Resideo Technologies, Inc.

Ladies and gentlemen, at this time, I'd like to welcome everyone to the Residio Technologies first quarter 2022 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. At that time, if you do have a question, please press star one on your telephone keypad. It is now my pleasure to turn the call over to Mr. Jason Willey, Vice President of Investor Relations. Mr. Willey, you may begin.

Good afternoon, everyone, and thank you for joining us for Resideo's first quarter 2022 earnings call. On today's call will be Jay Geldmacher, Resideo'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.resideo.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 forward-looking statements as a result of a number of factors, including those described from time to time in Residio's violence 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. We began 2022 on a strong note, continuing the positive momentum that has been building across the business since the middle of 2020. First quarter performance again demonstrated our ability to navigate the challenging supply chain and inflationary environments to deliver for customers. At the same time, we drove higher revenue, margin expansion, and strong earnings growth. We also continue to make progress on strategic priorities of both products and solutions and ADI around capital deployment, accelerating new products and services, and increasing exposure to high growth in adjacent categories. In the first quarter, we deployed over $630 million in capital to value-enhancing M&A activity. Within Proxxon Solutions, we completed the acquisition of First Alert, a leader in residential smoke alarms and carbon monoxide detection. First Alert expands our sensors within the home and occupies a highly strategic position on the ceiling. We are already working together to create value in the channel, leveraging First Alert's presence in retail, and residual strength and scale with professional distributors. Over time, we see opportunity to integrate First Alert products and technology with our existing product portfolio. We are also excited by the potential to drive smoke and carbon monoxide detector category growth by expanding connected offerings. While First Alert has only been on board for a month, we've already seen significant interest from partners looking to work closely with the combined First Alert and Resideo product capabilities. During the first quarter, ADI continues expansion in the data communications category with the acquisition of Arrow wire and cable. The business complements the 2021 acquisition of Norfolk wire and electronics geographically, strengthening ADI's product offering, category expertise, and customer exposure in the growing data communications market. I want to welcome both the First Alert and Arrow teams to Resideo, and we look forward to demonstrating the significant opportunity for value creation these acquisitions bring. Turning to segment performance in the first quarter, products and solutions delivered 2% year-over-year growth. Overall demand trends remained healthy across product categories and channels, as homeowners continue to invest to improve the security, energy efficiency, and comfort of their surroundings. The semiconductor supply chain environment remained challenged during the first quarter, and shipping costs have stayed at historically elevated levels. Helping offset these headwinds to revenue and costs was the flow-through of price actions we implemented throughout 2021. We've rolled out further price adjustments in April and May across parts of the portfolio. We are increasing investment in engineering to accelerate innovation and development efforts in support of our long-term strategy. Underpinning these efforts is significant progress around creating an integrated software and applications platform to support a residual products and services ecosystem. When completed, this platform will enable new value-creating solutions for our customers as well as provide more simplified experience for homeowners. We are excited by the progress and opportunity here, but acknowledge we have significant work to do in order to reach the ultimate vision of fully leveraging our unique product breadth within a connected home ecosystem. We are also expanding our business development efforts, focusing on innovative partnerships with other major players in the broader connected home market. Early results of this work include several design wins with OEM customers and initiatives underway to expand our presence in attractive growth categories such as multifamily, residential new construction, hydrogen, and energy management. At ADI, revenue grew 9% in the first quarter with strength in North America and categories that typically support commercial customers. As a reminder, approximately two-thirds of ADI's business typically comes from commercial customers. Growing backlog of products in numerous categories restrained ADI revenue growth in Q1 and is expected to remain a challenge moving forward. Over the past 12 months, ADI has made meaningful progress expanding into key adjacent categories of audiovisual and data communications. ADI drove significant expansion in total AV category sales during the first quarter. With the integration of the Shoreview acquisition into ADI, our AB business is seeing the benefits of ADI's scale and strength in customer service and supply chain, and the ability to win and execute on larger projects. ADI continues to expand its private brand offerings, introducing over 75 new SKUs in the quarter, with an extensive roadmap of future introductions. Private brand revenue grew over 40% compared to the first quarter 2021 at very accretive margin. With that, I will turn the call over to Tony to discuss our first quarter performance and 2022 outlook in more detail.

