Q2 2025 Resideo Technologies Inc Earnings Call

Good afternoon. My name is Eric and I will be your conference operator today.

At this time I would like to welcome everyone to the residio 2025 second quarter earnings call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad,

If you would like to withdraw your question, press star 1 again.

Thank you.

I would like to hand the conference over to your host today, Christopher Lee, Global Head of Strategic Finance. You may begin your conference.

Good afternoon, everyone, and thank you for joining us for Resideo's second quarter 2025 earnings call. On today's call will be Jay Geldmacher, our Chief Executive Officer; Mike Carlette, our Chief Financial Officer; Rob Aarnes, President of Resideo ADI Global Distribution Business; and Tom Surran, President of Resideo Products and Solutions Business.

We would like to remind you that this afternoon's call contains forward-looking statements statements other than historical facts made. During this call, May constitute 4 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 4-l looking statements as a result of a number of factors, including those described from time to time in residio filings with the Securities and Exchange Commission, the company assumes, no obligation to update any such forward-looking statements, we identify the principal risks and uncertainties that affect our performance in our annual report on form, 10K, and other SEC filings

In addition, we will discuss non-gaap Financial measures on today's call these non-gaap Financial measures. Which can sometimes be identified by the use of adjusted in the description of the measure should be considered in addition to not as a substitute for or an isolation from our gaap results. A Reconciliation of gaap to non-gaap financial measures is included in our earnings press release and earnings presentation which are both accessible on the investor relations page of our website at investor.com unless stated otherwise all numbers and results discuss on today's call. Other than Revenue are on a non-gaap basis with that. I will turn the call over to Jay.

Thank you Chris, and thanks to everyone for joining us today.

Rocio delivered, exceptional results. In our second fiscal quarter, both net revenue and adjusted ibida were new record highs. And those 2 Financial metrics plus adjusted EPS, all exceed the high end of our Outlook range.

Fundamentals.

We achieved year-over-year, organic Revenue growth of 10% ADI and 5% in our products and solution business segments.

Gross, margin expansion and increased. EBA generation, were underpinned by growing operating income dollars at 80 and pns, both sequentially and year-over-year.

For our new products, including the Honeywell Home Focus Pro thermostats.

And First Alert, combined smoke and carbon monoxide connected. Detectors continues to be strong.

We are excited about our pipeline of new products. They're both business, segments are introducing in the second half of 2025.

ADI is integration of snap 1 continues to progress progress well and I head of schedule.

Tom, Rob, and Mike will speak in greater detail to our execution and results shortly.

Residio has been executing a miss. A dynamic macro, in economic environment.

While our Market Outlook continues to be relatively cautious, especially given the ongoing dialogue around tariffs. By the US Administration, we believe our pipeline of products and the integration of snap 1 is positioning us. Well,

Our tariff, mitigation actions have been effective and our materially unchanged from what we shared last quarter.

Consistent with the first quarter, ADI, and pns customer demand, and the second quarter has been healthy.

Even as we have raised prices to pass along the cost impact of tariffs, our relationships with our customers, continue to be excellent.

We have also taken other actions such as working with our partners, in our supply chains to mitigate the impact of terrorists.

Brazil continues to remain agile and we believe we are well prepared to react to new developments of this Dynamic environment.

I am pleased with the team's consistent execution.

To do the strength of our business residio is Raising is 2025 Outlook, which Mike will speak more to in his comments.

Let me now hand the call over to Tom

Thanks Chad the products and solutions team executed well in the second quarter, delivering year-over-year, organik, net revenue growth and the 9th consecutive quarter of year-over-year. Gross margin expansion.

Pns reported, net revenue growth, of 6% year-over-year and 5% organic growth. Which excludes an approximate 1%? Favorable impact from currency.

Revenue grew across the majority of our sales channels driven by customer demand for our new products, price realization.

Now, let me walk through each of our primary channels.

The electrical distribution Channel, LED Revenue growth in the quarter.

Revenue associated with our BRK branded. Safety Products sold to professionals increase from a combination of increasing content per new home and the transition to UL 8th Edition. Fire Safety products.

The retail channel had a record quarter of revenue growth driven primarily by strong point of sales volumes for both our new Honeywell Home focused pro series of thermostats.

And our new First Alert, sc5, connected smoke, and carbon monoxide detector.

The sc5 was developed in partnership with Google Nest is compatible with the Google home app and was specifically designed to seamlessly replace Google's discontinued Nest, protect alarms.

