Q3 2024 Resideo Technologies Inc Earnings Call
efficiency.
Speaker Change: As Jay mentioned, we began taking orders during the quarter for the first new products in the refresh of our Thermostat portfolio.
Speaker Change: The Honeywell Home Focus Pro line are our refreshed entry-level thermostat products for the professional market.
Speaker Change: Included in the release products were the N100, a non-programmable thermostat, the P100, a programmable thermostat, and the S200, an ENERGY STAR certified connected thermostat that brings the energy savings benefits of a connected product to an accessible price point.
Speaker Change: All of the Honeywell Home Focus products are designed for style and simplicity to provide an excellent experience from installation to operation.
Speaker Change: We began shipment of the Focus Pro products to key distribution partners in late October, and the initial customer response has been extremely positive.
Speaker Change: In Q1 of 2025, we will release the retail variants of the Focus Pro line in preparation for the store resets of our retail partners.
Speaker Change: We look forward to following this up with a steady stream of new products across the mid-tier and premium portions of our thermostat portfolio over the next several quarters.
Speaker Change: I'm also excited about the progress on our new product pipeline in their security portfolio.
Speaker Change: We will roll out to dealers later this month an update to our Vista product line. This is our first major Vista portfolio upgrade in many years, and the new products target the larger residential and small and medium business markets.
Speaker Change: These new launches set the stage for future product introductions, and it also represents a return to a regular cadence of new product introductions that not only support our current market position, but also drive future innovation in key categories.
Speaker Change: I'm excited for what is in the pipeline as we move through 2025 and into 2026. With that, I'll turn the call over to Rob.
Rob: Thanks Tom. ADI reported 31% year-over-year sales growth in the third quarter and 4% growth on an organic basis. All of my following remarks on growth year-over-year represent organic business activities and do not include the impact of SNAP-1 acquisition.
Rob: Year-over-year revenue growth was driven by strength across all key commercial categories and with large customers, resulting in the strongest daily sales average in ADI's history. Our team is focused on carrying this Q3 performance forward to finish the year strong.
Rob: From a category perspective, we saw the greatest sales acceleration in the commercial categories of professional audiovisual and networking. This trend supports our continued expansion into our growth verticals of ProAV and Datacom.
Rob: We also saw our largest category, video surveillance, return to year-over-year growth. Such growth was partially offset by residential audiovisual headwinds.
Rob: In Q3, we also continue to drive progress on key strategic initiatives around both our digital platform and our exclusive brands.
Rob: ADI e-commerce sales grew 18% year over year. Our investments around Omnichannel and improved website user experience continue to drive increased customer adoption.
Rob: We are launching additional technology enhancements in the fourth quarter, including the integration of a leading AI search technology to aid product discovery and an improved user experience.
Exclusive brand sales grew 32% year over year.
Rob: In Q3, across our expanded portfolio, we launched key new product introductions that were well-received by our customers.
including
Rob: Control 4 integration of Apple Music, delivering a long-requested feature enhancement to the platform.
Rob: enhancements to our Access Networks networking products, earning CE Pro's Best Product Award for 2024, and delivering new Wattbox solutions for power management focused on the ProAV market that received Best-in-Show recognition at InfoComm 2024.
Rob: We believe our strength will continue with the large exclusive brand portfolio we can now offer, as well as with the R&D investments we will make to bring new products to market. I am thrilled with the progression of the SNAP One integration, and I'm even more excited about what we will achieve together.
Rob: We have formulated our ADI leadership team, which combines both ADI and SnapOne executives. In addition to capturing cost synergies, we see further opportunities to align and optimize our combined sales force to capitalize on increased selling opportunities of our exclusive brands.
Rob: Complementing our e-commerce focus, we opened our first combined store of the future in Omaha, Nebraska.
Rob: Opened in October, the store showcases the combined company assortment and refreshed store layout.
Rob: At just 120 days post-close of our acquisition, we are showing our customers what the future looks like with our storefronts and delivering proof points across the business, validating our ability to serve their many needs.
Rob: Omaha marks the first pilot of many future stores that will leverage this format.
Rob: Everything we do starts with our customers. Our team continues to be focused on the day-to-day execution of servicing the professional installers and delivering on an enhanced customer experience from our growing combined business.
