Jay might get any guys are just.
Jay Geldmacher: The integration of these two businesses is a top priority for us in the second half of 2024. We continue to target 75 million of annual run rate synergies exiting 2026, of which we expect to achieve 12 million in year in 2024.
Speaker Change: As we work towards the integration of snap one can you maybe talk about you told us.
Speaker Change: I already for you where within that is what is kind of the key priority is the product integrating the private label into Adi as a go to market actions as a customer account integration of our technology integration, where do you think you really need to start first and put a lot of emphasis as you can.
Jay Geldmacher: We are in entering a truly exciting period for Residio with strong operational execution and increasing pipeline of new products and important value creation opportunities ahead with the SNAP-1 acquisition.
Unknown Executive: Is it, you know, customer account integration or technology integration? Where do you think you really need to start first and put a lot of emphasis as you start to integrate the two businesses? And that's it for me.
Speaker Change: Start to integrate the two businesses and Thats. It for me Yeah, Hey here is the.
Rob Aarnes: Yeah, hey Erik, this is Rob. Thanks for asking that question. So I would, I would tell you that just a general statement around integration. I mean, we're seven, eight weeks into this thing, and I couldn't be more, um, impressed with the group and the movement that we've made. Um, I would tell you the first priority, while it sounds soft and squishy a little bit here is just the integration of these two great cultures and the leadership team, putting a leadership team in place to be able to drive all things forward. And, you know, you heard about Mike's announcement today.
Speaker Change: Hey, Eric This is Rob thanks for asking that question.
Jay Geldmacher: I've asked Tom Suran, president of our products and solutions business, and Rob Arnez, president of ADI, to join today's call and to provide greater insight into their respective businesses and the opportunities they see.
Rob: So I would I would tell you that just a general statement around integration I mean, we're seven eight weeks into this thing and I couldnt be more.
Speaker Change: I'm impressed with the group and the movement that we've made.
Speaker Change: I would tell you first priority, while it sounds soft and squishy a little bit here is just the integration of these two great cultures and the leadership team, putting our leadership team and the pieces in place to be able to drive all things forward and you heard about Mike's announcement today I've added three members of the staff leadership team now to my leadership team we've gotten through the.
Jay Geldmacher: Before I hand the call over, as you may have seen in our press release, I'm pleased to announce Mike Carlet as Residio's new Chief Financial Officer, effective tomorrow. Mike was the Chief Financial Officer of Snap 1 for the past decade and was instrumental in the growth of the business. He is a talented leader and I look forward to working with him to help drive Residio into our next phase of growth.
Rob Aarnes: I've added three members of the SNAP leadership team. Now, on my leadership team, we've gotten through the restructuring of the next two layers down, which is a good representation of both businesses. So I think that priority one for us positions us to now get after all the subsequent integration activities. Uh, some of the things that you just mentioned, you know, one I mentioned in my remarks around cross-selling. The team has really gotten out of the gates hot on this one.
Speaker Change: The restructuring of the next two layers down which is a good representative of both businesses. So I think that was priority one for us positions us to now get after all the subsequent integration activities.
Jay Geldmacher: Tony Trunzo will be stepping down as CFO but staying on until March 2025 to ensure a successful transition. Tony has been a tremendous leader and partner in reshaping the business with me over the last four years to a more financially stable, strategically focused and profitable organization. I appreciate his continued partnership during the transition period.
Speaker Change: Some of the things that you just mentioned you know what I mentioned in my remarks around cross selling the team has really gotten out the gate Hot on this one we got what box into our 80 out of the North America locations and E. Commerce channels nine days. After we closed in the next couple of months, we will have hundreds of snap proprietary products.
Rob Aarnes: We got Wattbox into our ADI North America locations and e-commerce channels nine days after we closed. In the next couple of months, we'll have hundreds of SNAP proprietary products launching into our, uh, ADI business, and then a few of our exclusive brands that we have at ADI launching into the, uh, SNAP locations here in the Americas to fill some gaps. So I'd say that's priority number, uh, number two.
Thomas Surran: With that, I will turn the call over to Tom. Thanks, Jay. We continue to make substantial progress within product and solutions in the second quarter.
Speaker Change: Launching into our Adi business and then a few of our exclusive brands that we have at Adi launching into the the snap locations here in the Americas to fill some gaps so I'd say that's priority number one number two and then number three in terms of bringing these are bringing these teams together the sales enablement piece.
Thomas Surran: Gross margin reached 41% our highest level since 1st quarter 2022 and our 5th consecutive quarter of year-over-year gross margin expansion. Many of our key channels have stabilized and channel inventory in North America appears to be within a normal range. Our new product introduction pipeline is growing and we're excited to have a number of significant product releases on target for introduction starting in the 4th quarter of this year. Demand trends have stabilized in many of our core markets in North America despite low levels of existing home sales and higher interest rates.
Rob Aarnes: And then number three, in terms of bringing these, uh, bringing these teams together, the sales enablement piece, and really getting all aspects of the business wrapped into one aggressive operating cadence to drive performance, to help us reach not only integration goals but our go-to-market goals, as well as our financial objectives for the back half.
Speaker Change: And really getting all aspects of the business wrapped into one aggressive operating cadence to drive performance to help us reach not only in integration goals, but our go to market goals as well as our financial objectives for the back half.
Jay Geldmacher: I'd add one thing just to kind of help a number of our investors out there understand a few things that Rob said in terms of how impactful they were shortly out of the gate. Rob mentioned Wattbox and getting that out into the existing ADI branches within two weeks after we closed. And that's just for everyone's information; that's over a hundred branches. That wasn't just a couple; it was over a hundred branches they were able to put that in. So the teams have been very focused on moving fast, and they really hit the ground running. Thanks, Jay. Yeah, I do you say even more challenging was e-commerce, right? We got it up on.
Speaker Change: I'd add one thing just to kind of help a number of our investors out there understand the a few things that Rob said in terms of how impactful they were shortly out of the gate, Rob mentioned what box.
Thomas Surran: We have seen pockets of demand improvement in the HVAC distribution channel and continued strength with our first alert safety products. Offsetting these positive trends has been slower activity in the European HVAC markets driven by changes in government incentive programs as well as continued slower security market sales. We continue to deliver strong results in our first alert safety portfolio. For the second quarter, these sales were up approximately 20% year-over-year representing our third straight quarter of double digit growth.
