Resideo Technologies Inc
NYSE:REZI
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Resideo Technologies Inc
Earnings Call Analysis
Q4-2023 Analysis
Resideo Technologies Inc
The company ended 2023 on a strong note, surpassing the midpoint of its forecast for Q4 and demonstrating robust cash generation, with a full-year operating cash flow of $440 million. It made strides in product and solution order activities, divested the Genesis business, and outsourced the San Diego casting facility, actions that underscore a strategic reshaping aimed at long-term profitability. Despite a challenging environment marked by a housing market downturn, the company sustained only a 2% sales decline, crediting a substantial product lineup and diverse customer engagements for navigating through nearly a 20% drop in existing U.S. home sales.
Q4 revenues reached $1.54 billion, slightly lower than the previous year, but operating income spiked by 50% to $147 million, resulting from cost savings and efficient operations. These achievements contributed to a record free cash flow conversion rate of 89% over the past three years. The Products and Solutions segment experienced a slight revenue decline but offset this with an impressive 110 basis points margin increase, attributed to cost reductions overpowering volume declines and labor cost inflations.
Looking to 2024, the company foresees a decline in security hardware sales to ADT by about $100 million, which is factored into the 2024 guidance, but is not expected to affect 2025's profitability meaningfully. The full-year guidance anticipates revenues between $6.08 to $6.28 billion, adjusted EBITDA from $560 to $640 million, non-GAAP EPS ranging $1.48 to $1.88, and at least $320 million in operating cash flow. This outlook incorporates low single-digit sales growth at the midpoint after adjusting for the Genesis and ADT impacts. Margins are expected to improve as factory volumes and utilization rates recover.
The first quarter historically reflects slower business for Products and Solutions due to less new construction and distribution restocking. The quarter's revenue is projected to be between $1.46 and $1.51 billion, with softer results potentially influenced by the ADT sales reduction and seasonal trends. However, the executives express cautious optimism about market conditions smoothing out as 2024 unfolds.
Executing on new product introductions is a key driver for the company, hopeful of achieving margin expansion, even with flat volume expectations. Executives underline the significant cash flow and gross margin sequential improvements from the past year, anticipating the continuation of this trend into 2024. They emphasize numerous completed actions beneath volume declines that solidify cost structures, positioned for substantial margin uplift with volume growth.
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Hello, ladies and gentlemen, at this time I would like to welcome everyone to the Resideo Technologies' Fourth Quarter 2023 Earnings Conference Call. Today's call is being recorded. [Operator Instructions]. It is now my pleasure to turn today's call over to Mr. Jason Willey, Vice President of Investor Relations. Mr. Willey, you may now begin.
Good afternoon, everyone, and thank you for joining us for Resideo's fourth quarter 2023 earnings call. On today's call will be Jay Geldmacher, Resideo's Chief Executive Officer, Anthony 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 investor.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 the forward-looking statements as a result of a number of factors, including those described from time to time in Resideo'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 turn the call over to Jay.
Thank you, Jason. And thanks, everyone, for joining us today. We finished 2023 on a strong note. Q4 revenue and profitability were above the midpoint of our outlook. And cash generation was strong with full year operating cash flow of $440 million. We built momentum throughout the year in order activity within Products and Solutions. We also made significant progress on our key strategic operational initiatives and in meaningful reducing structural costs.During 2023 we made substantial progress, reshaping our portfolio and operations with the divestiture of Genesis and the outsourcing of our casting facility in San Diego. Work continues on rebalancing our product portfolio, manufacturing operations and ADI footprint to help position the business for profitable long-term growth. We expect to have more to share on both fronts as we move through 2024.We also advanced the ball on the partnership front, strengthening our relationship with major insurance providers, establishing new relationships in the energy management market, including our recent announcement with Ford and meaningfully expanding the depth of home builder relationships. We have spoken previously about our progress building content with home builders. This work is led by our First Alert and BRK professional brands.We have expanded content with existing builders and increased the number of partners we are selling to, adding over 20 new builder partners in 2023. We believe we are well-positioned to drive growth in this channel as the new construction market recovers. We also expect this additional content will have positive long-term benefits to our potential replacement base.Our innovation within Products and Solutions, we significantly improved our new product introduction cadence. This included