Rob: Given our customer-first ethos and the momentum we saw in the third quarter, we expect positive trends in our core commercial markets to continue as we close out 24. I will now turn the call over to Mike to discuss our financial results and outlook.
Thanks, Rob. Good afternoon, everyone.
Mike: Third quarter consolidated financial performance strong across the business with mid-single-digit organic sales growth, continued gross margin expansion, improved profitability and free cash flow, and adjusted EBITDA above the high end of our outlook range.
Mike: Third quarter total company reported revenue of 1.83 billion was up 18% year over year and up 4% on an organic basis.
Mike: Adjusted EBITDA was $190 million, up 29% as compared to $147 million in Q3 2023.
Mike: Third quarter fully diluted adjusted earnings per share was $0.58 compared with $0.55 in the prior year. And operating cash flow was again strong at $147 million.
Mike: Turning to products and solutions, third quarter revenue of $645 million was up 4% organically and declined by 1% on a reported basis.
Speaker Change: Products and Solutions gross margin was 42.2 percent, up 350 basis points compared to last year, and as Tom said, represents the sixth consecutive quarter of year-over-year margin expansion.
Pricing realization continued across substantially all product categories.
Speaker Change: Volumes increased modestly year over year, driven by strength in the North American HVAC and the first alert safety product portfolios.
Speaker Change: This was partially offset by EMEA, where conditions continue to be challenging, with lower volumes for gas combustion and heat pump products, and continued headwinds in security.
Speaker Change: We continue to see products and solutions gross margin expansion opportunities, primarily via efficiency, though we anticipate the recent pace of gross margin expansion to slow until additional new products are introduced in 2025.
Speaker Change: Products and Solutions third quarter operating expense was down 15 million year-over-year reflecting lower restructuring costs and effective control of ongoing operating costs.
Speaker Change: Adjusted EBITDA was up 17 million year-over-year to 157 million with adjusted EBITDA margin expanding by 290 basis points to 24.3 percent.
Speaker Change: Turning to ADI, Qfee revenue was $1.18 billion. Excluding the $251 million of SNAP1 contribution, organic revenue was up 4% versus the prior year period.
Speaker Change: Sales trends improved in the quarter for key commercial categories following the strong finish to Q2.
ADI drove year-over-year growth in all major commercial categories.
Speaker Change: AARNES, THOMAS SURRAN, JASON WILLEY, ANTHONY TRUNZO, JAY GELDMACHER, JASON WILLEY, ANTHONY TRUNZO,
Speaker Change: Our adjusted EBITDA of $92 million was up 33% compared with Q3 last year and benefited from $25 million of SNAP-1 contribution.
Speaker Change: Lower gross margin in the organic ADI business reflecting diminished inflationary benefits and more competitive pricing in certain categories continue to negatively impact profitability.
Speaker Change: Organic operating expenses remained relatively flat year over year as investment in digital initiatives and exclusive brands was offset by focused cost controls.
Speaker Change: Turning back to the total company, Q3 cash from operations was $147 million compared with $60 million in Q3 last year, a 145% increase.
Speaker Change: For the trailing 12 months, operating cash flow was $504 million and free cash flow generation was $415 million.
Speaker Change: Now turning to our total company outlook, for the fourth quarter, we expect total company net revenue to be in the range of $1.815 billion to $1.855 billion.
Speaker Change: adjusted EBITDA in the range of 170 million to 185 million and adjusted EPS of 51 cents to 61 cents.
Speaker Change: For the full year 2024, we expect total company net revenue to be in the range of $6.72 billion to $6.76 billion and adjusted EBITDA to be in the range of $672 million to $687 million.
Speaker Change: Adjusted EPS is expected to be in the range of $2.18 to $2.28.
Speaker Change: We expect to generate at least $375 million of total company operating cash flow for the full year 2024.
Speaker Change: So in conclusion, Q3 was a strong set of results. We are progressing well on our journey. We are pleased with our operational execution.
Speaker Change: the continued structural improvements we are achieving on products and solutions, gross margins, and the integration of SNAP-1.
Speaker Change: I'll now turn the call back over to Jay for just a few concluding remarks.
Thank you, Mike.
Jay Geldmacher: This was a significant quarter for Resideo with year-over-year growth across both products and solutions and ADI.