Rob: And getting that out into the existing Adi branches within two weeks.
Speaker Change: After we closed and Thats just for everyone's information that's over 100 branches. There wasn't just a couple it was over 100 branches. They are able to put that in so the teams have been very focused.
Speaker Change: Moving fast.
Speaker Change: And they really hit the ground running.
Speaker Change: Thanks Jay.
Rob Aarnes: Yeah, I do say even more challenging was the e-commerce, right? We got it up on the e-commerce site, which you think is easy, but then all the relationship building that went into making sure that Wattbox was recommended with every viable product, right? That's a lot of relationship building there. So, and that's been a big driver as well.
Speaker Change: I didn't say it even more challenging was the ecommerce right. We got it up on the E. Commerce site, which you think is easy, but then all the relationship building that went into making sure that what box was recommended with every viable product right. That's a that's a lot of relationship building there so and that's been a big driver as well.
Thomas Surran: Our position remains strong with our key retail partners and we continue to drive share gains in the home builder channel with our BARK brand. Product and solutions again delivered strong progress against our goal of structural margin and expansion. Gross margin reached 41.3% up 300 basis points compared to Q2 2023. We are delivering improvements in our manufacturing and supply chain organization and we also benefited in the quarter from better factory utilization in our North American production facilities.
Speaker Change: Okay.
Speaker Change: Thank you guys.
Speaker Change: Robert.
Operator: Alright, your next question comes from the line of Amit Daryanani from Evercore. Your line is now open.
Amit <unk>: All right. Your next question comes from the line of Amit <unk> from Evercore. Your line is now open.
Speaker Change: Yeah.
Operator: Great, thanks. This is Michael Fisher on behalf of Amit.
Speaker Change: Alright. Thanks. This is Michael Fisher on for Amit.
Thomas Surran: These results were achieved in a relatively flat overall volume environment which highlights the significant structural cost reduction and strategic initiatives undertaken over the past several years. The strong gross margin and ongoing focus on the adjusted EBITDA margin of 24.8% up 460 basis points year-over-year.
Speaker Change: Just to start with so on the P&L side. The gross margin performance has been impressive despite.
Unknown Executive: Just to start with, so on the P&F side, the gross margin performance has been impressive, despite, you know, challenges in the markets, I suppose. So how should we think about the long-term gross margins in this business as markets recover? I mean, should we think about a lot of leverage on future growth as existing home sales and kind of everything else recovers?
Speaker Change: Some challenged end market I suppose.
Speaker Change: So how can how should we think about the long term gross margins in this business as end markets recover I mean should we think about a lot of.
Speaker Change: Bridge on future growth as existing home sales and kind of everything else recovers.
Tom Surran: Tom, why don't you take that? Yeah, Michael, this is Tom.
Speaker Change: I want to take the yes, Michael this is Tom.
Thomas Surran: As we look forward within product and solutions, I am particularly excited by the progress that has been made on the new product front. Since I joined the organization late last year, we have refocused the R&D and product management organizations on critical high return projects with a goal of pulling forward the introduction of impactful new products in the key areas of our portfolio. This includes a refresh of our thermostat portfolio and updated offerings in our security portfolio to address the large residential and SMB opportunities. Our team is responded enthusiastically to the more focused and accelerated development roadmap and I look forward to providing details on these efforts later this year.
Tom: The way to think about the margins for PNM, yes.
Speaker Change: There's four major things that will be focused on.
Tom Surran: The way to think about the margins for PNS, there are four major things that we'll be focused on. One is we're focusing our development on platforms and product development. So we're taking our scale and leveraging that. And with that, that'll improve. Second is the efficiency of our operations. And you saw some of that in this past quarter.
Tom: One is were focusing our development on platforms and the product development. So we're taking our scale and leveraging that and with that that will improve margins.
Speaker Change: Second is the efficiency of our operations and you saw some of that in this past quarter. So we wanted to make sure that our spending levels and our utilizations are high and that will improve margins.
Tom Surran: So we want to make sure that our spending levels and our utilization are high, and that'll improve. Third, with our product development, we're creating differentiation in our product. And we expect the market to reward us with better gross margins as we create differentiated offerings and create value for our customers. And then lastly, as we invest in these products, you would expect, and I know we will focus our investments on those products that are going to have the best returns. So you'll see a natural shift in the mix to the higher-margin products. So when you aggregate those, that gives a positive trend line for our margins over the long haul.
Speaker Change: Third with our product development, we're creating differentiation in our products and we expect the market to reward us with better gross margins as we create differentiated offerings and create value for our customers.
Robert Aarnes: With that, I'll turn the call over to Rob. Thanks Tom. The ADI team delivered solid results in the quarter and what remains a choppy market environment. We saw increased daily sales averages in each month of the quarter highlighted by strength and large accounts and were focused on building momentum in the second half of 0.4. From a category perspective, we saw improved trends across most of our key product areas, including year-over-year growth in commercial fire, residential intrusion, data comm and professional audio visual offsetting this was headwinds in the video surveillance and residual audio, sorry residential audio visual markets.
Speaker Change: And then lastly, as we invest in these products you would expect and I know, we will focus our investments on those products that are going to have the best returns. So you'll see a natural shift in the mix to the higher margin products.
Speaker Change: So you aggregate those that gives a positive trend line for our margins over the long haul.
Jay Geldmacher: The one additional thing I'd like to add, because I want to give kudos to our, to Tom's supply chain organization, is that, you know, we all know how tough it was out there during the crazy supply chain constraints for a couple years there. And the team now has been able to go out and reduce costs out there in the supply base, which has been helpful. And that, you know, that that trend should continue. Yeah, that's part of the event.
Speaker Change: The one additional thing I like to add because I want to give kudos to our to Tom's supply chain organization is that we all know how tough it was out there during the crazy supply chain constraints for a couple of years there.
Speaker Change: And the team now has been able to go out and be able to pick up reduce cost out there in the supply base, which has been helpful in that.
Robert Aarnes: Exclusive brand sales, not including the impact from stamp one grew 18% year-over-year and reached a new quarterly revenue record as we continue to roll out new products and expand our category reach. With the addition of snap one and its large exclusive brand portfolio and development expertise, we expect to meaningfully expand this area over the coming periods. Wattbox snap one successful power management solution launched into all ADI branches in North America, as well as on the ADI North America e-commerce site within just nine days of close.