The OEM channel posted a third consecutive quarter of year-over-year revenue growth driven primarily by the sale of higher-priced and more profitable units as the energy equipment market in the Americas and AMIA continues to improve.

Revenue in the HVAC, channel was flat to slightly down in the quarter as the market experienced some softness due to the macroeconomic environment.

In addition, we experienced some disturbances in the market from the recent transition of refrigerants used in the HVAC equipment in accordance with the new United States regulations.

Despite that we believe we have grown our position in the segment driven primarily by continued demand for our new products.

Revenue, and the security channel was down year-over-year primarily due to a decrease in sales from a large private label customer.

The General market was also down slightly and it continued soft domestic residential Market.

Gross margin was 42.9% up, 160 basis points year-over-year.

Then that vast majority of pns. Good source for Mexico are usmca compliant which continued to be exempt from tariffs.

Looking ahead to the second half of 2025. We expect continued demand for our new products introduced earlier in the year.

We intend to capitalize on this momentum by introducing additional new products in the air and comfort security and water categories.

In closing, the products and solutions team X is executing against our strategic plans, delivering new products against a multi-year product roadmap while achieving organik, net revenue growth.

Gross margin expansion and adjusted Eva dog growth.

With that trying to call over to Ross.

Thanks Tom, the ADI, team achieved 33% year-over-year, growth in reported net, revenue in the second quarter and 10% organic growth. After excluding the impact of the snap 1, ACP from currency.

Organic average. Daily sales grew. 10% year-over-year.

Growth despite the benefit of 2 percentage points from recouping tariff. Related impacts through price realization.

As a reminder, this is the last quarter that snap 1 will be excluded from organic growth calculations as we lap the 1 year anniversary of the close of the acquisition.

To establish go forward disclosure with the inclusion of snap 1 total ADI year-over-year growth in reported net. Revenue was 9%.

Now, getting into revenue drivers, organic net revenue growth was driven primarily by continuing commercial customer strength across most product categories and increasing contributions from the digital channel.

From a product category perspective, we saw solid double-digit percentage. Organic Revenue growth year-over-year in multiple categories with notable contributions from the commercial security fire, professional audio video and data. Communication product categories. These performance Trends also hold through on a total ADI basis.

From a customer perspective, the cohort of top. Integrators also saw solid double-digit percentage growth year-over-year, showcasing our importance to these valuable customers

ADI is winning more new project business evidence of our scale and execution capabilities.

Organic e-commerce, net revenue, grew 19% year-over-year achieving another quarter of strong Revenue contribution and a new record in run rate. Daily sales average. E-commerce continues to be structurally, accretive to Total ADI, gross margin

With the inclusion of snap 1, total Adie Commerce, net revenue, grew 8% year-over-year.

Increase 32% year-over-year while also generating more gross margin dollars in the quarter versus the same period last year.

Growth was primarily driven by continued success on cross-selling, exclusive Brands added to our portfolio with the snap 1 portfolios.

In the quarter, we added nearly 200 skus. We also continue to be recognized for the value. We delivered to the customer notably being named the number 1 top industry. Distributor in the CE Pro 100 brand analysis.

With the inclusion of snap 1 total ADI, exclusive Brands Revenue, grew 5% year-over-year.

To progress nicely and remains ahead of our Synergy goals. This quarter, we are excited to highlight that the acquisition has been accretive to residio in our first full year of ownership.

ADI reported a 22.2% gross margin in the second quarter, up 280 basis points year-over-year.

in expansion was primarily driven by higher volumes of snap 1 exclusively that provided a temporary benefit.

Note that we have adjusted prices, dynamically related to tariff mitigation actions and to protect audeze. Gross margin dollars.

The increase margin dollars flowed down to support our adjusted EPA. Doug growth.

In closing, ADI is executing well driven by our customer. First, ethos we look to continue driving, organic Revenue, growth and adjusted Eva Doug growth throughout 2025 and Beyond.

Now, let's turn the call over to Mike to discuss our second quarter Financial results in 2025 Outlook.

Thanks Rob. Good afternoon everyone. Let's get straight into the quarterly results.

As J. Highlighted our second quarter was very strong with net revenue, adjusted. I adopt and adjusted earnings per share all above our outlook for the quarter.

$0.94 billion, representing a 22% year-over-year increase and an 8% rise on an organic basis. Excluding the impact of Snap 1 AC and a 1% favorable impact from currency.

Both Tom and Rob spoke earlier about the drivers of organic, net revenue growth and their respective businesses.