Jay Geldmacher: Strong cash flow generation and notable progress in our new product introduction efforts.
Jay Geldmacher: We are encouraged by the early success of product launches, pipeline developments, and the integration of SNAP1.
Jay Geldmacher: I'd like to thank the team for their continued strong execution and cost discipline, which is driving momentum as we close out a successful 2024.
Jay Geldmacher: I want to make a final comment before we turn to Q&A. Today I announced my intention to retire as CEO of Resideo in 2025.
Jay Geldmacher: I will continue to serve as the CEO of Resideo until a successor is appointed and plan to remain with the company as a senior advisor to ensure a smooth transition.
and many more. Thank you. Thank you.
Jay Geldmacher: I'd like to congratulate Andy on his appointment as board chair and thank Andy and Roger for their partnership and leadership on the board.
Jay Geldmacher: It's been my privilege to lead the company for the last four and a half years.
Jay Geldmacher: I've been enriched by exceptional colleagues from around the world, and I make my decision with gratitude for all we have accomplished together.
Jay Geldmacher: That includes refocusing our product portfolio and accelerating new product introduction, improving the financial profile, and executing on two transformational acquisitions, all of which results in Resideo being better positioned for future revenue and earnings growth.
and many more. Thank you. Thank you.
Speaker Change: I have two primary objectives in the coming quarters. First, I intend to continue executing against Resideo's business strategy, because it's important to me that our next leader inherit this business with momentum.
Speaker Change: Second, I plan to work closely with our Board of Directors and my successor once named.
to ensure a smooth transition.
My excitement for our company is as strong as ever.
and I'm confident in its bright future.
With that, let's open the call up for Q&A.
Speaker Change: and many more. Thank you for watching. I hope you enjoyed the video. If you did, please click the thumbs up button, subscribe, and share with your friends. See you next time.
Speaker Change: Thank you. If you would like to ask a question, press star followed by the number 1 on your telephone keypad.
Speaker Change: Your first question today comes from the line of Eric Woodring with Morgan Stanley.
Your line is open.
Eric Woodring: Super. Thanks for taking my question, guys. Jay, obviously, congrats on the announcement. But you're not done with us yet, so I'll save those for when a successor is appointed. I would love to maybe just pick your brain on just kind of – you've obviously – you came in during very tough times. You had stated goals here when you joined along with Tony. And I think you did a lot of that, right, breaking down silos, really focusing on margins. And you're seeing that play out.
Eric Woodring: What kind of leader do you think Resideo needs for this next phase of its journey? What are you looking for in that next operator? And then I have a follow-up, please. Thanks.
Jay Geldmacher: Thanks, Eric. Thanks for your comments and a good question. You know, I mentioned in my comments, you know, before we start Q&A about
I want to make sure that
in making this
Jay Geldmacher: move and transition with me retiring next year, that the company's in a really good spot.
Jay Geldmacher: So it's the next chapter in the book as I like to call it because we've done a lot of good things I'm really proud of in those four and a half years and as you stated When I came in four and a half years ago, there was a lot of challenges with the business It's actually one of the reasons why I took the job
Jay Geldmacher: because I saw the potential of what this company could be. We've progressed a long way as I highlighted in my comments. Now, I think we're really posed.
for really a wonderful future ahead.
and to be able to drive further growth.
Profitability.
Jay Geldmacher: And I just think it's a great time for it when the new leader is picked that he or she
Jay Geldmacher: could then leverage off that and continue the trajectory of what we've done. Not to worry about some of the things we had to worry about four and a half years ago and focus on what we can do to grow both top line and bottom line.
and many more. Thank you. Thank you.
Okay, that's helpful. I appreciate kind of that early look.
Jay Geldmacher: and look forward to the next developments there. Maybe, Rob, I'd love to pick your brain, too. Your comments on ADI stood out to me, right? Best daily sales ever. Exclusive brands up over 30% year over year. E-commerce up almost 20%. None of that including Snap1.
Speaker Change: Can you just help us understand kind of what's going on behind the scenes? Because obviously, not too long ago, this business was declining year over year. So what's happening in the market that's really changing, and how sustainable is that momentum? And if you could just feed in kind of why that isn't translating into better margins. I know you talked about competition and kind of installation pricing going away, but just help us understand why if the kind of underlying demand backdrop is so strong, why you can't capture that pricing. But other than that, that's it for me. Thank you.