Speaker Change: Trend should continue.
Tom Surran: That's part of the efficiency, yes.
Speaker Change: Part of the efficiency.
Speaker Change: Great and then.
Unknown Executive: And then I'm just curious, kind of two questions here, but the one on HVAC inventory levels, are those back to normal levels? And then on the security products business, I think that's been a drag for a few quarters now. Is that one where we just need to see existing home sales recover, or is there anything else to be aware of there?
Speaker Change: I was just curious.
Speaker Change: Two questions here, but the one on HVAC inventory levels.
Speaker Change: Are those back to normal levels, and then on security product business I think that's been a drag for a few quarters now is that.
Speaker Change: Is that one where we just need to see existing home sales recover or is there anything else to be aware of there.
Jay Geldmacher: I'll comment and let Tom know that the inventory levels in our channels have gotten, you know, I would say we're in pretty good shape compared to where they were. So that's why I think I made the comment about stabilizing in those areas. In the area of security, that ties a lot to MPI, what Tom's doing with MPI. I mean, sure, with the housing market coming back, that'll help too. But in particular, the MPI is really important, Tom. Yeah, so I would just clarify.
Speaker Change: I'll comment and then let Tom.
Robert Aarnes: In the third and fourth quarters, we will launch hundreds of additional snap one proprietary products into ADI as well as several ADI exclusive brands products in the snap one's branches and e-commerce channels. For ADI, not including the impact from snap one e-commerce sales grew by 6% compared to Q2 2023, including 10% year-over-year growth in June. Our e-commerce investments continue to drive increased customer adoption and we expect several significant enhancements to launch in the second half of 0.4.
Speaker Change: The inventory levels in our in our channels.
Speaker Change: Have gotten I.
Speaker Change: I would say we're in pretty good shape compared to where they were so that's why I think I've made the comment about stabilizing in those areas.
Tom: And in the area of security that ties a lot to MPI what times do an MPI sure where the housing market come back that will help too but for in particular, the MPI is really important time, yeah. So I would want to just clarify on the inventory levels. You are speaking to the North American distribution right Mark.
Tom Surran: Yeah, so I would just clarify on the inventory levels. You're speaking to the North American distribution, right?
Robert Aarnes: These include improvements to site speed and performance, the integration of a leading AI search technology to aid product discovery, and more accurate estimated delivery dates online for stock and flow orders and projects. We closed the snap one acquisition in mid June and over the past seven weeks have come out of the gates strong with initiatives around cross selling, shared best practices, cost reductions and sales enablement. We're excited to have the teams working together to drive value for our combined customers.
Tom Surran: Market, and that we have seen inventories dropped to a healthy level where we basically wouldn't expect too much additional improvement EMEA, because of what's been occurring there, we see concerning inventory levels, and we don't expect that to correct until mid 2025. Now, in terms of the second question, in terms of security products, it's clearly an area we're focusing our new product introductions on. And we'll have something later this year as our first offering in that.
Mark: And that we have seen the inventories were dropped.
Mark: Dropped to a healthy level, where we basically wouldn't expect too much additional progress.
M B: M B, a because of what's been occurring there we see concerning inventory levels and we don't expect that to correct until mid 2025.
Mark: Now.
Speaker Change: In terms of the second question in terms of the security products is clearly an area, we're focusing our new product introductions and we will have something later this year as our first offering in that and we're going to continue to invest in that because our position in our right to win that market. We believe is quite high and we like what we've got in the pipe.
Robert Aarnes: The addition of snap one adds to ADI's product growth in attractive growth categories expands the mix of higher margin proprietary products and services and broadens our customer base. The ADI team remains focused on day-to-day execution, serving our customers across our physical locations and increasingly through digital channels, while at the same time working with the snap one team to drive enhanced customer experience and value from the combined businesses.
Tom Surran: And we're going to continue to invest in that because our position and our right to win that market, we believe, are quite high. And we like what we've got in the pipeline to develop to create value for our customers.
Speaker Change: To develop to create value for our customers.
Speaker Change: Great. Thanks, guys.
Operator: Yep. Thank you, Michael.
Michael Fisher: Yeah. Thank you Michael.
Operator: All right, great. Thank you. Before we move to the next question, just as a reminder, if you would like to ask a question again, press star and the number one on your telephone keypad. The next question comes from the line of Ian Zaffino with Oppenheimer. Your line is now open.
Speaker Change: Alright, great. Thank you before we move to the next question just as a reminder, if you would like to ask a question I can press star and the number one on your telephone keypad.
Anthony Trunzo: I will now turn the call over to Tony to discuss our financial results and outlook. Thank you Rob and good afternoon everyone. Second quarter profitability and cash flow were strong driven by a more stable demand environment in many of our core markets, gross margin out performance at products and solutions and good spending control across the business. Residio's second quarter revenue of $1.59 billion was 1% lower than Q2 last year, and down 2% excluding the impact of the divestiture of genesis and 15 days of snap one results.
Speaker Change: The next question comes from the line of Ian Zaffino with Oppenheimer. Your line is now open.
Unknown Executive: Hey, good afternoon. This is Isaac Sellhausen on for Ian. Thanks for taking all the questions. Just on the updated guidance, I know you've provided some updates on ADI and commentary on the softness and residential, but could you just provide some color, maybe, on your expectations for SNAP1's growth for this year?
Isaac thousand: Hey, Good afternoon. This is Isaac thousand on for Ian Thanks for taking all the questions.
Isaac: Just on the updated guidance I know you've provided some updates on Adi and commentary on the softness in residential.
Speaker Change: But could you just provide some color maybe on your expectations for snap one's growth for this year.
Speaker Change: Yes.
Tony Trunzo: Yeah, I mean, the outlook we gave for the year included 65 million of adjusted EBITDA and 550 million of revenue for SNAP. So not terribly inconsistent with sort of the trends that we saw pre-acquisition. The markets are a little bit soft, but we expect the business to start to stabilize as we go through the year. And I'd highlight, as Rob mentioned, the real value creation here in the short and intermediate term is around the execution that Rob was talking about, sales enablement, cross-selling, the execution of the operating system that ADI brings into the SNAP organization, and really driving those exclusive brands through ADI. It's going to take a little while to get there on those, Isaac, but those are the areas that we're focused on, and those are where we see the real value.