new video doorbell and outdoor camera products for our professionally monitored security offering, launching ProSeries for the EMEA security market, First Alert branded connected water leak detection and shutoff products and the rollout of UL 8th edition smoke defectors. We are seeing results based on all these actions. We are encouraged by order trends within Products and Solutions, which have stabilized year-over-year and grew sequentially in Q3 and Q4. Through executing on new product introductions and taking effective cost control actions, we are achieving gross margin expansion despite volume headwinds and continuing to invest in key long-term initiatives.At ADI, we continue to grow our digital capabilities. Building a leading digital experience is critical to customer engagement and is expected to be margin-accretive over time. For 2023, e-commerce sales were up 8% year-over-year. Total touchless sales, which includes e-commerce, electronic data interchange and e-mail automation now account for 38% of ADI's total sales. We made significant investment during 2023 in our product information management and data asset management systems. This work helps to enhance the usability of our web experience with a focus on speed, intuitive search and accuracy of availability and delivery information.ADI continues to make progress with its expansion into adjacent categories, particularly in the audiovisual market. ADI acquired BTX in early 2023, adding new capabilities in the professional AV market and in-sourcing custom fiber assemblies. Pro AV was one of ADI's better-performing categories in 2023, growing 6% on an organic basis and now accounts for 10% of ADI sales.With that, I will turn the call over to Tony to discuss our fourth quarter results and 2024 outlook.
Thank you, Jay, and good afternoon, everyone. Fourth quarter financial results exceeded the midpoint of our outlook range for a second consecutive quarter, led by continued momentum in the Products and Solutions business. We drove sequential improvements in gross margin in P&S for the third consecutive quarter and generated $263 million in cash flow from operations.For the year, cash flow from operations was $440 million, a record since spin. Over the past 3 years, we have converted 89% of GAAP net income into free cash flow, demonstrating the strong cash flow characteristics of our business. Resideo fourth quarter revenue of $1.54 billion was 1% lower than Q4 last year, but flat excluding the sale of our Genesis wire business. Operating income for the quarter was $147 million, an increase of 50% compared to last year. Adjusted EBITDA was $136 million, up 11% compared to Q4 of 2022. Fully diluted earnings per share were $0.56 and $0.48 on a non-GAAP basis compared with $0.26 and $0.25 respectively last year. Non-GAAP EPS exceeded the upper end of our guidance range for the quarter.Products and Solutions' fourth quarter revenue of $683 million was 1% lower than the fourth quarter 2022, but up 2% when adjusting for the sale of Genesis. Price realization added approximately $16 million to revenue. And overall volumes excluding the Genesis impact were down low single digits. First Alert delivered a strong quarter, particularly in residential new construction, and we also saw growth year-over-year in water products. Orders were up sequentially following the stabilization experienced in the third quarter. While channel inventory remains elevated in some areas, we believe order activity and point-of-sale data indicates channel inventory overall is normalizing.Products and Solutions' gross margin in Q4 was 39.5%, up 110 basis points compared to last year. Gross margin improved sequentially in each quarter of 2023 as we achieved reductions in raw material costs, manufacturing headcount and freight costs, which more than offset the impacts of reduced volumes and labor rate inflation.As unit volumes and factory utilization rates recover, we continue to believe P&S gross margins can further improve. Products and Solutions' fourth quarter operating expense was down $14 million year-over-year, excluding restructuring costs. Products and Solutions' operating income was $147 million in the fourth quarter, up 50% compared with Q4 2022 and up 16% when adjusting for prior-year restructuring charges.Turning to ADI. Q4 revenue was $854 million, down 1% versus the prior year. The business continued to experience pressure in residential security and video surveillance sales, which was partially offset by growth in access control and professional AV categories. ADI gross margin in the fourth quarter was 18% compared with 19.1% in Q4 last year. Gross margins were negatively impacted by transitory inflationary pricing benefits experienced in 2022, reduced vendor rebate activity due to lower volumes and more competitive pricing in certain categories.ADI operating profit of $59 million was down 14% compared with prior Q4, reflecting the lower sales and gross margin on flat operating expenses. Corporate costs were $55 million in Q4, down $12 million compared with the prior year. Adjusting for unusual items in both periods, we drove $3 million of structural cost savings versus the prior period. Q4 cash from operations was $263 million, up 89% compared with $139 million in Q4 last year. Improved cash generation and specifically working capital performance was a major initiative throughout 2023, and we more than achieved our objectives. For the full year, we generated $440 million in operating cash.During the