© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Resideo First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
Mr. Jason Willey, Vice President of Investor Relations, you may begin your conference.
Good afternoon, everyone, and thank you for joining us for Resideo's first 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.
Thank you, Jason, and good afternoon, everyone.
I'm pleased to say, in the first quarter, we delivered results at the upper end of the outlook we outlined back in February. Over the past several months, we've seen improvements in a number of areas related to supply chain and logistics. Our teams are focused on taking advantage of these improvements to drive gross margin and cash flow improvements as 2023 progresses.
While macro signals in our end markets remain mixed, we see opportunities for improved volume trajectory as the year progresses, as customer inventory trends normalize, and we leverage the opportunities we've created over the past 18 months by being a reliable partner to our customers.
For first quarter 2023, Products & Solutions delivered revenue of $658 million, up 6% year-over-year, as the addition of First Alert and continued price realization helped offset lower volumes, particularly in our security and energy products. While our Q1 air product revenue was relatively stable year-over-year, we continue to see our HVAC distribution channel manage its inventory levels in the quarter. We expect this channel to continue to manage inventory down as 2023 progresses.
In our OEM channel, we believe customer inventory levels have largely normalized and order activity is generally tracking end demand, which has returned to historical trend levels following stronger activity in late 2021 and early 2022.
Building on recent momentum, we introduced a number of exciting new products during the quarter that we expect will grow our position in the market. This includes our L1 WiFi Water Leak and Freeze Detector and L5 WiFi Water Shutoff Valve. These First Alert-branded connected devices provide real-time water leak notifications and automatic water shutoff capabilities.
The DT4 digital thermostat for EMEA markets, which we introduced in Frankfurt at ISH, the world's leading trade fair for HVAC and water, features a slimmer, modern design, and extensive application support, including heat pumps, hybrids, zoning, and integrates with our underfloor heating solutions.
We introduced the HPC-r, an indoor control unit for heat pumps. This is a part of our component portfolio supporting the growing EMEA heat pump market.
We also launched the VX1 video doorbell at the ISC West security conference. This product will be available in May and offers AI-based intelligent event detection with video verification. It will also carry the First Alert brand.
The first quarter was a productive period of trade show activity, kicking off in January at CES, where we participated in a number of activities focused on home energy management and industry standards, including the Home Connectivity Alliance and Matter. At ISH, in Frankfurt, March, we showcased several of the new products I have previously highlighted. And at the ISC West security show in Las Vegas, we connected with a large cross-section of our security dealer customers as we launched the VX1 video doorbell.
In the first quarter, we saw improvements in our supply chain and the overall logistics environment relative to recent periods. Availability of key electronics and semiconductor components have improved from what we experienced over much of the past 18 months. This enabled us to limit our broker buy activity during Q1, and we currently expect limited broker activity over the remainder of 2023.
While we are still carrying higher-than-usual delinquent backlog, levels have shrunk meaningfully from a year ago. With the supply chain beginning to normalize, resources can be shifted from short-term tactical initiatives that have consumed disproportionate engineering time over the past 18 months. This allows our operations and engineering teams to return more of their focus to structural value creation initiatives around new products and value engineering.
As discussed on our Q4 earnings call, we have begun our facility optimization work with announcement of the plan to close our San Diego castings facility, which is expected to be completed in early 2024. This is our first significant manufacturing facility optimization action and ties to a portion of the restructuring charges we took in Q4 2022 and Q1 2023. We expect this activity to begin to positively impact financial performance in Q4 2023. And once completed, the San Diego project is expected to deliver $12 million of annual savings.
We've also made significant progress and are ahead of schedule on our El Paso, Texas distribution center consolidation. Most importantly, we have accomplished with no meaningful customer disruption. This project involves exiting a legacy facility and folding those operations into the El Paso location that came across in the First Alert acquisition. We expect annualized savings of over $2 million per year from this project once fully completed.
