Resideo Technologies, Inc.

Ladies and gentlemen, at this time, I'd like to welcome everyone to the Residual Second Quarter 2021 Earnings. Today's call is being recorded. All participants will be in a listen-only mode until the formal question and answer portion of the call. It is now my pleasure to introduce Mr. Jason Willey, Vice President of Investor Relations. Mr. Willey, you may now begin.

Good afternoon, everyone, and thank you for joining us for Residio's second quarter 2021 earnings call. On today's call will be Jay Geldmacher, Residio's chief executive officer, and Tony Trumzo, our chief financial officer. A copy of our earnings release and related presentation materials are available on the investor relations page of our website at investors.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 Residio's filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. We identify the principal risks and uncertainties that affect our performance in our annual report on Form 10-K and other SEC filings. With that, I will now turn the call over to Jay. Thank you, Jason, and good afternoon, everyone. Our Q2 performance reflects positive market trends, the strong position we've built with our customers, and solid execution across the organization. We grew revenue 44% year over year as both products and solutions and ADI continue to benefit from positive residential spending trends, with ADI also seeing a healthier commercial backdrop. Significant improvements in operational execution has allowed us to successfully manage the difficult and dynamic supply chain and logistics environment. Profitability expanded meaningfully year over year in Q2, Both segments leverage higher revenue and continued focus on cost management to deliver improvement in gross margin and operating margin. We continue to make progress with our value and cost engineering programs within products and solutions. Additionally, our investments in technology to improve customer support, sales force effectiveness, and digital tools are showing benefits within both ADI and products and solutions. We continue to manage through significant logistics and supply chain challenges, and these dynamics are creating some headwinds to financial results. While we believe the team continues to do an excellent job delivering for our customers in this environment, our backlog grew in the second quarter and remains at elevated levels. The entire supply chain team, along with senior leadership, including myself, are actively engaged with our suppliers and focused on continuing to ensure that we are able to procure more than our fair share of critical components. Our freight costs are also running well ahead of 2020 levels as the tight supply chain situation and unpredictable ocean freight conditions are necessitating more expediting in air freight. We currently expect challenging component supply and freight dynamics through at least the end of 2021. During the quarter, we continued our strategic work and business transformation efforts. As part of this, we unveiled Resideo's overarching vision and purpose to our employees. This work is grounded in a desire to clearly lay out and articulate what Resideo is, what we stand for, and what we aspire toward. Our vision and purpose will represent and inform our strategies across Resideo. This begins with our vision. We imagine a world where homes and buildings are good for the planet, where technology works to simplify everyday life. In that world, people are healthy, happy, and secure. To help create this future, we work every day to simplify the connected world so people have peace of mind and can focus on what matters most. This is our purpose. Our new vision and purpose will help us align the Resideo culture around common beliefs and aspirations and serve as a galvanizing force in pursuit of our long and short-term objectives. As a follow-on to this work, we will surely be rolling out new core values to the Resideo team. From a business and organizational standpoint, we continue to focus on tightening our collaboration and breaking down silos within products and solutions. During the quarter, we aligned product management into two groups, integrated home and building solutions and OEM and partner solutions. This change better positions us to focus on the needs of our varied customers and allocate resources, particularly software development, to common initiatives across product categories. By improving internal collaboration and thinking more holistically across the home when roadmapping and developing solutions, we expect a new integrated home and building solution structure that better position us for long-term connected home opportunity. During the quarter, we also finalized our decision to relocate our corporate headquarters from Austin, Texas to Scottsdale, Arizona. This move will allow us to consolidate our real estate square footage and better positions us for engagement with key customers and suppliers. The headquarters move and resizing our footprint in Austin are expected to generate ongoing annual savings of approximately $2 million. During Q2, products and solutions saw strong demand across markets, geographies, and trade and OEM channels. This is a continuation of the positive trends we have seen since the middle of 2020, as investments in home and security solutions remain priorities for many individuals. Our execution within products and solutions on new product introduction continues to gain momentum. This includes the release of the latest version of our Pro Series security platform in North America. This release brings improvements, including increased wireless communication range and enhanced panel support for video from cameras and doorbells. We are committed to further enhancements of our security offering, including the rollout of Pro Series to our EMEA customers. At ADI, Q2 performance further demonstrates our leadership in the market. We saw strong year-over-year growth across all major product categories, serving both commercial and residential customers. ADI is performing well in meeting customer demand by focusing on having the products their customers need when and where they need them. ADI's focus on product availability has enabled the business to grab additional sales and deliver strong support to existing and new customers. This is evident in the growth rates ADI has consistently delivered when compared to competitors and the overall industry. ADI is making good progress with the integration of our recent North Polk and Shore View acquisitions. We are already seeing great collaboration and opportunity between the acquired organizations and ADI. We expect the integration of both Northfolk and Shoreview to be completed by year-end. With that, I will turn the call over to Tony to discuss our second quarter performance and 2021 outlook in more detail.