Speaker Change: Yes, I mean if.
Speaker Change: The outlook, we gave for the year included $65 million of adjusted EBITDA and <unk> 50 of revenue for for snap. So.
Anthony Trunzo: Adjusted EBITDA was $175 million and $166 million excluding snap one impact compared to $155 million in Q2 2023 and compared to our outlook range of $130 million to $150 million. Fully diluted earnings per share were 19 cents and 62 cents on an adjusted basis compared with 34 cents and 48 cents respectively last year. Operating cash flow was again strong at $92 million. Products and solutions second quarter revenue of $630 million was 7% lower than Q2 2023 but down only 2% adjusting for the sale of genesis.
Mark: Not terribly inconsistent with sort of the trends that we saw pre acquisition. It's the markets are a little bit soft, but we are we expecting.
Speaker Change: The business to start to stabilize as we go through the year.
Mark: And I'd highlight as Rob mentioned.
Mark: The real value creation here in the in the short and intermediate term is around the execution of that Rob was talking about sales enablement, the cross selling the execution of the operating system that.
Adi: That Adi brings into the snap organization and really driving those exclusive brands through Adi, it's going to take a little while to get to get there on those Isaac but those are the areas that we're focused on and that's that those are where we see the real value levers.
Anthony Trunzo: Within North America, we believe inventory levels have normalized across key channels and order trends have stabilized in major product areas. Conditions in AMIA remain more challenging with a reduction in government incentives and political uncertainty causing lower volumes for both gas combustion and heat pump products. First alert safety products delivered another strong quarter driven by our BRK branded products. We also delivered better revenue and order activity in our air products with improved performance at major distribution customers.
Unknown Executive: Okay, understood. Thank you. And then just a quick follow up on ADI, you know, now that Snap One's products are in the portfolio, what is the overall mix of, I guess, proprietary products versus exclusive or third-party brands? And then has there been any, any rationalization so far as far as product overlap is concerned? Yeah, that's great.
Speaker Change: Okay understood. Thank you.
Speaker Change: And then just a quick follow up on Adi.
Mark: Now established products in the portfolio.
Speaker Change: What is the overall mix of I guess proprietary products versus exclusive or third party brands.
Speaker Change: And then has there been any any rationalization so far is as far as product overlap so far.
Rob Aarnes: Yeah, that's a great question, Isaac. So overnight, right, you think about the day after we did the deal, you roughly 4.6, $4.7 billion organization, about 20% of that is now proprietary products, right? Snaps, if you look at Snap, just standalone, about two-thirds of their business was proprietary products, and about 5% of our business was what we call our exclusive brands. So again, combined, we're now kind of knocking on the door at about 20%.
Speaker Change: Yes, that's great question, Isaac so overnight right you're thinking about the day after we did the deal.
Speaker Change: Roughly 4.6, $4 $7 billion organization about 20% of that is now proprietary products right snaps.
Anthony Trunzo: The residential new construction channel remains an area of growth as we continue to increase our content per home, which now exceeds $350 at the top 25 North American home builders. Products and solutions gross margin in Q2 was 41.3% up 300 basis points compared to last year and the fifth consecutive quarter of year over year margin expansion. Gross margin benefited from supply chain savings, ongoing labor cost management and favorable factory utilization. Products and solutions second quarter operating expense was down 10% year over year.
Speaker Change: Look at snap just stand alone.
Speaker Change: About two thirds of their business was proprietary products and about 5% of our business was what we call. Our exclusive brands. So again combined now we're sitting kind of knocking on the door of about 20%. So a significant advantage for for us as an organization and now have that.
Rob Aarnes: So it is a significant advantage for us as an organization to now have that. And then if you take it a step further, you think about, all right, where are those products positioned? The majority of Snap products are in pretty much one area, right? Residential AV. Now we have an opportunity to, as we move forward, utilize their development expertise to actually expand that into other categories that ADI plays in, and really start building muscle from the sales team to start understanding how to sell not just hardware products, but great hardware products with robust software offerings and ecosystems like Oversee and Control 4.
Speaker Change: And then if you take it a step further you think about all right where those products positioned the majority of the snap products is in pretty pretty much one area right residential a V. Now we have an opportunity to as we move forward utilize their development expertise to actually expand that into other categories that Adi plays in and really start building a muscle from the sales.
Anthony Trunzo: The cost reduction actions undertaken over the past two years and focus on ongoing expense controls continued to drive costs lower. Products and solutions adjusted EBITDA was up $19 million year over year to $156 million with the adjusted EBITDA margin expanding by 460 basis points to 24.8%. Turning to ADI, Q2 revenue was $959 million. Excluding the $45 million of SNAP 1 revenue contribution, revenue was down 1% versus the prior year. Sales trends improved as the quarter progressed however and particularly in the last two weeks of the quarter.
Speaker Change: Team to start understanding how to sell not just hardware products, but great hardware products with robust software offerings and ecosystems like oversee and control for.
Rob Aarnes: And that's where we'll spend the majority of our time between now and the end of the year, building those capabilities to then better position us for 25 and beyond. And I'm not sure I got your second question. I want to make sure I get back to that.
Speaker Change: And that's where we will spend the majority of our time between now and the end of the year building those capabilities to them better position us for for 25 and beyond.
Speaker Change: And I'm not sure I got your second question I want to make sure I get back to that.
Rob Aarnes: Yeah, it was just on rationalization as far as product overlap is concerned, if there's any areas that you've addressed that so far.
Speaker Change: Yeah. It was just on the rationalization as far as product that's why lab, if there's any areas that you've addressed that so far.
Rob Aarnes: Yeah, so we're gonna have to do some of that, Isaac. Those projects are underway, and they will be launching simultaneously, as you heard me talk about earlier, as we launch a few hundred more Snap proprietary products into AEI. We will be looking at the current third-party brands, many of which are near and dear to us. We want to make sure we continue to support those, but we'll also look hard at rationalization opportunities to make sure that we make room for that very margin-accretive Snap 1P product line. Okay, great.
Speaker Change: Yeah. So we're gonna we're gonna have to do some of that.
Isaac: Isaac there both those projects are underway and they will.