Thank you, Jay. And good afternoon, everyone. In the first quarter, we continue to grow the business and drive improved profitability, even as we increased investment in key technology and engineering initiatives. Overall demand trends remain solid, and our recent pricing actions have helped offset higher component and labor costs. As usual, ADI delivered strong results from great execution and its organic and inorganic growth investments. First quarter revenue of $1.5 billion was up 6% compared to Q1 last year. Gross margin for the quarter was 28.8%, up 290 basis points compared to last Q1. Consolidated operating expenses grew by $24 million, or 10%, reflecting increased investment in both businesses, as well as $10 million in one-time first alert transaction costs. Operating income of $172 million was up 32% compared to last Q1. This performance generated diluted earnings of 58 cents per share, an increase of 76% compared to Q1 last year. Products and Solutions' first quarter revenue of $619 million was up 2%. Revenue benefited from price realization of approximately $53 million year-over-year and demand that remained solid across key product areas and channels. As expected, P&S volumes were down slightly in the quarter, primarily in security. Delinquent backlog again increased in Q1 and remains at historically elevated levels, limiting our ability to fully meet the demand we see in the market. Note that we do expect products and solutions volumes to increase year over year in the second quarter. Products and solutions gross profit margin in Q1 was 42.8%, up from 38% in the first quarter of 2021. The expansion in gross margin resulted from the flow through of 2021 price adjustments and our annual inventory revaluation. which together more than offset the material price inflation and higher freight costs we continue to see. Products and solutions segment operating profit was $153 million for 24.7 percent of sales, compared with $130 million for 21.5 percent of sales last year. Operating expenses for products and solutions bore up $11 million year-over-year, reflecting increased R&D investment higher trade show and travel spending, and inflationary pressure on compensation. We closed the first alert transaction on March 31st, and thus there was no impact on our income statement during the first quarter beyond the $10 million in one-time transaction costs included in corporate expenses. Our first quarter balance sheet and cash flow statement do reflect the closing of the transaction. ADI Q1 revenue of $887 million was up 9% year-over-year, reflecting a strong pricing environment and increased volumes in North America. ADI saw good activity in the quarter in categories serving commercial markets, including fire, access control, and wire. Revenue in Q1 was constrained by a significant increase in backlog, particularly in the video surveillance category. E-commerce sales were up 24% year-over-year, accounting for 17% of total ADI revenue, and private brands revenue grew by over 40%. The three acquisitions that we've completed at ADI since the beginning of 2021 added approximately 300 basis points to revenue growth in the first quarter. ADI gross profit margin in the first quarter was a very strong 19.2%, up from 17.2% last year. reflecting improved product line margin, increased private brands contribution, and a strong pricing environment. ADI Q1 operating margin increased 170 basis points from last year to 9%. We continue to direct investment to ADI with a focus on M&A, IT infrastructure, and digital and sales enablement tools. Corporate costs for the quarter were $61 million, or 4% of sales, compared with $59 million in the first quarter of 2021. Included in the first quarter 2022 number are $10 million of one-time transaction costs associated with the first alert acquisition. Excluding these costs, corporate spending decreased by 14%. During the quarter, we used $59 million of cash for operations compared to operating cash generation of $5 million in Q1 of 2021. This reflects the normal seasonal impact of bonus and customer rebate payments accrued in prior periods, as well as higher inventory to manage the dynamic supply chain environment. We ended Q1 with cash and cash equivalents of $244 million in total outstanding debt of $1.4 billion. The increase in debt reflects a $200 million add-on to our term loan B related to the closing of the first alert acquisition. Turning to our outlook for 2022, we expect revenue to be in the range of $6.45 billion to $6.65 billion, implying year-over-year growth of 12% at the midpoint. Consolidated gross margin is expected to be in the range of 27.5% to 28.5%. GAAP operating profit is now expected to be in the range of $680 million to $720 million, compared with our prior outlook of $610 million to $650 million. For the second quarter, revenue is expected to be in the range of $1.65 billion to $1.7 billion. Consolidated gross margin is expected to be in the range of 27% to 28%. and GAAP operating profit is expected to be in the range of $165 to $175 million. Our full-year outlook includes revenue from First Alert of approximately $325 million and operating profit of approximately $25 million. For the second quarter of 2022, we expect First Alert to contribute revenue of approximately $95 million and operating profit of approximately $5 million. We expect to incur approximately $10 million of first alert related integration costs during the remainder of 2022. These integration costs are included in the first alert outlook provided above. We anticipate exiting 2022 at an annual cost synergy run rate of $10 million and continue to expect to achieve run rate annual cost synergies of $30 million by the end of 2023. We have not completed the full purchase accounting analysis for the first alert transaction and thus have not included any purchase price amortization in the current 2022 operating income outlook. Our outlook contemplates the continuation of supply constraints and further increases in backlog at both products and solutions and ADI through the remainder of 2022. Additional outlook details can be found on page 10 of our earnings slides.

