Resideo Technologies, Inc.

Ladies and gentlemen, at this time, I'd like to welcome everyone to the Resideo fourth quarter and full year 2021 earnings conference call. Today's call is being recorded. All participants will be in a listen-only mode until the formal question and answer portion of the call. It is now my pleasure to turn today's call over to Jason Willey, Vice President of Investor Relations at Mr. Willey, you may now begin.

Good afternoon, everyone, and thank you for joining us for Residio's fourth quarter and full year 2021 earnings call. On today's call will be Jake Elmacher, Residio's chief executive officer, and Tony Trunzo, our chief financial officer. A copy of our earnings release and related presentation materials are available on the investor relations page of our website at investors.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. 2021 was a record year for Resilio, with revenues growing 15% year over year, gross margin expanding by 80 basis points, an operating margin of 350 basis points. We generated 315 million of operating cash flow in 2021, up from 244 million in 2020 and 23 million in 2019. These results were well above the expectations we outlined at the beginning of 2021 and reflect positive underlying market conditions and strong execution across the organization. The significant improvement in financial performance was against the backdrop of a dynamic and challenging supply chain environment, continued inflationary pressures, and the ongoing challenges of navigating COVID. The team managed through all of this and made significant progress strengthening the foundation of the business and in driving key investment initiatives. We also unveiled our vision, purpose, and values and completed strategic planning initiatives at the corporate level and within the businesses. I would like to thank the entire Resideo team for their tremendous efforts in 2021. We delivered for our customers and partners while generating record financial results and taking important steps to position the business for long-term sustainable success. Thanks to improved profitability and cash flow, combined with favorable financings, we ended 2021 with a dramatically improved capital structure. This enabled us to execute on our strategic initiatives and focus on long-term value creation. Our announcement last week of an agreement to acquire First Alert, a leading provider of home safety products, highlights this financial flexibility and the value it brings. FirstAlert provides Resideo a highly complimentary suite of fire and carbon monoxide detection and fire suppression products with widely recognized and respected brands. FirstAlert expands our sensors within the home and occupies a highly strategic position on the ceiling. The transaction will more than double products and solution sales in the retail channel and provides new products for our professional partners. We are excited to bring the first alert team on board and expect to hit the ground running upon closing, which we anticipate to occur by the end of Q1. Moving to segment performance for 2021, products and solutions delivered 16% year-over-year growth with revenue reaching a record $2.5 billion. Demand was strong across our key markets, product categories, and channels. People continue to invest in their homes, and we are well positioned as the go-to partner for professional contractors and OEMs to capitalize on what we see as sustainable trends toward increased comfort through managing air, water, security, and energy. In 2021, we completed critical foundational work that positions the business for sustained growth. This includes investments in sales operations and business development, systems consolidations, introduction of a comprehensive integrated business planning process, and digital efforts to consolidate and refresh our web presence. We also launched the ProPerks loyalty program with professional security dealers and HVAC contractors. Much of this work was centered around solidifying systems and processes to ensure we are more deeply engaged with key customers and partners, and we have the visibility to better plan and meet their needs. We also accelerated investment in our engineering organization to strengthen our innovation engine and better focus new product development efforts. During 2021, we rolled out enhancements to our Pro Series security platform across the general market in North America, launched an innovative entry-level connected thermostat with Amazon, and refreshed our hydronic portfolio in Europe. We also consolidated software development efforts under one leader and made significant progress in development and platforming initiatives. At ADI, revenue grew 15% in 2021 to 3.4 billion with double digit growth in all key categories. This is a continuation of the consistent above market growth ADI has delivered over the past decade. Both residential and commercial markets saw accelerated activity in 2021. As the year progressed, vendor supply issues became more prevalent, particularly in categories such as video surveillance and intrusion, which resulted in significant backlog at year end. ADI also invested aggressively in 2021, including improvements to the e-commerce experience, pricing optimization, and Salesforce effectiveness tools. Pricing initiatives, which have provided the ADI sales team better real-time insight and the ability to price more efficiently, help the business deliver 100 basis points of year-over-year gross margin expansion. Our digital investments support more transactions flowing through touchless channels, allowing ADI to free up sales associates for more value-added selling. This allows for better leverage of these high-value individuals as ADI execute on this long-term growth strategy. The average revenue per sales employee grew by 14% in 2021 to over 2 million. During the year, we completed the acquisition and integration of the Shoreview and Norfolk businesses, expanding our presence in key strategic adjacencies of data communications and audiovisual markets. Yesterday, we announced the acquisition of Arrow Wire and Cable, a West Coast distributor of data communication products. The acquisition complements Norfolk geographically, strengthening our growing position in the data communications market. I'd like to welcome the Arrow team to Resideo. We are excited by the value creation opportunity we see for the combined organizations. With that, I will turn the call over to Tony to discuss our fourth quarter and full-year performance and 2022 outlook in more detail.