Anthony Trunzo: ADI adjusted EBITDA of $77 million was down 3% compared with Q2 last year and benefited from $9 million of SNAP 1 contribution. Lower gross margin in the pre-acquisition ADI business continues to negatively impact profitability with operating expenses remaining relatively flat year over year. Corporate costs were $70 million, but essentially flat with Q2 2023 after adjusting for Snap 1 transaction expenses and other unusual items in both periods. Q2 cash from operations was $92 million, compared with $121 million in Q2 last year.
Isaac: Be launching simultaneously as you heard me talk about earlier as we launch a few hundred more snap proprietary products into AI, we will be looking at the current third party brands, many of which are near and Dear to US we want to make sure. We continue to support those but we'll also look hard at rationalization opportunities to make sure that.
Speaker Change: We make room for that very margin accretive snap one P product line.
Unknown Executive: Okay, great. Well, that's all I had. Thanks so much, guys.
Speaker Change: Okay, great well, that's all I had thanks, so much guys.
Speaker Change: Okay.
Operator: All right. In the
Speaker Change: Alright, and the next question comes from the line of Danny <unk> with J P. Morgan. Your line is now open.
Anthony Trunzo: Excluding the impacts of the Snap 1 transaction costs and stub period results, operating cash flow was essentially similar to the prior year period. For the trailing 12 months, operating cash flow was $417 million and free cash flow generation was $325 million. Working capital trends remained positive and we anticipate continued strong cash flow for the remainder of 2024. Concurrent with the closing of the Snap 1 acquisition, we closed on a new $7 million, $600 million term loan be offering and completed the previously announced $500 million per petrol convertible preferred stock investment from CD&R.
Unknown Executive: Hey guys, thanks for the questions. For the first, I believe last quarter, you guys called out large project delays in January and February. I'm just wondering if any of those were resolved.
Danny: Hey, guys. Thanks for the questions for.
Danny: For the first I believe last quarter, you guys called out large.
Speaker Change: Delays in January and February I'm, just wondering if any of those trends trickled into <unk> and then for the second can you maybe parse out what's kind of driving the strong growth in our personal or despite the weaker macro backdrop. Thanks.
Tony Trunzo: Yeah, so, hey, Danny, it's Tony. Yeah, early in the year, we saw as we came into the year at ADI, we saw some delays in some of our large projects that we were pretty sure weren't going to get cancelled; we just saw them getting pushed out. I'll let Rob comment, but I'd say that's abated. Over the last, you know, three or four months, we haven't seen a robust recovery. But I think things have abated there. Yeah. So just to add to Tony's comments,
Speaker Change: Yeah, So hey, Danny as Tony Yeah early in the year, we saw as we came into the year and at Adi. We saw some delays in some of our large projects that we were pretty sure weren't gonna get canceled we just saw them getting getting pushed out.
Rob: I'll, let Rob comment, but I'd say, that's abated over the last you know three or four months, we havent seen a robust recovery, but I think things have abated. There yeah. So just to add to Tony's comments there Danny.
Anthony Trunzo: Subsequent to quarter end, we sold $600 million of 8-year senior unsecured notes and an attractive 6.5% interest rates. These notes were used to repay a portion of our $1.1 billion of outstanding 2028 term loan and providing incremental flexibility by translating secure debt to unsecured. Following the acquisition of Snap 1 and these related financing transactions our net leverage stoded approximately 2.3 times our last 12 months adjusted EBITDA. As previously communicated, retarding to reduce our net leverage to below two times by the accomplish this through cash from operations, ongoing growth in adjusted EBITDA and potential divestiture of non-strategic assets. We remain committed to an investment grade credit profile and strong double B credit ratings.
Unknown Executive: Great, thanks. And then on the second question, if you could parse out maybe kind of what's driving that strong growth at FirstSport, just by kind of the weaker macro backdrop. Thanks.
Rob Aarnes: Yeah, so just to add to Tony's comments there, Danny. He's exactly right. What we saw in Q1, and I mentioned this briefly in my remarks, but as we look at April, May, and June, right, we saw an acceleration of our daily sales average in all three of those months. And with our best month being June, and a lot of that growth was driven by our large accounts, and some of that was, you know, projects that didn't happen in Q1 that were shifted to Q2, but I'm also, as Tony mentioned, cost-optimistic about that trend continuing into the back half when I look at our order intake, our sales pipeline, the verticals that continue to perform for us and continue to look like there's I don't see a stopping this trend. I don't see any hockey sticks, but I do see it continuing into the back half.
Rob: He is exactly right we saw in Q1.
Rob: And I mentioned this briefly in my remarks, but as we look at April May and June right. We saw it actually acceleration of our daily sales average all three of those months and with our best month being June and a lot of that growth was driven by our large accounts.
Tony Jay: And some of that was you know projects that didn't happen in Q1 that were shifted to Q2, but I'm also as Tony mentioned cautiously optimistic about that trend continuing into the back half when I look at our order intake or sales pipeline. The verticals that continue to perform for us and continue to look like there's a little bit of upward momentum in the back.
Speaker Change: Have I don't see a.
Speaker Change: Stopping to this trend I don't see any hockey sticks, but I do see seeing it continue into the back half.
Anthony Trunzo: Turning to our outlook, for the third quarter, we expect revenue to be in the range of $1.79 billion to $1.83 billion. Adjusted EBITDA in the range of $170 million to $180 million and adjusted EPS of 49 to 59 cents.
Speaker Change: Great. Thanks, and then on the second if you could parse out maybe kind of what's driving that strong growth that effort.
Speaker Change: That the weaker macro backdrop. Thanks.
Unknown Executive: Yeah, we did. We did see strength in First Alert, particularly in BRK, through that residential new construction channel. That's really been the driver of the outperformance at First Alert.
Speaker Change: Yeah. We did we did see we did see strength in first alert, particularly in in drk through that residential new construction channel that's really been the driver of the outperformance at first solar and if you remember Dan. We've we've indicated I think over the last quarter or two in terms of some of the <unk>.
Anthony Trunzo: For the full year 2024, we expect revenue to be in the range of $6.68 billion to $6.76 billion and adjusted EBITDA to be in the range of $655 million to $695 million. Adjusted EPS is expected to be in the range of $2.15 to $2.35. This outlook includes expected contribution from Snap 1 of approximately $550 million of revenue and $65 million of adjusted EBITDA.