Speaker Change: and many more. Thank you for watching. I hope you enjoyed the video. If you did, please like, comment, and subscribe. I'll see you in the next video.
Speaker Change: Yeah, hey Eric, thank you. Great question. There was a lot there, so let me try and pick it apart a few different ways. So, if you remember from Q2, we talked about continuing momentum, right, every month of the quarter, April, May, and June, with specific momentum in our commercial categories.
and...
Speaker Change: Then we actually saw that continue up and to the right in the third quarter, and as my prepared remarks said, I talked about the fact that we saw a lot of that growth coming from our large national accounts, which was really, really good to see those guys really coming back to
some fairly strong growth.
Speaker Change: And they play in a number of different verticals, right, which we saw continue to accelerate throughout the quarter. You know, verticals like banking, retail, large entertainment venues, education, and some government. And really we saw the pipeline, the project, large project pipeline grow.
Speaker Change: throughout the second quarter, throughout the third quarter. And as I also mentioned in my comments, we continue to see that, we expect that momentum to continue into
Speaker Change: the fourth quarter. So that's how I would talk about it. That's how I would kind of justify the organic growth. In terms of what we're seeing...
Speaker Change: on exclusive brands, our DX e-commerce business. This is something we've been talking about for quite some time. It's an area we started to invest in two, three years ago, especially on the e-commerce front.
Speaker Change: And we're now to the point where, you know, if you take SNAP out of the equation...
Speaker Change: look at our exclusive brands line. We're launching over 200 new products a year across all of our categories. That's driving a lot of that growth.
Speaker Change: That's part one. And then on the DX side, you know, we made some significant advancements this year in the user experience.
Speaker Change: One, along the lines of speed. You heard me talk about our AR search capability that actually just launched last night, and we're already starting to see some great progress there.
Speaker Change: So, the growth in these areas haven't been overnight, they're the result of the investments we've been making here over the last few years that are finally coming to fruition for us.
Speaker Change: in kind of concert with some of the pickup in some of the commercial sectors that we're seeing as well.
Super. Thanks for the color, guys. Good luck.
Speaker Change: Your next question comes from the line of Chan Park with Evercore. Your line is open.
Chan Park: Great. Thanks for taking my question. This is Chan for Amit. Jay, I just wanted to echo the congrats on your announced retirement.
Chan Park: I just had one on SGNA. I think it came in a little higher than what we were anticipating. I just wanted to understand the cadence on some of the optics targets that you mentioned before, where we should expect these to show up going forward. Any comment on that would be super helpful.
Chan Park: Hey, Jen, thanks for the call. It's Mike. Yeah, there was a couple unusual one-time things in SG&A at P&S this quarter that inflated a little bit by, you know, single-digit millions, so it did come in a bit higher than we expected. That shouldn't be a trend. We should see that return to more normal levels on a go-forward basis. So nothing systemic in there, but it was a bit higher on that side due to some one-time events.
Speaker Change: Got it. And then just as a follow-up, on margins, on gross margins, you talked on
Speaker Change: You know, the expansion on the product side, the expansion that are updating going forward until new programs or products ramp in 2025, and some, you know, pricing headwinds and the ADI. How should we think about margins?
Speaker Change: 2025 and, you know, should we expect this to be back half loaded as products ramp or what are the offsets that can make this more linear as the year goes?
and many more. Thank you. Thank you.
Speaker Change: Yeah, so we haven't got our 2025 guide out yet obviously. We're still positive about the momentum in the business. We still think there's lots of opportunity for future gross margin accretion at the P&S side. Clearly, you know, as we think about the new product introduction that will continue to drive it forward, but when we get to the exact timing, we'll make sure we get that guidance out there appropriately.
Great. See you all.
This concludes our Q&A.
Speaker Change: This time, I turn the call back to Jason Willey for closing remarks.
Speaker Change: and many more. Thank you for watching. I hope you enjoyed this video. If you did, please give it a thumbs up and subscribe to my channel. I'll see you in the next video.
Speaker Change: Thank everyone for participating today. And as always, if you have any additional questions, please feel to reach out. Have a good rest of your day. Thank you very much.
This concludes today's call. You may now disconnect.
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