Thank you, Jay, and good afternoon, everyone. As Jay said, 2021 was a year of record financial performance for Resideo. We delivered strong top-line growth, higher gross margins, and operating leverage, resulting in meaningful expansion in earnings and cash flow. We achieved these results while managing through the most challenging sourcing and inflation environments in decades. In Q4, our ability to fully meet customer demand was again limited by the availability of critical components. Q4 revenue of $1.5 billion was down 3% compared to Q4 last year. Gross margin for the quarter was 27.2%, down 100 basis points compared to Q4 2020. while consolidated operating expenses for Q4 decreased by 6%, primarily due to a $19 million year-over-year reduction in corporate costs. Operating income of $141 million was 7% lower than the last Q4. Products and Solutions' fourth quarter revenue of $633 million was down 6% year-over-year and was essentially flat sequentially. Revenue was negatively impacted by the ongoing shortage of semiconductor components. Products and Solutions' gross profit margin in Q4 was 37.9 percent compared to 41.9 percent in the fourth quarter of 2020. The decline in gross margin was due to the deleveraging effect of lower volumes as well as materials price inflation and higher freight costs, all partially offset by price realization of approximately $40 million. Products and solutions segment operating profit was $125 million, or 19.7% of sales, compared with $166 million, or 24.6% of sales last year. Operating expense for products and solutions was unchanged year over year, reflecting lower transformation costs offset by increased investment and higher sales expense. ADI Q4 revenue of $821 million was flat year over year, but grew 8% on a daily sales average basis, reflecting higher volumes and increased pricing over five fewer selling days. ADI saw good activity in the quarter in fire, access control, and wire categories, while video surveillance and intrusion were constrained by product availability. E-commerce sales were up 27%, accounting for 17% of total ADI revenue in the quarter. ADI also continues to make progress in expanding its private brand sales, which were up over 30% year over year in the quarter. ADI gross profit margin in the fourth quarter was 19.1%, up from 17.5% last year. The higher gross margin was a result of improved product line margin, as ADI benefits from investment in tools to support pricing initiatives and increased private brands' contribution. Margins also benefited from positive industry pricing dynamics. ADI Q4 operating margin increased 130 basis points from last year to 8.5%. We continue to direct investment toward ADI, especially in the areas of digital and sales tools, which is reflected in higher year-over-year operating expenses. We're already seeing significant return from these investments, as evidenced in strong top-line performance and product line gross margin expansion. Corporate costs for the quarter were $54 million, or 4% of sales, compared with $73 million, or 5% of sales in the fourth quarter of 2020. During the quarter, we generated $112 million of cash from operations, and for the year, operating cash flow was $315 million, compared to $244 million in 2020. Over the past 12 months, we've made significant improvements to our capital structure, including refinancing all of our debt instruments. These transactions extended our debt maturities and will generate approximately $8 million in annualized interest expense savings. We ended Q4 with cash and cash equivalents of $779 million and total outstanding debt of $1.2 billion. Net debt stood at $451 million at the end of the year compared to $645 million a year earlier. I would also note that this morning we launched a $200 million add-on to our existing term loan B to provide incremental liquidity in anticipation of the first-order transaction. Looking toward 2022, we expect revenue for the year to be in the range of $5.95 billion to $6.2 billion. implying year-over-year growth of 4% at the midpoint. Consolidated gross margin is expected to be in the range of 27% to 28%, and gap operating profit is expected to be in the range of $610 million to $650 million. For the first quarter, revenue is expected to be in the range of $1.425 billion to $1.475 billion. Consolidated gross margin is expected to be in the range of 27.5% to 28.5%, and GAAP operating profit is expected to be in the range of $140 million to $150 million. Corporate expenses for the full year 2022 are expected to be approximately $240 million, down an additional $10 million compared to 2021. We also expect a positive impact to gross margin in Q1 due to a larger-than-normal annual inventory revaluation in the products and solutions business. Our first quarter and full-year operating profit outlook includes approximately $10 million in transaction costs associated with the PennDate First Alert acquisition. No other impact from First Alert is contemplated in our annual or first quarter outlook. Assuming a first quarter closing, we will provide an updated 2022 outlook, including first alert, on our first quarter earnings call. Additional outlook details can be found on page 12 of our earnings slides. I'll now turn the call back to Jay for a few concluding remarks before we take questions.