Unknown Executive: And if you remember, Dan, we've indicated, I think over the last quarter or two, in terms of some of the momentum, in terms of shared that we've been able to pick up with our RNC customers. Tony mentioned his comments, but the BRK has been a good driver of that. Tom, do you have anything to add?
Tom: Minimum in terms of shared that we've been able to pick up with our with RNC customer as Tony mentioned in his comments, but the <unk> has been a good driver of that Tom you have.
Speaker Change: It's actually exactly right. So as we sold the <unk>.
Tom Surran: So as we've sold the BRK product into the RNC, it's creating the opportunity to bring other offerings and have them exposed to the complete product line and developing those relationships, and them understanding the suite of products we can bring to their houses. That's been very successful. Yeah, and as you guys also have known out there, I think over the last couple of years.
Speaker Change: RK product into the RNC, it's creating the opportunity to bring other offerings and having them being exposed to the complete product line and developing those relationships and them understanding the suite of products, we can bring to their houses.
Anthony Trunzo: We now expect to generate at least $375 million of operating cash flow for the full year 2024 compared to our prior guidance of $320 million.
Speaker Change: That's been very successful yeah, I mean as you guys also have known out there that I think over the last couple of years, we've indicated at various points about the overall content that we have for new home and if you go back couple of years ago. It was in the low hundreds and today, it's well over 300 for these new <unk> hundred $53 50 times said in terms of these new RMC.
Unknown Executive: Yeah, and as you guys also have known out there, I think over the last couple of years we've indicated at various points about the overall content that we have for a new home. And if you go back a couple of years ago, it was in the low hundreds, and today it's over 300 for these new homes. Yeah, 350, Tom said, in terms of these new R&C customers that we've been able to penetrate with a large help from the first floor BRK product.
Anthony Trunzo: Before I hand the call back to Jay, I wanted to say how pleased I am that Mike Carlett will serve as our next CFO. Mike is an outstanding leader for the team and the strategic skills that I've observed working across the table in the Snap 1 transaction and as peers in the industry for the past few years will prove valuable as we continue to shape our business and capitalize on the growth opportunities ahead. Congratulations Mike.
Speaker Change: Customers that we've been able to penetrate with a large help with the <unk>.
Speaker Change: Firstly <unk> product.
Speaker Change: Thanks.
Dan: Thanks, Dan.
Jay Geldmacher: I'll now turn the call back over to Jay for a few concluding remarks. Thank you, Tony. During the second quarter, we demonstrated continued momentum and our work to structurally improve the foundation of Residio. This includes driving higher gross margin and profitability within products and solutions while accelerating our innovation and new product-off efforts. We also took a major step in driving value through strategic M&A with the acquisition of SNAP-1 adding capabilities that expand ADI's offerings and grow our opportunity in smart living across both businesses.
Jason Willey: There are no further questions at this time. Mr. Willey, I turn the call back over to you for closing remarks.
Dan: There are no further questions at this time, Mr. Willie I turn the call back over to you for closing remarks.
Jason Willey: Thank everyone for their participation today and continued interest, and, as always, please feel free to reach out if you have any further questions, and we look forward to speaking with you over the coming weeks and months. Have a good rest of your day. Thank you.
Willie: I, thank everyone for their participation today and continued interest and as always please feel to reach out if you have any further questions and we look forward to speaking with you over the coming weeks and months have a good rest of your day. Thank you.
Operator: Thank you. That does conclude today's conference call. You may now disconnect.
Speaker Change: Thank you that does conclude today's conference call you may now disconnect.
Dan: [music].
Jay Geldmacher: Many of our key end markets are showing signs of stabilization and we continue to deliver profitability expansion despite constrained volumes. As we look forward, I'm extremely excited about our near-term new product pipeline within products and solutions. The planned releases in both our thermostat and security product categories have the potential to be the most impactful since I joined Residio in early 2020. Just as exciting as the opportunity we see for creating value and bringing the SNAP-1 organization together with Residio.
Jay Geldmacher: While less than two months into the combination, we have already made significant progress in enabling cross-selling, validating cost reduction opportunities, and sharing best practices across the teams. It's been a busy period, Residio, and the rest of 2024's position to deliver continued progress. I want to thank the entire Residio employee base for their efforts. I'm excited to continue to build on the momentum together as we move through 2024.
Dan: Okay.
Dan: [music].
Dan: Yeah.
Dan: [music].
Unknown Executive: Operator, we are now ready for questions. Thank you. The floor is now open for questions. If you would like to ask a question, please press star and the number one on your telephone keypad to raise your hand and join the queue. If you are called upon to ask your question, please ensure that your phone is unmuted when asking your question. Please stand by as we pause for just a moment to compile the list. Thank you.
Erik Woodring: Your first call or your first question comes from the line of Eric Woodring from Morgan Stanley. Your line is now open. Great. Thanks so much for taking my question. Congrats on the quarter-guys. Tony, we'll miss you. I guess we're stuck with you for the rest of the year and entirely next year, but it's been a pleasure. And Mike, obviously, I get to try to work with you again. I think maybe my first question, maybe I guess it's for you.
Erik Woodring: It's for you, Jay. As I look at the back half of the year and think about the way that you're guiding the PNS business, it does imply that declines in the business improve. I know you laugh at Genesis, I believe, in 4Q, the Genesis divestiture in 4Q. Can you maybe help us dig a little bit deeper and understand, is that a reflection of market trends? Is that a reflection of the products you guys are talking about in your prepared remarks?
Erik Woodring: Maybe it's a little bit of both, but maybe just help us understand the moving pieces for PNS as we look into the second half from a top-line perspective. And then I just have a follow-up thing. Yeah. Thanks for the question. As both myself and Tony indicated, as well as Tom and our remarks, I mean, the residential housing market still is a little challenging and we have to be careful with that. It's still a really normal major change from recent trends.
Erik Woodring: The interest rates are where they are for the ability to constrain housing turnover and discretionary repair and return, repair and remodel. But same time we know, I think we've all read the press in terms of what we think is going to happen with interest rates, with the Fed changing most possibly here in the coming months. So I think we've done a really good job from an operational cost standpoint as we've indicated over the last 18 months to position the business as we've gone through this change in the market.