quarter, we repurchased 719,000 shares of our stock for a total cost of $11 million. For the full year, we repurchased 2.6 million shares for $41 million. And our fully diluted share count declined year-over-year. As we look toward 2024, our guidance is predicated on the following assumptions, we expect residential repair and remodel activity to be flat to down low single digits year-over-year and residential new construction starts to grow by low to mid-single digits. We have assumed HVAC channel inventory levels largely normalized in the first half of 2024. We expect to drive 50 to 100 basis points of gross margin expansion year-over-year within Products and Solutions, moving sustained P&S gross margins close to 40% based on the benefits of ongoing efficiency initiatives in an essentially flat market. ADI gross margin is expected to be flat for the year as we continue to see year-over-year headwinds from inflationary benefits in the first half of 2024.The sale of our Genesis wire business will reduce 2024 Products and Solutions' security sales by approximately $105 million and operating income by approximately $10 million compared with 2023. At the end of December, we executed an amendment to our contract to directly supply ADT hardware for their North American residential security offerings. Our agreement now runs through early 2025, at which time deliveries of these products will conclude. Based on this agreement, we expect our 2024 security hardware sales to ADT to decline by approximately $100 million compared with 2023 levels with a similar additional reduction in 2025.The impact of the new agreement is fully reflected in our 2024 outlook and is expected to be immaterial to Products and Solutions' 2025 profitability. Our guidance moving forward will focus on revenue, adjusted EBITDA, non-GAAP EPS and operating cash flow. We believe these metrics in combination provide the best view into the health of the business.That said, here is our outlook. For the first quarter, we expect revenue to be in the range of $1.46 billion to $1.51 billion, adjusted EBITDA in the range of $120 million to $140 million and non-GAAP EPS of $0.28 to $0.38. The first quarter is typically a slower seasonal period for Products and Solutions due to reduced new construction activity and more limited restocking by our distribution channel. For the full year 2024, we expect revenue to be in the range of $6.08 billion to $6.28 billion. Adjusted EBITDA is expected to be in the range of $560 million to $640 million. Non-GAAP EPS is expected to be in the range of $1.48 to $1.88. We expect to generate at least $320 million of operating cash flow for the full year 2024.We finished 2023 on a positive note with strong Q4 results driven by outperformance in P&S. While uneven quarter-to-quarter, our cash generation was excellent in 2023 and has been strong since 2020. We are cautiously optimistic about a more accommodating macro backdrop as 2024 progresses. However, the current interest rate environment and related low housing turnover continues to provide headwinds to our business. Despite market uncertainties, our initial 2024 outlook implies low single-digit sales growth at the midpoint, adjusting for the Genesis and ADT impacts and higher adjusted EBITDA, adjusted EBITDA margin and non-GAAP EPS compared to 2023. As unit volumes and factory utilization rates recover, we continue to believe Products and Solutions margins will further improve.I'll now turn the call back to Jay for a few concluding remarks before we take questions.
Thank you. Looking back on 2023, both businesses navigated significant market headwinds with an almost 20% reduction in existing home sales in the U.S., leading to the weakest housing turnover year since 1995. This had negative implications for our residential security business within both Products and Solutions and ADI. Consolidated sales fell only 2% in 2023 despite these headwinds. Because of our strong product offering and customer relationships, we were able to drive price realization within Products and Solutions and ADI's broad commercial market exposure provided diversification. We finished the year with strong cash generation, improving order trends and gross margin momentum in our Products and Solutions business.As Tony noted in his remarks, we'll be winding down the existing contractual hardware portion of our long-standing relationship with ADT. Since I arrived at Resideo almost 4 years ago, our team has built a collaborative, constructive relationship with ADT from the executive level down. While we are wrapping up this legacy contract, we believe these relationships have created a strong shared foundation for continued collaboration and partnership. As we look to 2024, at Products and Solutions, we are focused on executing further portfolio and facility optimization efforts as well as increasing velocity of NPI. With our cost actions and transformation work, we believe we are well-positioned to drive improved margin and profitability as market conditions improve. At ADI, we will continue to expand our digital initiatives and build upon our adjacent market and exclusive brands' expansion opportunities. Our focus remains firmly on executing our key strategic initiatives while driving profitability expansion and strong cash flow. I want to again thank the entire Resideo employee base for their outstanding efforts during 2023, and I'm excited to continue to build on the momentum together in 2024.Operator, we are now ready for questions.