Thank you, Jay, and good afternoon, everyone. In the second quarter, we again delivered strong growth in revenue and profitability across Resideo. Consolidated Q2 revenue was $1.5 billion, an increase of 44% compared to Q2 last year, which was negatively impacted by the emergence of COVID-19. Q2 gross margin of 25.8% was up 290 basis points from Q2 2020. Consolidated operating expenses were $260 million in the quarter, up just 7% from last year, despite sharply higher revenue and a $16 million expense related to the pending shareholder litigation settlement we announced on Tuesday. Operating expenses were 18% of total revenue, compared with 24% in Q2 2020. Operating profit for the second quarter was $121 million, or 8.2% of sales, compared to a loss of $6 million last year. Products and solutions second quarter revenue of $598 million was up 50% due to continued strong demand across our major product categories, geographies, and channels. Products and solutions gross profit margin in Q2 was 38.6%, up from 33.9% in the second quarter of 2020. P&S operating profit was $129 million, or 21.6% of sales, compared with $42 million, or 10.6% of sales last year. The improved margin performance was primarily due to fixed cost leverage and productivity improvements net of the negative impact of recent materials price inflation of approximately $8 million, as well as $20 million of higher freight costs year-over-year. Gross profit also benefited from a $7 million reversal of an inventory reserve. Operating expense was up 10% year-over-year due to higher sales commissions and incentive compensation, as well as incremental investment initiatives. ADI Q2 revenue of $879 million increased 39% year-over-year. Demand was strong across commercial and residential markets, with over 30% growth in each of ADI's six largest product categories. ADI's investments in e-commerce and digital selling tools continued to show results, with e-commerce sales up over 65% year over year and accounting for 14% of ADI total sales. ADI's two recent acquisitions contributed $15 million in Q2 revenue. ADI gross profit margin in the second quarter was 17.3%, up from 16% last year. A higher gross margin was a result of better mix, including a higher proportion of private brand sales, improved product line margin resulting from our NVP pricing initiative, and more favorable supplier rebates due to higher volumes. ADI operating profit was $66 million, or 7.5% of sales, up 113% from $31 million, or 4.9% of sales, in Q2 last year. ADI operating profit benefited from higher revenue, partially offset by increased investment activity of approximately $4 million, largely around digital tools and Salesforce effectiveness initiatives. The recent acquisitions were not material to operating profit. Corporate costs for the quarter were $74 million, or 5% of sales, compared with $79 million, or 7.7% of sales in the second quarter of 2020. This reflects a reduction in spend and transformation-related costs of approximately $25 million, as well as the litigation settlement expense this year. The pending settlement reduced Q2 operating income by $16 million, net income by $12 million, and diluted earnings per share by $0.08. Consolidated cash from operations for the second quarter was $94 million, compared with $145 million in the prior year period. Cash from operations last year was affected by unusual COVID-related positive cash flow items including a reduction in working capital and focused cash conservation efforts. We ended Q2 with cash and cash equivalents of $579 million and total outstanding debt of $1.2 billion. Our net debt stood at $615 million compared to $1.1 billion at the end of the second quarter of 2020. As a result of continued strong performance and our current view into the near-term demand environment, we are revising our outlook for the full year and now expect 2021 revenue to be in the range of $5.85 billion to $5.95 billion, implying year-over-year growth in the range of 15% to 17%. Consolidated gross margin is expected to be in the range of 26% to 28%, And GAAP operating profit is expected to be in the range of $535 million to $565 million. For the third quarter of 2021, we expect revenue in the range of $1.5 billion to $1.55 billion. Consolidated gross margin in Q3 is expected to be in the range of 26.5% to 28.5%. and GAAP operating profit is expected to be in the range of $140 million to $150 million. Our revised 2021 revenue outlook anticipates an increase in products and solutions backlog in the second half due to continuing shortages of certain components. We are also forecasting higher costs of goods in the second half of 2021 as a result of an estimated $20 million of additional year-over-year freight costs incremental to volume growth as well as inflation to the cost of certain components of approximately $25 million. Offsetting these higher costs are expected pricing benefits above our typical baseline of approximately $50 million in the second half. Corporate expenses for the year are expected to be approximately $260 million compared with $290 million in 2020. This includes the $16 million litigation settlement in Q2. Also included in our outlook is up to $12 million in one-time leasehold impairment costs related to subleasing our former Austin headquarters office. We expect approximately $7 million of this cost to fall in the third quarter. Additional outlook details can be found on page 10 of our earnings slides. As a reminder, ADI will have five fewer selling days in the fourth quarter compared to Q4 2020. I will now turn the call back to Jay for a few concluding remarks before we take questions.