Overall integration of First Alert is progressing well. We moved the business to our ERP platform in the first quarter and are well on our way to achieving at least our $30 million annualized synergy target. We are expanding the First Alert brand into [non-smoke and CO] (ph) products. We view the First Alert brand with strong market awareness and reputation as a key asset that we intend to utilize more broadly moving forward.
ADI's first quarter reported revenue was essentially flat compared with Q1 2022 with daily average sales up 2%. ADI continues to execute on expanding its ecommerce and digital capabilities, enhancing its exclusive brands offerings and investing in tools to drive sales force efficiency. ADI reached total touchless sales of 39% for the first quarter 2023 and ecommerce revenue was 20% of total sales and grew 17%.
ADI saw continued softness in the first quarter in residential AV and security categories and slower growth in several commercial categories. We saw signs of customers managing inventory levels as supply chains normalize across categories, particularly in commercial fire and video surveillance.
Over the past several months, the ADI team has actively engaged with suppliers and integrators on the state of the current and expected demand environments. These direct conversations and our integrators survey continue to point to growth in commercial categories in 2023 and healthy project backlog.
With that, I'll turn the call over to Tony to discuss first quarter performance and 2023 outlook in more detail.
Thank you, Jay, and good afternoon, everyone.
First quarter revenue of $1.55 billion was up 3% compared to Q1 last year. Excluding $121 million from acquisitions and approximately $27 million of negative foreign currency exchange impact, revenue was down approximately 3% compared to strong Q1 2022 performance.
Operating income was $138 million in Q1 compared to $172 million last year.
Fully diluted earnings per share were $0.38 compared with $0.58 in the year-earlier period.
Adjusted EBITDA, which includes the impact of the Honeywell reimbursement agreement, was $138 million compared to $173 million in Q1 2022.
Products & Solutions' first quarter revenue of $658 million was up 6%. Excluding $98 million from First Alert and approximately $13 million of unfavorable foreign exchange impact, revenue declined approximately 7% compared to last Q1.
Price realization remained strong and added approximately $28 million to revenue year-over-year. Offsetting this was a 12% decline in unit volumes, driven by slower residential end demand compared with last year.
Security revenue was lower due to continued softness in Europe and lower 3G, LTE, radio sunset migrations in the US. Our US general market security sales also experienced declines during the first quarter.
Products & Solutions gross margin in Q1 was 38% compared to 43.3% in the first quarter of 2022. The decline reflects continued year-over-year inflation on labor and certain material inputs, the impacts of reduced volumes on fixed cost absorption, and the inclusion of lower-margin First Alert results. We have begun to see improvements in some materials and freight costs, but these dynamics had a limited year-over-year impact on Q1.
Total operating expenses for Products & Solutions were up $18 million year-over-year due to the inclusion of First Alert costs, partially offset by initial benefits of restructuring activities.
Products & Solutions operating profit was $117 million, or 17.8% of sales, compared with $154 million or 24.8% of sales last year.
ADI delivered Q1 revenue of $891 million, essentially flat to the prior-year period. E-commercial categories, including fire and video surveillance, were up year-over-year, but at slower rates compared to recent periods. Sales in residential security and AV categories contracted in the quarter.
ADI gross margin in the first quarter was 19.2% compared with 19.3% last year. We were able to offset the expected waning of inflationary margin benefit with ongoing initiatives around pricing optimization and exclusive brands.
ADI operating profit of $72 million was down 10% compared with prior year. The decline reflects increased investment in strategic areas around digital and systems initiatives. ADI has initiated restructuring activities, including targeted headcount reductions, facilities rationalization, and slower investment spending. We have identified $7 million of cost savings to-date and expect to report a $2 million charge in our Q2 results related to these actions. We are continuing to evaluate plans for additional cost reduction at ADI.
Corporate costs in Q1 were $51 million, down from $61 million in the prior-year first quarter. Excluding $10 million of one-time First Alert transaction costs in Q1 2022, corporate costs were flat year-over-year.