now turn the call back over to jay for a few concluding remarks before we take questions thanks tony our performance in the first quarter further demonstrates the strength of our underlying businesses and the progress on our long-term strategy adi continue to deliver best-in-class execution while driving digital initiatives and expanding the categories it serves within products and solutions The team has delivered for customers and expanded profitability through historic supply chain challenges and the highest inflation in decades. At the same time, we've deepened relationships with key customers and partners, and they've begun to expand our presence in attractive categories. As we look to the remainder of 2022, we see solid demand trends across our markets. Our conversations with key customers and partners indicate a significant backlog of project activity across both residential and commercial markets. With a large exposure to repair, renovation, and retrofit projects and positive secular trends around home comfort, energy efficiency, and physical security, we are well positioned to deliver growth even in a more challenging interest rate environment. We see the opportunity to grow revenue in both businesses as 2022 progresses through price and volume expansion. We are managing the business on the assumption that current conditions related to supply chain and cost headwinds will persist throughout the rest of the year. We also plan to invest in strategic initiatives and look for attractive opportunities to deploy capital through acquisitions as we did in the first quarter with Arrow and First Alert. Before we take questions, I want to express my thanks and appreciation to the entire global video team for their hard work, dedication, and focus. Our success is dependent on each and every one of you. This concludes our prepared remarks. Operator, we are now ready for questions.

Thank you. And ladies and gentlemen, once again, it is star one. If you have a question, we'll pause for just a moment. We'll take the first question today from Ryan Markle, William Blair.

Thanks. Good afternoon. Thanks for taking the questions.

Hey, Ryan.

So I wanted to start on the supply chain. Obviously, a lot of mixed commentary out there. And my question is, you know, in the quarter, were the supply chain challenges as you've expected? And I believe the prior guide assumed no improvement in chips. Is that still the outlook?

Ryan, this is Jay. You know, it's a It's a good question, but it's one that's complex from the standpoint that this last 18 months has been unexpected all the way around. And I think, as we've stated before, I think the team has done a really nice job of working with our suppliers and hopefully getting our extra fair share. And that's why we've been able to serve our customers the way we have. As I'm going to state and you hear from other people, I think 2022 is going to continue to be a challenge for everybody. There are certain suppliers that are becoming a little more predictable, the visibility is a little better, and others that are not. And so that will continue, and as Tony and I both have said, we've built that into our outlook for the rest of the year.