Erik Woodring: And so I think we feel pretty strongly that as when the markets do change and the strength comes back in these areas, I think that's going to be very beneficial to the company. You heard me talk about MPI as well as Tom. And I think my excitement is very strong in terms of what's going on in projects and solutions in terms of MPI velocity. And I think we won't see a big step up this calendar year and that.
Erik Woodring: But I think it brings a really positive and exciting future getting into 2025. And I'll let Tom give it any further comments from his side on that too. So our current out for the back half of the year is we know there's still some headwinds out there. But I'm excited about the future going, you know, as we finish up 24 and the 25. Tom, do you have any additional comments? Yeah, I think the MPI that you're referring to will just start at the end of Q4.
Erik Woodring: So that's really something you'll see more in 2025. That said, we're very pleased with the progress we're making in the residential new construction market and we continue, we expect to continue to see improvement in that market as we expand our content per home. So those are two things to watch. Great. Thanks. That's very helpful. Thanks, and a mortgage raise at 15-year lows, so cross your fingers here. I saw that, because we're 15 months long. 15 months, not years. A little different, yeah.
Erik Woodring: Maybe a second question, and this is Tony Jay, Mike, and any guys. As we work towards the integration of SNAP 1, can you maybe talk about, you know, you told us it's priority for you. Where within that is, what is kind of the key priority? Is it, you know, product integrating the private label into ADI? Is it go-to-market actions? Is it, you know, customer account integration or technology integration? Where do you think you really need to start first and put a lot of emphasis as you start to integrate the two businesses?
Erik Woodring: And that's it for me.
Robert Aarnes: Hey, Erik, this is Rob. Thanks for asking that question. So I would, I would tell you that just a general statement around integration. I mean, we're seven, eight weeks into this thing. And I couldn't be more impressed with the group and the movement that we've made.
Robert Aarnes: I would tell you, first priority, while it sounds soft and squishy a little bit here, is just the integration of these two great cultures. And the leadership team, putting a leadership team in the pieces in place to be able to drive all things forward. And, you know, you heard about Mike's announcement today. I've added three members of the SNAP leadership team now to my leadership team. We've gotten through the restructuring of the next two layers down, which is a good representative of both businesses.
Robert Aarnes: So I think that was priority one for us, positions us to now get after all the subsequent integration activities. Some of the things that you just mentioned, you know, what I mentioned in my remarks around cross selling. The team has really gotten out the gate hot on this one. We got walk box into our ADI North America locations and e-commerce channels. Nine days after we closed in the next couple of months will have hundreds of SNAP proprietary products, you know, launching into our ADI business. And then a few of our exclusive brands that we have at ADI launching into the SNAP locations here in the Americas to fill some gaps. So I'll say that's priority number number two.
Jay Geldmacher: And then number three, in terms of bringing these bringing these teams together, the sales enablement piece and really getting all aspects of the business wrapped into one aggressive operating cadence to drive performance to help us reach not only integration goals, but our go to market goals, as well as our financial objectives for the back half. I had one thing just to kind of help a number of our investors out there understand the few things that Rob said in terms of how impactful they were shortly out of the gate.
Jay Geldmacher: Rob mentioned walk box and getting that out into the existing ADI branch is within two weeks after we closed. And that's just for everyone's information. That's over a hundred branches. There wasn't just a couple. It was over a hundred branches. They were able to put that in. So the teams have been very focused on moving fast. And they really hit the ground running. Thanks, Jay.
Robert Aarnes: I do say even more challenging was the commerce, right? We got it up on the commerce site, which you think is easy, but then all the relationship building that went into making sure that walk box was recommended with every viable product, right? That's that's a lot of relationship building there. So and that's been a big driver as well.
Unknown Executive: Thank you guys longer.
Michael Fisher: All right, your next question comes from the line of Amit Daryanani from Evercore. Your line is now open. Thanks, this is Michael Fisher on for Amit. Just to start with, so on the P&F side, the gross margin performance has been impressive despite some challenge in markets, I suppose. So, how should we think about the long-term gross margins in this business and markets recover? I mean, should we think about a lot of Webbridge on future growth as existing home sales and kind of everything else recovers?
Michael Fisher: How much take that? Yeah, Michael, this is Tom. The way to think about the margins for P&S, there's four major things that will be focused on. One is we're focusing our development on platforms and the product development. So, we're taking our scale and leveraging that and with that, that'll improve margins. Second is the efficiency of our operations and you saw some of that in this past quarter. So, we want to make sure that our spending levels and our utilizations are high and that'll improve margins.
Michael Fisher: Third, with our product development, we're creating differentiation in our products and we expect the market to reward us with better gross margins as we create differentiated offerings and create value for our customers. And then lastly, as we invest in these products, you would expect and I know we will focus our investments on those products that are going to have the best returns. So, you'll see a natural shift in the mix to the higher margin products.
Michael Fisher: So, you aggregate those that gives a positive trend line for our margins over the long haul. The one additional thing I like to add because I want to give kudos to Tom's supply chain organization is that, you know, we all know how tough it was out there during the crazy supply chain constraints for a couple of years there. And the team now has been able to go out and be able to pick up reduced cost out there in the supply base, which has been helpful and that, you know, that trend should continue.
Michael Fisher: Yeah, that's part of the efficiency. Yes. And then I'm just curious times two questions here, but so one on HVAC inventory levels are those that's normal levels and then on security products business. I think that's been a drag for a few quarters now, is that is that one where we just need to see existing home sales recover or is there anything else to be aware of there. I'll comment and let Tom, the inventory levels in our channels have gotten, you know, I would say in pretty, we're in pretty good shape, you know, compared to where they were.
Michael Fisher: So, that's why I think I made the comment about stabilizing in those areas. In the areas, that ties a lot to MPI, what times do an MPI? I mean, sure with the housing market come back that will help too, but in particular, the MPI is really important, Tom. Yeah, so I would want to just clarify on the inventory levels, you're speaking to the North American distribution market and that we have seen the inventories were dropped to a healthy level, where we basically wouldn't expect too much additional performance.
Thomas Surran: And Mia, because of what's occurring there, we see concerning inventory levels and we don't expect that to correct until mid 2025. Now, in terms of the second question, in terms of security products, it's clearly an area where we're focusing our new product introductions, and we'll have something later this year as our first offering in that, and we're going to continue to invest in that because our position and our right to win that market, we believe is quite high, and we like what we've gotten the pipeline to develop to create value for our customers.