Total company gross margin in the quarter was 29.3% of 120 basis, points year-over-year.

The increase is primarily driven by the more margin-accretive activities and ADI, as well as the structural operating efficiencies at PNS.

second quarter total company adjusted earnings per. Share was 66 cents above the high end of our Outlook range and up from 62 cents from the same period in the prior year.

In the quarter, we recorded a current liabilities balance of 1.625 billion in conjunction with the expected. Termination of the Honeywell Indemnity indemnification agreement with a corresponding expense of 882 million.

This results in a reported GAAP net loss and loss per share.

This item is adjusted out to arrive at our adjusted EPs and adjust the debit top.

Total company adjusted IBA was a record 210 million in the quarter up 20% year-over-year and exceeding the high end of our Outlook range.

The primary drivers of the increase include a positive contribution from Step 1, as well as customer demand.

These positive drivers were partially offset by Investments made in both business segments.

Going forward. We expect our adjusted Evita to benefit from the removal of the 35 million quarterly payments on Honeywell related to the termination of the indemnification agreement.

Total cash provided by operating activities, was 200 million driven, primarily by strong sales and collections in the quarter.

Now, before I provide our financial outlook for the third quarter of 2025 and the full year 2025, let me walk you through some of our Market perspectives and assumptions that are incremental to those shared with you last quarter.

As previously, noted adjusted EBA is expected to benefit by 35 million in each of the third. And fourth quarters related to the termination terminated in them cash. Provided by operations benefits by 35 million. As we did, make a payment to Honeywell in July

And our cash provided by operations Outlook. We assumed 20 million of Separation related payments in the second half of 2025.

In a continued dynamic environment, we are maintaining our second half 2025 expectations.

For our second half outlook, we account for the impacts from the terminated indemnification agreement and a shift in Adis' implementation of a new ERP system from the second quarter to the third quarter.

And while this is not a change, we felt it important to reiterate that we included the impact of all tariffs currently enforced, as of today, in our Outlook.

We continue to assume we will benefit from the usmca Tariff exemptions for products manufactured in Mexico.

With all that, we are raising our 2025 Outlook as follows.

Total company, net revenue to be in the range of 7.45, to 7.55 billion.

Total company adjusted ibaa to be in the range of 845 to 885 million.

And note this range is inclusive of 70 million related to the payments made to Honeywell in the first half of 2025.

Total company fully diluted earnings per share to be in the range of 2.75 to 2.87.

And cash from operations, excluding the Honeywell termination payment of 405 to 435 million.

We are initiating an outlook for the third quarter of 2025 as follows.

Total company. Net revenue to be in the range of 1.85 for 1.90 billion,

And total company adjusted ibaad to be in the range of 220 to 240 million.

Total company fully diluted earnings per share to be in the range of 70 cents to 76 cents.

Please go to our investor relations website to access our earnings presentation, which includes our Outlook ranges along with key modeling assumptions, for 2025,

Now, let me hand the call back to Jay for some final comments before opening the call up for questions.

Thanks Mike.

The last several months have been momentous for residio. Last week, we announced 2 important events.

Reimbursement agreement.

The second was to announce our intention to spin off our ADI business segments as an independent company.

Both events are expected to create significant value in the near and long-term while refining our strategic and operational, focus and simplifying our story within the investment community.

Operator, let's now open the call up for questions.

At this time, I would like to remind everyone in order to ask a question. Press star, then the number 1 on your telephone keypad,

we'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Eric Woodring

With Morgan Stanley, your line is open.

Awesome. Thank you guys for, uh, for taking my questions. Um, I have a small handful, if I met, um, you know, maybe just to start. Um, uh, Rob. I'll start with you. Um, just just really strong organic performance, um, from ADI, um, I'd love if you can just kind of help us, understand kind of price times, quantity or Price times. Volume uh in the second quarter just understand kind of where you got that 10% organic growth because obviously that is a a multi quarter um high. And I'll ask a similar question, but maybe opposite. Um just in the interest of time which is I I think most of the kind of as reported versus organic growth metrics you gave for ADI would suggest

The snap 1 business is uh, is declining. I think it was a headwind to e-com exclusive Brands and total growth. Can you maybe just help us understand what's going on in snap 1. Obviously a bit more residential, uh, exposure. But just could come in maybe compare and contrast snap 1 with what you're seeing, um, in kind of ADI. Um, organically, please, thank you.