Right. Brian, I just add one thing on to Jay's commentary. You have to kind of parse the supply chain challenges into the two businesses, too. Proxmox Solutions is faced with component shortages that are challenging our ability to deliver and taking our delinquent backlog up. And we you know we addressed that just now in the in the commentary it was what we expected frankly um maybe a little tougher actually at the margin i think looking out through the remainder of the year just as we said before we expected this to continue to be difficult and we still expect it to continue to be difficult In ADI, it's a different story. The supply constraint is with our suppliers. And I would say incrementally that has gotten a little more challenging over the last couple of quarters to the point where ADI's revenue growth this quarter was constrained a bit by their inability to get product that they had orders for. And that's a little bit different, right, just because of the different dynamic of the business.

Other than I just add that those finished good products that come into ADI are being impacted because of semiconductors for the most part. So it's just a different part of the chain where everybody's getting hit. But I'd also say, again, with ADI, even though they've continued to increase their length of backlog, too, I think their relationships are strong with their supply base, their principles. That's helped in terms of getting an unfair share of the supply to them. And you see it in the results. And, again, the same, I think, is with P&S. and we'll just continue to grind it out this year i i you know if you ask my best opinion today i think 2023 is going to be a different type of year uh out there but right now this year is going to be a continued uh you know grind and and but i'm very pleased with the team of their efforts and successes that they've been able to achieve and you can see the results okay yeah most of the companies i follow are saying what you're saying it's actually a little bit tougher out there and the supply chain hasn't got much better It depends on who you're married to. There are some suppliers that, as I said, are clear, a little more predictable. Others are not. It just depends on who it is.

Yeah. Okay. That's helpful. And then on the full year guide, I think previously it included flat volumes. What are you assuming now?

Pretty – Ryan, pretty much the same. I mean, if you're asking about the products business, pretty much the same. Volumes were down a little bit in Q1. We expected volumes to be down in Q1. Pretty much all of that was traceable to a couple of expected migrations, if you will, in the security business. We had less radio business, and we knew that EMEA was going to be a little bit soft because we haven't delivered our newest products there yet, and those things came to fruition. But for the full year, you know, it's not different to what we said a couple of months ago. We think it's going to be flat-ish, maybe up a tiny bit. Rob's business is a little bit different. I mean, he did see a little bit of expansion in volumes in Q1. Sorry, I should be more specific. ADI is a little bit different. We did see some volume expansion in Q1, and I think we are continuing to expect some modest volume expansion over the course of the year.

Yeah, and again, I hate to keep throwing it back, but the supply chain will have a lot to do with it.

Yeah. Okay, thanks. I'll pass it on. Thanks, Ryan.

Up next, we'll take a question from Ian Zafino, Oppenheimer.

Hey, Ian.

Hey, good afternoon, guys. This is Isaac Saaz, and I'll answer Ian this afternoon. Just the first question I had as it relates to the full-year outlook, would you be able to just walk us through sort of the volume and price assumptions, I guess, in the ADI segment that you sort of touched on before?

You know, I think when you're looking out over the course of a year with the dynamics of this kind of this kind of market, what I just described I think is pretty much as far as we can go. We're looking at the products and solutions business, and for the full year we expect volumes to be roughly flat, maybe up a tiny bit. For ADI, we expect volumes to be up incrementally more than that. Underpinning those assumptions are continued supply chain challenges in both businesses, such that if we didn't have those supply chain challenges, we would see incrementally stronger growth in volumes.

Okay, great. That makes sense. And then sort of on the competition side, products and sales are sort of called out of softness and security products. Are you seeing any notable changes in the competitive dynamics in that market, or is that sort of just a function of the supply chain right now?

I wouldn't say there's any changes in the competitive environment. We introduced some pretty dynamic new products in the U.S. into our security portfolio last year, and they've done really well in the marketplace, and that's helping to drive that market in a positive direction. We have the migration of radios, the 3G migration in 2021 that created some incremental demand and some incremental revenue. We expected that to begin to tail off, and, indeed, that's been the case.