Michael Fisher: Great. Thanks, guys. Yep. Thank you, Michael.
Unknown Executive: All right.
Unknown Executive: Great. Thank you.
Unknown Executive: Before we move to the next question, just as a reminder, if you would like to ask a question, again, press star and the number one on your telephone keypad.
Isaac Sellhausen: The next question comes from the line of Ian Zaffino with Oppenheimer. Your line is now open. Hey, good afternoon. This is Isaac Sellhausen on for Ian. Thanks for taking all the questions. Just on the updated guidance, I know you've provided some updates on ADI and commentary on the softness and residential, but could you just provide some color maybe on your expectations for SNAP ones growth for this year? Yeah, I mean, if the outlook we gave for the year included 65 million of adjusted EBITDA and 550 of revenue for SNAP.
Isaac Sellhausen: So not terribly inconsistent with sort of the trends that we saw pre acquisition. The markets are a little bit soft, but we expect the business to start to stabilize as we go through the year. And I'd highlight, as Rob mentioned, the real value creation here in the short and intermediate term is around the execution that Rob was talking about, sales enablement, the cross selling, the execution of the operating system that ADI brings into the SNAP organization, and really driving those exclusive brands through ADI.
Isaac Sellhausen: It's going to take a little while to get there on those Isaac, but those are the areas that we're focused on, and those are where we see the real value levels. Okay, understood. Thank you. And then just a quick follow up on ADI, you know, now with SNAP ones products in the portfolio. What is the overall mix of, I guess, proprietary products versus exclusive or third party brands? And then has there been any recitalization so far as far as product overlap so far?
Isaac Sellhausen: Yeah, that's a great question, Isaac. So overnight, right, you think about the day after we did the deal, you roughly $4.64.7 billion organization, about 20% of that is now proprietary products, right? SNAPs, if you look at SNAP, just stand alone, about two-thirds of their business was proprietary products, and about 5% of our business was what we call our exclusive brands. So again, come on, now we're kind of knocking on the door, about 20%.
Isaac Sellhausen: So a significant advantage for us as an organization, and now have that. And then if you take it a step further, you think about, all right, where are those products positioned? The majority of the SNAP products is in pretty much one area, right? Residential AV. Now we have an opportunity to, as we move forward, utilize their development expertise to actually expand that into other categories that ADI plays in, and really start building a muscle from the sales team to start understanding how to sell not just hardware products, but great hardware products with robust software offerings and ecosystems like Oversee and Control 4.
Isaac Sellhausen: And that's where we'll spend the majority of our time between now and the end of the year building those capabilities to then better position us for 25 and beyond. And I'm not sure I got your second question. I want to make sure I get back to that. Yeah, it was just on the rationalization as far as product. That's right. If there's any areas that you've addressed that so far. Yeah, so we're going to have to do some of that.
Isaac Sellhausen: Um, Isaac there, you know, both those projects are underway and they will be launching simultaneously, as you heard me talk about earlier as we launch a few hundred more snap proprietary products into AEI. We will be looking at the current third party brands, many of which are near and dear to us. We want to make sure you know we continue to support those. But we'll also look hard at rationalization opportunities to make sure that we make room for that very margin of creative snap 1p product line. Okay, great. Well, that's all I had. Thanks so much, guys.
Danny Fifer: All right, and the next question comes from the line of Danny Fifer with JP Morgan. Your line is now open. You guys, thanks for the questions. Um, for the first, I believe last quarter you guys called out large project delays in January and February. I'm just wondering if any of those trends tripled in the two queue. And then for the second committee, parse out what's kind of driving the strong growth in our first alert despite the kind of weaker macro backdrop.
Danny Fifer: Thanks. Yeah, so hey, Danny, that's Tony. Yeah, early in the year we saw as we came into the year at AEI, we saw some delays in some of our large projects that we were pretty sure weren't going to get canceled. We just saw them getting getting pushed out. I'll let Rob comment, but I'd say that's abated over the last, you know, three or four months. We haven't seen a robust recovery, but I think things have abated there.
Danny Fifer: Yeah, so so just to add to Tony's comments, they're Danny. He's exactly right. We saw on Q1 as I'm and I mentioned this briefly in my remarks, but as we look at April, May and June, right. We saw it actually acceleration of our daily sales average all three of those months and with our best month being June and a lot of that growth was driven by our large accounts. And some of that was, you know, projects that didn't happen in Q1 that were shifted to Q2, but I'm also, as Tony mentioned, costly optimistic about that trend continuing into the back half when I look at our order intake or sales pipeline, the verticals that continue to perform for us and continue to look like there's a little bit of upper momentum in the back half. I don't see a stopping to this trend. I don't see any hockey sticks, but I do see seeing it, seeing it continue into the back half. Great. Thanks.
Danny Fifer: And then on the second, if you could parse out maybe kind of what's driving that stronger that first floor, despite kind of the weaker macro backdrop. Thanks. Yeah, we did see, we did see strength in first alert, particularly in BRK through that residential new construction channel. That's really been the driver of the out performance at first alert. And if you remember, Dave, we've, we've indicated, I think over the last quarter or two in terms of some of the momentum in terms of shared that we've been able to pick up with our, with R&C customers.
Danny Fifer: Tony mentioned his comments, but the BRK has been a good driver that Tom, you have anyone at. So as we sold the BRK product into the R&C, it's creating the opportunities to bring other offerings and having them being exposed to the complete product line and developing those relationships and them understanding the suite of products we can bring to their houses. That's been very successful. Yeah, I mean, you guys also have known out there that I think over the last couple of years we've indicated at various points about the overall content that we have for a new home.
Danny Fifer: And if you go back a couple years ago, it was in the low hundreds and today it's over 300 for these new 350, 350 times set in terms of these new R&C customers that we've been able to penetrate with the large help with the, the first floor BRK product. Thanks. Thanks, Danny.
Jason Willey: There are no further questions at this time. Mr. Willey, I turn the call back over to you for closing remarks. Thank everyone for their participation today and continued interest and as always, please feel to reach out if you have any further questions and we look forward to speaking with you over the coming weeks and months. Have a good rest of your day. Thank you.
Unknown Executive: That does conclude today's conference call. You may now disconnect.
Unknown Executive: Thank you.