Yeah, sure Eric. So uh thanks. Um so first question, you know, if I if I look at that 10% growth, you can attribute 1 to 2% of that to probably closer to 2% to the tariffs, the price increases that we have implemented through uh, throughout the second quarter as, you know, when we get the price increases, we pass those right through. Um, when we when we met, I guess last earnings call. I think we talked about, you know, the potential volatility. We aren't quite sure what was going to happen to demand in the second quarter, but we were pleasantly surprised. I mean, we did see momentum in March and then through April May and June, we just continued to see that momentum specifically in the categories. I mentioned in the uh in the prepared. Remarks commercial security. Uh fire video, professional a V and Datacom when I look at.

What we saw in the second quarter, the pipeline bill, I mean, we're a record levels there, uh, and that continued, by the way, into July. So I feel really good about the demand that we generated. Uh, I feel like we absolutely, you know, took share in the market and, uh, gives me confidence to kind of continue that as we move through the rest of Q3 um, in in terms of the actual overall performance of a good segment, um good performance or the performance of snap right versus the rest of the business. I wouldn't say declining I would say holding flat compared to the rest of the business. As you know, it's a kind of a tough, tough macro environment out there on the residential side. We're seeing the same thing in residential security. But I will tell you this, we are seeing, um, terrific benefits from the integration, uh, as we scale snaps exclusive brand products to the rest of our ADI, customer base.

We had a kind of a prepared timeline for that when we had originally done the deal the first year and we decided to accelerate that we moved really fast. I think we're I'd say we're in the fourth or fifth Inning on that in terms of scaling, to all of our stores. The majority of the sort that is up on the ADI website. So from that perspective, the integration is paying significant dividends for us. Uh, but you know, I'd say, yeah, the snap business is overall about flat right now compared to the rest of the adios.

Customer demand was maybe a million, a hundred million dollar headwind last quarter. You talked about it being a little bit less, but overall, just help us understand what's going on with that relationship because it seems like there are some headwinds, but there are also some tailwinds emerging. Could you unpack that for us a little bit, please?

Okay, so first let's deal with the se5 so that was done working with Google hand in hand to make sure we delivered a product that they believed to be worthy successor of the best protect a large. So that was tightly integrated in terms of the teams they were excellent to work with. I hope they feel the same about how we performed in terms of our relationship with Google. We're continuing to have discussions about other ways we can work going forward. Now I think, what you you were mentioning there is well, Google had a security product which

Was sold to another party, which is now in the security market and we compete in the security Market. We're not competing with Google in the security Market. Let's that's really kind of the 1 piece of it and

Our relationship with Google, we'd like to see strengthening going forward. In terms of the security market, though, how do we look at that in that large private label customer that we talked about? Um, that relationship is dynamic. You know, there were some forecasts that were related that we've tried to keep everyone informed about how it's progressed.

Uh, the amount of the downturn has been less. I'd like to think that that is because of our engagement with that customer trying to make sure that we Rose to any kind of question or opportunity to be able to provide value to them. Um, we continue to have discussions about future, there's nothing to update at this point in time specifically on Revenue. Um, I'll let Mike kind of make the call about any time would we would want to give greater detail but it's a customer. We can continue to support. We can continue to work with and we're hopeful that we can have a long-term relationship with our customer.

Okay, perfect. Um, that's also really helpful and then maybe last 1, um, for me and I guess I'll throw this to Rob but it can be for, for, for anyone, which is, you know, the the staff 1, um, has a residential connected home kind of software OS um and support OS back in the the control 4 days. You know, that that feels like a kind of Perfectly Natural technology to kind of leave with pns. The the residential part of the business, um what what happens again I realized that it's early and and the spin transaction is is expected to be kind of a year from now. But you know what happens to that Legacy control for platform that was that was integrated into snap 1. Does that does that go to pns? Does it stay with ADI and if it stays with IDI just

Kind of weird is that fit because it feels like it. It's an opportunity for pns but please correct me if I'm wrong. Kind of an open-ended question for whoever would want to take it. Thanks so much guys.

Appreciate that.

We're all smiling in the room here. It's a really good question. Um, know, as of right now and we don't see this changing at all. Uh, the you know what, what came over with the snap business. Uh, as, as the acquisition that sits with ADI today will absolutely remain with us going forward. That's a just strategic decision that, uh, that we make. And we feel like we can actually with some proper Focus, right? We can actually, uh, you know, do some things to rejuvenate if you will the control for brand. Uh, there's a lot of pull through as you know that comes along with that. Of course there's the oversee ecosystem. That's uh that's highly complimentary there. But you know, with the launch of X4, uh which uh which just was the new operating system, I think it was April time frame, we're seeing good traction with that. Of course, Lux lighting came out right after that and we've got uh, we've got some good ideas new for new products in the pipeline to support control for going forward. So, uh, it's staying with ADI, I think belongs here and

I think we've got a great opportunity to just continue to enhance the user experience going forward.