[Operator Instructions] Your first question comes from the line of Ryan Merkel with William Blair.
I wanted to start with the comments about order activity improving and stabilization in the market. But it looks like the first quarter revenue guide is maybe a little softer than we were thinking. So was that just seasonality? Or maybe talk about the cadence of how you see sales progressing in '24, maybe it's a stronger second half?
Yes. Hey, Ryan, it's Tony. So yes, there is an element of seasonality in Q1. There's also -- security sales are going to be lower because of the disclosure we just made about ADT and our expected reduction in revenue from them during Q1, and also the impact of Genesis in Q1, which is $25-ish million, somewhere in that ZIP Code. If you look at the, what I'll call the trade channels, it's still a little bit up and down. But by and large, we've seen inventories begin to work their way down. I think there's still some normalization in some areas that's got to happen in the next couple of quarters, and that's certainly contemplated in our guidance. But then beyond that, I think things really are starting to settle out a little bit as well. So yes, all those things are affecting Q1, and that's why you're going to see a little bit of a ramp as we go through 2024.
Okay. That's helpful. And then the gross margin in P&S stood out. Just curious, are you going to be able to build off the fourth quarter level as we think about '24? Just talk about the pluses and minuses and sort of the direction of gross margin for P&S.
Yes. So I think the 2 things we were most excited about in 2023 was our ability to generate significant cash flow, a little choppy, but we certainly did a great job, I think, over the course of the year. And the other was the sequential improvement in gross margin in P&S. We expect that to continue, if you look at it year-over-year. Quarter-to-quarter, again, you still might see some variation. But we've really made a lot of progress underneath kind of all of the volume declines and all that sort of stuff in our fundamental cost structure. And we talked a little bit about that in the script in terms of what those things are. And the expectation of 0.5 point to 1 point of gross margin expansion in P&S this year is predicated on basically flat volumes. So we really feel like there's an opportunity if we see margin -- I'm sorry, volumes begin to grow again for some really meaningful margin expansion in that business.
Yes. I would add also, Ryan, that I talked -- I think we even talked it even in our last call together that as supply chains continue to improve, input costs continue to be trend in a favorable fashion. -- and that has continued, including between material componentry and of course, freight, which is a good thing, and that's just going to continue. And the various actions that we've talked about that you guys have heard us talk about over the last couple of quarters, cost actions impacts provides a benefit to us on the gross margin expansion. So I think between what I had said as well as what Tony has said that we feel very positive about the opportunity there for further margin expansion.
Your next question comes from the line of Erik Woodring with Morgan Stanley.
I have 2. Maybe one just on the clarification point on ADT. Just to confirm, the North American hardware business seems to be gone after 2025. You're kind of very clear on the trajectory of that. But is there anything else with them? Because, Jay, you mentioned kind of other areas of collaboration and partnership. And so just want to kind of understand at one level higher, how you think about the relationship with ADT after 2025, if there's anything that you can do that's incremental or if you still have a relationship? Just how that stands. And then I have a follow-up.
Yes. Thanks, Erik. As we indicated, the legacy hardware program that Tony talked about in terms of that -- the end of that program into 2025. But as I've not just stated today, but I've indicated for quite some time our relationship with them is very good. And we spent a lot of time on that. And so we're continuing to talk about other opportunities, and we'll keep you guys informed.
Okay. Yes. That is very clear then. And this can maybe be for -- maybe it's for Tony, it is any update to how to think about the ceiling for P&S gross margins? Like if I just think about some of the comments you've made tonight, you've obviously taken cost actions on that business. You're getting leverage in that business despite flat volumes. It seems like getting rid of Genesis and ADT will be margin-accretive. And I'd imagine that when volumes recover, that's all positive for P&S gross margins. And so any way to think about the longer-term trajectory? Or are there any headwinds that I'm missing that we're not necessarily considering as we think, again, 1, 2, 3, 4, 5 years out? And that's it for me.
