Resideo Technologies, Inc. (NYSE: NYSE:REZI), a leading global provider of home comfort and security solutions, reported robust fourth-quarter earnings for 2023, surpassing market expectations with significant revenue and profitability gains. The company announced a strong full-year operating cash flow and strategic progress in operational initiatives and partnerships. Despite a slower sales forecast for 2024 due to market headwinds, Resideo remains cautiously optimistic about its growth prospects and profitability.
Key Takeaways
- Resideo Technologies achieved higher than expected revenue and profitability in Q4 2023.
- The company reported a full-year operating cash flow of $440M.
- Strategic progress was made in portfolio reshaping, cost reduction, and expanding partnerships.
- Resideo expects flat to low single-digit growth in repair and remodel activity for 2024.
- The company forecasts full-year 2024 revenue between $6.08B and $6.28B.
- Adjusted EBITDA for 2024 is projected to be in the range of $560M to $640M.
- Non-GAAP EPS is anticipated to be between $1.48 and $1.88 for 2024.
- Resideo aims to drive profitability, cash flow, and margin improvement despite market uncertainties.
Company Outlook
- Resideo anticipates growth in residential new construction and gross margin expansion in products and solutions.
- The company expects to generate at least $320M of operating cash flow in 2024.
- Resideo is focused on executing portfolio and facility optimization efforts.
- The company plans to expand digital initiatives and exclusive brands in ADI.
Bearish Highlights
- Slower sales are expected in 2024 due to reduced construction activity and limited restocking.
- The decline of security hardware sales to ADT is anticipated as the contract winds down.
- The company is cautious about the current interest rate environment and low housing turnover.
Bullish Highlights
- Resideo saw stable year-over-year growth in orders within products and solutions.
- ADI, the digital business, experienced growth in ecommerce sales and expansion into the audiovisual market.
- The company expects low single-digit sales growth, higher adjusted EBITDA, and non-GAAP EPS compared to 2023.
Misses
- There were no specific details provided regarding misses or shortfalls in the earnings call summary.
Q&A Highlights
- Executives discussed a "good plan of attack" with various new products and solutions.
- A 1% price increase is expected in 2024, with a focus on remaining competitive in a soft market.
- Product innovation and capturing additional market share, particularly in the security sector, are emphasized.
- The company plans to focus on the velocity of new products in each segment they serve.
Resideo's earnings call highlighted the company's success in the fourth quarter of 2023 and its strategic initiatives that have led to a strong operating cash flow. With a cautious yet optimistic outlook for 2024, Resideo is poised to navigate market uncertainties while pursuing growth and profitability. The company's commitment to innovation and expansion in the home comfort and security sectors remains a cornerstone of its strategy moving forward.
InvestingPro Insights
Resideo Technologies' recent earnings report showcased a company on the rise, with Q4 2023 figures exceeding expectations. Delving deeper into the company's financial health and stock performance using InvestingPro data and tips can give investors a clearer picture of what lies ahead for Resideo.
Based on the latest InvestingPro data, Resideo boasts a market capitalization of $2.5 billion, indicating a substantial presence in the home comfort and security market. The company's Price/Earnings (P/E) ratio stands at 15.02, but when adjusted for the last twelve months as of Q3 2023, it presents a more attractive figure at 7.46. This lower adjusted P/E ratio suggests that the company's earnings power may be stronger than the current market price implies. Moreover, Resideo's Price/Book ratio during the same period is 0.94, which could signal that the stock is potentially undervalued relative to its assets.
InvestingPro Tips further reveal that while net income is expected to drop this year, analysts predict the company will maintain profitability. This is corroborated by the company being profitable over the last twelve months. Additionally, Resideo's liquid assets surpass its short-term obligations, providing a buffer against financial uncertainties. However, investors should note that the stock price movements have been quite volatile, and the company does not pay a dividend to shareholders, which may influence investment strategies focused on income generation.
For those considering deeper analysis, InvestingPro offers even more tips, with a total of 6 tips available for Resideo. By using the coupon code PRONEWS24, investors can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, providing access to valuable insights that could inform investment decisions.
In summary, Resideo's financial stability, coupled with its strategic initiatives, suggests a company that is navigating market challenges with a focus on sustained growth and profitability. The InvestingPro data and tips provided here should offer investors additional context as they assess Resideo's potential in their portfolios.
Full transcript - Resideo Tech (REZI) Q4 2023:
Operator: Hello, ladies and gentlemen. At this time, I'd like to welcome everyone to the Resideo Technologies Fourth Quarter 2023 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 pleasure to turn today's call over to Mr. Jason Willey, Vice President of Investor Relations. Mr. Willey, you may now begin.