Okay, awesome. Excited to learn more, guys. Um, good luck, and thanks for all the, uh, answers again.

Thanks Eric.

Your next question comes from the line of Ian zafino with Oppenheimer.

Your line is open.

All right, thank you very much. Um,

What do you think you could achieve in this environment and then maybe as housing and repairer model improves? Um worker margins go from there. Thanks.

Okay, so first, I I want you to understand we're not done with kind of the continued Improvement in the margins. And there's a couple pieces to the Improvement in the margins. 1 is the value that we're delivering in the products that we're offering. So that's the NPI. And we have a pipeline that is full of products that will be introducing over the next couple of years that we expect to be a creative to margins. Second is how efficiently do you create that value? We have a plan to continue to improve our manufacturing footprint and third is the mix of the products. So some of our products have higher margins and we're making sure we shift our investment to those things that are going to maximize the return on our investment. So all that said, you're saying okay, where does it end up? We're going to end up. I would say in the range of 45 to 50% over a longer period of time, we will continue to see the increments over the next couple of years, to get to that kind of range.

okay, thanks and then, um, you know, on the tariffs, um,

Help us understand where the kind of power is. Um, you know, are you able to push back onto your suppliers at all? Um, to the ability to do that and or is you have to take the price and then hope to pass it through to your customers. Um, how do we think about that? Thanks.

Yeah, good good. Good question. The answer to all the answer to that is an emphatic. Yes. On several different fronts. Um, we have uh, is just based on our size. I'll start with our branded suppliers first and so based on our size and scale, right? We tend to have very favorable terms with all of our suppliers. Um, things like, you know, uh certain certain time periods before, you know, we get price increases, I told us and then we have to make it effective in the channel. And so, while terrorists might have taken effect, there's usually some distances are of time. Between the time we get, that's our suppliers, where we get, the tariffs, get as we put in place, and then, uh, when the supplier pricing increases get put in place, so we're able to actually, you know, buy a head inventory. Um, I think I mentioned that as well earlier have that average lower lower cost inventory as it burns through but higher price points in the channel. So typical distribution type of stuff. And then on the exclusive brand side, we absolutely are able to go back to a lot of our JDM.

Flyers in RCM suppliers and actually get them to eat part of the tariffs. And we've been very, very successful with that. So between those 2 things and then, of course, all the pass through, we've been able to mitigate fully the effects of tariffs since they went into effect, you know, late in q1, early Q2

Okay thanks and then um just final question just on m&a how are you thinking about that going forward? I know you're kind of digesting this big um snap 1 but it's been almost a year now. So you know how we thinking about m&a, you know, are there holes that you need to fill, are their adjacencies, you want to get into or is it just per se scale and adding more doors in the EDI side so I think

I look, we continue to refund our or I'm sorry, we continue to uh, you know, look at a strong m&a pipeline going forward. Yeah, to your point. Look, we were we were engaged heavily in making sure we drove a proper integration for a year. We're at the 1 year, Point that's going very, very well. And now, as we look to the future, I mean, Emma m&a has always in the all was in the cars. I mean, I'd like it to be, you know, in some of the our Focus will be in some of the more adjacent space categories where we're seeing some significant growth. We still got some capabilities, we want to build their proav and Datacom specifically and then I would also tell you with. Now the the addition of the snap 1 um product line, right? There's there's opportunities. There's technology opportunities, right? And ways to

Kind of fill out better for better fill out that portfolio as well. So um you know, I would say that uh that we're in a great position to continue to look to uh to Opportunities. I Ian, this is Jay. I mean I'd add another Tom also, comment. I mean it's the m&a is is part of both businesses, strategic plan.

So and Rob's right in the case of ADI and snap, you know, that was a big acquisition to digest. And as you've heard, they're doing a really good job on that front, but they have the, you know, they've, they've taken quite a bit of time as part of their

He is working with his team. On taking a look at opportunities. Tommy, you want to add anything to that? No, that's exactly right. You said, we absolutely are looking at those opportunities. We think add to shareholder value? Yeah.

All right, great. Thank you very much.

Thanks Ian.

There are no further questions at this time. This concludes today's conference call. Thank you all for joining you may now. Disconnect