Operating cash flow for the first quarter was a use of $4 million compared with a use of $59 million in the first quarter of 2022. As a reminder, in the first quarter, we made payments on accrued bonuses and customer rebates, which typically makes Q1 our lowest cash flow conversion quarter.
Current levels of working capital are being impacted by inflationary impacts in inventory, incremental safety stock, and unfavorable changes to some supplier terms. As the year progresses, we expect to see improvement in working capital metrics, particularly in the Products & Solutions business.
Turning to our outlook for the full year. We continue to expect revenue to be in the range of $6.2 billion to $6.55 billion, implying flat revenue at the midpoint. Consolidated gross margin is expected to be in the range of 26.8% to 27.8%, and operating profit is expected to be in the range of $625 million to $675 million, all unchanged from our outlook provided in February.
We expect GAAP earnings per share to be in the range of $1.80 to $2.00, which reflects an estimated increase of $24 million, or $0.16 per share, in our Honeywell reimbursement agreement liability to a total of $164 million for the year. Our annual cash payments pursuant to the agreement remain capped at $140 million per year.
Adjusted EBITDA is expected to be in the range of $610 million to $660 million for the full year of 2023. Adjusted EBITDA includes the full impact of the $164 million estimated reimbursement agreement expense.
For the second quarter, we expect revenue to be in the range of $1.59 billion $1.64 billion; consolidated gross margin in the range of 26.8% to 27.8%; GAAP operating profit in the range of $150 million to $170 million; and GAAP earnings per share of between $0.41 and $0.51.
We expect underlying residential demand to remain soft as we move through 2023. We anticipate improving supply chain dynamics as the year progresses, which should have a positive impact on Products & Solutions gross margin, our working capital metrics and our cash conversion.
Improving our cash cycle and overall cash generation is a top priority for the remainder of 2023. We are targeting a 10-day improvement in our cash cycle by the end of 2023 relative to the 69 days at the end of Q1.
As a reminder our full year 2023 revenue outlook assumes mid-single digit volume declines in Products & Solutions, partially offset by carryover price impacts and targeted new price actions.
For ADI, our 2023 outlook incorporates low single-digit revenue growth, as modest growth in commercial-focused categories is partially offset by slower activity in residential categories, including AV and intrusion.
I will now turn the call back to Jay for a few concluding remarks before we take questions.
Thanks, Tony.
We remain focused on delivering to our financial targets, improving cash generation, expanding margins and accelerating the momentum on key product and partnership initiatives. We move into Q2, we expect to see growing benefits from our restructuring activities and we continue to work on incremental cost saving opportunities. We are well positioned to improve our margins and overall profitability even in an environment where end market demand remains constrained.
I want to thank the Resideo team for their continued focus on delivering for our customers and ensuring the business is positioned for long-term success.
This concludes our prepared remarks. Operator, we are now ready for questions.
[Operator Instructions] Your first question comes from the line of Erik Woodring from Morgan Stanley. Your line is open.
Hey, good afternoon, guys. Thank you for taking my question. I have two. Maybe just on the first one, I believe last quarter you guided to First Alert contributing about $120 million of revenue in the March quarter, and the press release shows it contributed about $100 million in total -- about 20% below plan. I just -- is that right? And if so, can you just maybe help us understand what's happening with the First Alert business? Anything that you believe we should know that you can call out? And then, the second part of that, I'll just give you both, is you were still able to perform at the high end of your revenue guidance range. And so, where did you perhaps see better-than-expected improve -- better-than-expected performance to offset that? Thanks.
So Erik, it's Tony. Thanks for the question. So, there's a couple of things about the First Alert business. It is a little bit seasonal. So, Q1 is typically the lowest quarter. And we did have some softness in retail, particularly early in the quarter. Things got better as we rolled through the quarter, but we did see a little bit of softness. I wouldn't put it at the magnitude that you just flagged of $20 million. It wasn't in that scale, but it was a little bit soft. And we saw -- and the other place that was soft was the security business, which we flagged in our comments.