Jason Willey: 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; 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 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.
Jay Geldmacher: 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 (NYSE:F) and meaningfully expanding the depth of homebuilder 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're 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 Pro Series for the EMEA security market. First Alert branded connected water leak detection and shut off products and the rollout of UL Eighth edition smoke detectors. We are seeing results based on all these actions. We are encouraged by ordered trends within products and solutions, which have stabilized year-over-year and grew sequentially in Q3 and Q4. Through executing a 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, ecommerce sales were up 8% year-over-year. Total touchless sales which includes ecommerce, electronic data interchange and email 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. ProAV 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.
Tony Trunzo: 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 then. Over the past three 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 or $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, we're 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 margins 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 and 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, or $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 factor utilization rates recover, we continue you 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.
Jay Geldmacher: 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, with that 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 longstanding relationship with ADT. Since I arrived at Resideo almost four 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 you looked at 2022, the products and solutions, we are focused on executing further portfolio and facility optimization efforts, as well as increasing velocity of MPI. With our costs, 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.
Q - Ryan Merkel: 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, Tony, is that just seasonality or maybe talk about the cadence and how you see sales progressing in '24 maybe it's a stronger second half?
Tony Trunzo: 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 [indiscernible] 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 at $25-ish million somewhere in that zip code. If you look at what I 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, it'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.
Ryan Merkel: Okay. That's helpful. And then the gross margin and P&S stood out just curious, you're 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?
Tony Trunzo: Yes. So I think the two 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 a year. And the other was a 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 scripts in terms of what those things are. And the expectation of 0.5 to a 1 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 volumes begin to grow, again, for some really meaningful margin expansion in that business.
Jay Geldmacher: Yes. I would add also, Ryan, that I talked, I think we've been talked about in our last call together, that is supply chain has continued to improve, the input costs continued 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 that the various actions that we've talked about that you guys are just talking 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 had said, that, we feel very positive about the opportunity there for further margin expansion.
Operator: Your next question comes from the line of Erik Woodring with Morgan Stanley.
Erik Woodring: I have two. 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 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. Thank you.
Jay Geldmacher: Yes. Thanks, Eric. As we indicated, this legacy hardware program that Tony talked about in terms of 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 spend a lot of time on that. And so we're continuing to talk about other opportunities. And we'll keep you guys informed.
Erik Woodring: Okay. Yes. That is very clear the. Maybe it's for Tony, any update to how to think about the ceiling for P&S gross margins. 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 anyway, to think about the longer-term trajectory? Or there any headwinds that I'm missing that we're not necessarily considering, as we think, again, 1, 2, 3, 4 or 5 years out? And that's it for me. Thanks so much.
Tony Trunzo: Thanks, Eric. 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 diluted 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 the backdrop over the past, I guess, five or six 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.
Jay Geldmacher: And I'd also add just a couple of summary. Of course, the input cost, I talked about that before in the last call, our cost actions that we've been taking. The price piece that Tony just talked about, 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, move that to an offshore third party. We have other opportunities there. And we will share more of those. And the other that I wanted to just mention is because with our heavy focus on MPI, just in terms of bringing more new products to market, but also with that then looking at opportunities with more growth tied to MPI, 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 one or two pieces, we're, I think we have a good plan of attack with all the different items that we've mentioned here between Tony and I.
Erik Woodring: That is super helpful. Totally realize there's a lot of moving pieces. So I appreciate all that color, I mean honestly. So thank you.
Operator: [Operator Instructions] Your next question comes from the line of Cory Carpenter with JPMorgan.
Danny Pfeiffer: Hey, this is Danny Pfeiffer on for Cory Carpenter. Thanks for the questions. On the first, given the uncertain timeline of 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? Thanks.
Tony Trunzo: Sure. So thanks, Danny. So on price, our outlook 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 you know, 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.
Jay Geldmacher: I would agree with that. And I would just say not losing prices 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 -- 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, MPI or MPI in general? I'll make comment on MPI in general. And I've said it before, but it's worth saying again, I mean, we have MPI is very important to us in terms of capturing additional market share, looking at opportunities to expand our total reach in 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 are able to expand our footprint there. So focusing on the velocity of new products in each one of the segments we serve 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.
Operator: There are no further questions at this time. I will turn the call back to Jason for closing remarks.
Jason Willey: 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.
Operator: This concludes today's conference call. We thank you for joining. You may now disconnect.
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