And then the same, you know, as I said in – Which was tied to the sunset in February.

Correct, which was tied to the AT&T and Verizon radio sunset. Yeah. And then in Europe, our Pro Series rollout is scheduled to happen later this year, and that's been a factor in the European softness is that we just didn't get that. We were waiting to get that product out into the market.

Okay, great. That's all I have. Thanks very much, and congrats on a strong start to the year.

Thanks. Thank you.

Just a reminder, ladies and gentlemen, it is Star 1. If you have a question, we'll go next to Eric Woodring, Morgan Stanley.

Hey, guys. Good evening. Congrats on the results. Really, really strong. And obviously, you're raising the guide, both revenue and margins for the year. I realize there's first alert, and I apologize I jumped on late here, but can you just walk through some of the puts and the takes that drive you to your new outlook if we take away the first alert integration, where you're seeing some tailwinds relative to 90 days ago versus where you're seeing some headwinds? And then I have a follow-up.

um yeah so i i don't have the i didn't pull the numbers walking into the room but um you know we were looking for first alert to be something on the order of 95 million of revenue and 5 million of of oi for q oh there it is thank you jason uh Hang on. For Q2 and for the full year, $325 million of revenue and $25 million of off-profit. So, underpinning that is a pretty meaningful expansion in margin and operating income for what I'll call the non-first alert business. We're feeling a little more confident about Q2. Q2 is going to be another strong quarter, we think. So the core business is taking up. First Alert's gross margins are, they're accretive to the aggregate gross margins, but they're slightly dilutive to products and solutions gross margins at this point. We're still working through the integration, and we've still got our synergy plan to drive through that.

Yeah. Got it. Awesome. Thank you for that, Collar. And then maybe as my follow-up, again, I apologize if you already covered this, but how should we think about the impact of pricing actions on 2022 results? And then any guidance you can give us on should we expect any incremental pricing increases as we look forward? Thanks.

Yeah, so, you know, as Jay mentioned, we took some more price action here just in the last couple weeks. And looking out at the remainder of the year, I think we're going to be in a position to respond if we see incremental cost pressures. But I don't anticipate that there's going to be sort of meaningful price movement in our portfolio. I'm talking about products and solutions. In our product portfolio, absent price,

more in cost inflation than what we're currently looking at yeah because you know you have just some of the more uncertainty what's going to happen in the rest of the year and so as tony said and i said in my in my comments we just recently uh initiated some additional increases in certain spots for pns and we as you as you saw in the results you know we had a good flow through from what we did at the end of the year last year into the first quarter and so it's you know i think the key for any company It's just keeping a real close eye on the ball and being ready to make movements as more, you know, any other curveballs come out of the sky at us during these weird times.

You know, Eric, I'd like to make one other comment about first alert. We didn't put it in the script, but I think this is probably going to be directionally illustrative for you all. The business is doing really well. We acquired it with an expectation of what we were going to see this year, and our outlook points to a stronger result for the year than what we anticipated three or four months ago. The team is executing really well, and we're seeing really good results. So when you look at the numbers here, you look at the 325 of revenue and 25 of OI for the year, that 25 of OI includes $10 million of integration costs. Because of the way we report, we're burdening First Alert with the integration costs. So when you're looking at the margin in that business, I want you to keep that in mind.

And I assume those $10 million entirely run off after this year. Is that a fair thing to say?

We'll have some more leaking into 2023, but not meaningful. Okay.

I like that thought process. Thanks, guys.

And everyone, at this time, there are no further questions. Mr. Willey, I'll hand things back to you for any additional or closing remarks.

Thank everyone for their participation today and continued interest. And just to let you know, we'll be out on the road this quarter at several conferences and NDRs. And so hope to talk to many of you in person for the first time. So everyone take care. Thank you.

Once again, everyone, that does conclude today's conference. Thank you all for your participation today. You may now disconnect.