Pretty much everywhere else things were relative to our expectations, held up pretty well. The OEM channel stabilized during the quarter in terms of channel inventory and the HVAC distribution channel, it sort of ebbed and flowed during the quarter. We had some periods where it was pretty strong. We had some periods where it sort of ebbed back again, which is a little bit of kind of what we find ourselves in today with respect to our outlook for Q2. We haven't seen a clear directional changed there yet. But pretty much all the rest of the business performed as we expected or a little bit better than we expected.
Okay. Perfect. That's helpful color. And then maybe just a clarification question on the Honeywell payment. So obviously, it looks like that ticked up a little bit this year. Just why do you owe more to Honeywell this year? And then, can you help us think about the timing of when you expect maybe that incremental payment to come through? And that's it for me. Thank you so much.
Thanks, Erik. On the call, I'll attempt to do some Honeywell explaining and then obviously we're happy to follow-up with people and provide detail. But we -- this is the first quarter we've guided to data below operating income. And the reason that we historically stopped at operating income is there's always been variability in the accounting impact of the Honeywell liability in any given quarter versus the very stable, very predictable $35 million a quarter in cash. And that variability always showed up in other income. So it was below the operating income line. When we're talking about GAAP EBIT -- non-GAAP EBITDA, we're talking about earnings per share, those things start to have an impact again. And we're managing it.
This quarter, the accrual we took was $41 million. I think historically, it's -- we've had it in the $40 million-s a couple of times in the past. It's been that high. And it really represents a true-up from Honeywell of their estimate of the five-year cost of environmental maintenance and remediation. So, they'll go through all of the properties, all of the overall maintenance costs, all of those things on a regular basis and they'll update. And you can have inflation, you can have changes in a given site, those kinds of things that will have an impact on a quarterly basis.
What I want to be really clear about is that it has a no impact on the cash dynamic either in the short term where it's $35 million a quarter, or for the life of the agreement, which is for 25 years, 20.5 of which still remain. So, it doesn't point to us having to pay ultimately in aggregate more money to Honeywell either in short term or in the long term.
And I think that's -- when Tony was talking about it in our remarks, he made that point that, that is capped and that's -- we know what that is and that's predictable.
Fair enough. Thank you so much guys.
Thanks, Erik.
Thanks, Erik.
Your next question comes from the line of Brett Kearney from Gabelli Funds. Your line is open.
Hi, guys. Good evening. Thanks for taking my question.
Hey, Brett.
Hey, Brett.
With the balance sheet still in pretty good -- still in good shape and it sounds like there's some positivity from some of the commercial, I guess, contractors, integrators you interact with. Can you talk about maybe potential for further ADI bolt-on acquisition opportunities in this environment? Are they still available? And kind of what's the appetite on your end for doing more in that front?
So, they are still available. As we've talked about before, those guys have a -- ADI team has a pipeline. They're in regular dialogue with, at any given time, a couple to a handful of potential targets. We've done a really good job of being disciplined around price and around -- frankly around timing. And as opportunities come up, we will continue to do those kinds of deals.
But the reality is with the cost of capital having gone up, our view is valuations have probably come in a little bit. And sometimes when those kinds of dynamics happen when you're trying to do a consolidation play, you have to get sellers to adjust to a new reality from a valuation standpoint. And I think maybe we've seen a little bit of that in terms of timing. But I mean, we continue to look at them and to the extent that they make good financial sense from an upfront cost standpoint. These things almost always make really good sense in terms of us being able to consolidate them into ADI.
I think Tony's comment spot on, and I just would add that I think because of some of the dynamics in the market out there that has been a little bit more of a sense of reality in terms of valuations, and so if it gives us an opportunity to scrutinize it and determine if that -- if it make sense now versus holding on for a period of time before we do it. But the ADI team is -- bottom line, they done a really nice job of selecting their bolt-ons. They've been -- and they were pleased with their progress.
Great, very helpful. Thanks so much guys.
Thanks, Brett.
[Operator Instructions] Your next question comes from the line of Paul Chung from J.P. Morgan. Your line is open.