Thanks, Erik. So obviously I don't have a number for you in terms of a long-term gross margin target for P&S. And the reason we don't have one is because of the long list of things you just laid out and the puts and takes around them. From where we sit today, there are more from a market perspective and from our own execution and our own sort of position in the market. I think the balance is certainly looking out over a few years, more tailwinds than headwinds. We've done a really good job maintaining price, which was, if you recall, back during the inflationary surge, we were basically matching increased input costs with our price increases, and that was dilutive to margin because we weren't getting margin on top of it. But we really felt like as input costs abated, we were going to be able to hold price, and that has proved to be true. We have made substantial progress in a number of other manufacturing efficiency areas. We have divested some businesses that are lower margin, and we feel like there are opportunities to grow in some higher-margin areas. And all of that is happening against a backdrop over the past, I guess, 5 or 6 quarters of declining volumes. As the decline slows and as volumes flatten out, you're seeing that in the gross margins. You're seeing a little bit more benefit. And to the extent that you begin to see volumes expand again, I think there's a real opportunity for us to see significant margin expansion.
And I'd also add, just a couple of -- just a summary. Of course, the input costs, I talked about that before in the last call or cost actions that we've been taking. The price piece that Tony just talked about, and of course the leverage opportunity when the market begins to come back. But just a couple of additional comments. The portfolio optimization piece that we've been talking quite a bit about and then the proof of the pudding is things like Genesis as well as operational optimization like when we closed off the San Diego facility and moved that to an offshore third party. We have other opportunities there and we'll share more of those. And the other that I want to just mention is because with our heavy focus on NPI, just in terms of bringing more new products to market, but also with that and looking at opportunities with more growth tied to NPI, but also margin expansion with new products. So all those wrapped together, I think is a great way of summarizing. We're not just relying on 1 or 2 pieces. I think we have a good plan of attack with all the different items that we've mentioned here between Tony and I.
[Operator Instructions] Your next question comes from the line of Cory Carpenter with JPMorgan.
This is [ Danny Afron ] for Cory Carpenter. On the first, given the uncertain time line of the broader macro recovery, do you think you have any further room to take price if necessary? And maybe if so, any color on kind of what that cadence could look like throughout 2024. And then on the second, maybe on the pace of product innovation within Products and Solutions for 2024, are there any specific verticals to call out for having kind of the most runway?
Sure. So thanks, Danny. So on price, our outlook for 2024 assumes basically 1% on price. So not a significant factor in our 2024 outlook. I think we'd be cautious about taking a more assertive position there just as the market has been a little bit soft and we want to remain competitive and all those sorts of things. We're not losing price, which I think is really important because we did achieve a significant amount of price. Incremental leverage on the price line is probably going to have less of a factor on our results than operating leverage as we see expansion in volumes.
I would agree with that. And I would just say that not losing price is a very important piece. And as the market -- we all know, we're all watching what's happening out there in the world in terms of inflation. And with supply chains that have normalized, then you are going to be in a -- we're in a situation then that there's a little more competition -- competitiveness out in the marketplace that we see for both businesses. You also asked about, I think, Danny, right, on security NPI or NPI in general.
Yes, so…
Yes, maybe -- sorry, go ahead.
No, I was just going to say -- I'll make comment on NPI in general, and I've said it before, but it's worth saying again. I mean we have -- NPI is very important to us in terms of capturing additional market share, looking at opportunities to expand our total reach of the market in terms of share with new products. We mentioned this time and before about content in a home and we also mentioned about being able to add a bunch of additional wins with our RNC builder community. One of the reasons with that is the expansion of our footprint in each one of those new homes. And as we continue to do that, we will have more new products that will enable to expand our footprint there. So our focusing on the velocity of new products in each one of the segments we serve is top of -- is a big focus for us. And that's why I have highlighted not just today, but through the past few quarters, the number of new products that we are bringing to market, and there'll be more to share.
There are no further questions at this time. I will turn the call back to Jason for closing remarks.
Thank you, everyone, for participating today, and we look forward to speaking with you over the coming weeks and months. Have a good rest of your day. Take care.
This concludes today's conference call. We thank you for joining. You may now disconnect your lines.