Hi. Thanks for taking my questions. So just on free cash flow, after heavy investments in inventory over the past two years to kind of find growth, how should we think about inventory levels as we exit '23 and as the channel continues to get leaner? And then, you also mentioned cash cycle days goal of around 60 days, which may suggest rebounding back to '21 levels in the free cash flow range there. Is that the right way to think about it? And can you expand on what steps you're taking to drive cash cycle days lower? And I have a follow-up.
Paul, thanks for the question. I guess the short answer is in order for us to get to that target that we just laid out in terms of bringing that cash cycle in, the significant majority, if not, all of that has to come from inventory. We're disciplined about how we pay suppliers. So the AP lever is not one that we pull. Our DSO are relatively stable. They've ticked up a couple of days here, but they're relatively stable. So the focus is on bringing inventory down in dollars between now and the end of the year to get to that level.
And you're right, that gets us down to those kind of 2021 levels. It doesn't get us all the way to the kind of late '20, early '21 levels that were lower than that. And I guess I'd highlight that those were probably artificially low. We were coming out of COVID. We had -- our fill rates were lower than we want them to be. Our delinquent backlog was higher than we wanted it to be. And it was sort of the beginning of the supply chain challenge and we just leaned out very heavily at that point.
So I'm not sure at least shorter intermediate term, we could expect to get back to those levels. But I think to be able to take the 10 days out of the cycle between now and the end of the year is doable and we're -- as I said, we're exceptionally focused on.
Yes. And I would add to that there's no doubt about it, we have a heavy focus on that, the whole organization does. And as we've indicated not just today, but in February we talked about too, with -- I'm very pleased to say that with the supply chain situation becoming significantly better, it's not all cleared up and gone, but much, much better. There's more predictably than that. We're able to run our operations a little differently, because we don't have to have inventory hung up. And so, I'm excited about the opportunity here and we wouldn't have put that target out if we didn't feel pretty strongly about this. And we know how important it is for a whole variety of reasons. So, the team is highly focused on it, and you'll hear more about it.
Yes, that would put your cash in a great place. That would be fantastic. And then, just a follow-up on the lower component costs, you mentioned were kind of minimal in the quarter. How do you think about the coming quarters? Can we see more meaningful improvement throughout the year in terms of realizing that on the margin front? And then, separately...
No, that's all -- go ahead, Paul. Sorry.
Yeah. And then, separately can you expand on some of the pricing power you've had? In the tough environment, do you still have those opportunities to raise prices for a certain product line? And that's it for me. Thank you.
Thanks, Paul. Yes, I mean we're going to continue to see opportunities and be able to attain things on price in terms of our input cost that we haven't been able to do for probably closer to two years. We were paying a lot higher price because of the way the supply chain was. So there's definitely -- that's in our grasp and I think that will continue to improve further as the year goes on.
We've also talked about freight is significantly less than it was because of all the dynamics that took place for the last two years. So that's important. We had to spend a lot of money, as many companies did, on broker buys last year. And as I indicated, we had much, much less and continue that trend throughout the year.
So there's a whole variety of opportunities there that -- I'll say this, I'm not just pleased about it, but I can tell you my supply chain team is very excited about the opportunities there.
Yes, Paul, a couple of things maybe. The input costs in Q1 both in term -- from an inflationary perspective, both in terms of material costs and frankly labor, were significant compared to last Q1, and that's what you saw. And our price realization was able to offset a fair chunk of those costs, but we didn't get margin on that price realization.
Our outlook for the second half of the year points to improved margins and improved profitability, and it's driven by what we see as sort of the lapping of some of that -- some of those headwinds and the opportunity to maybe get a little bit more from -- in terms of value engineering, in terms of supplier management, those kinds of things that should help us to bring some of those costs down in the second half of the year.
The only thing I'll add is -- oops. The other thing I was going to add was that supplier lead times also have significantly been reduced. So, it helps in terms of our management of our inventory. Our own internal, we have an investment in [indiscernible] and our forecast improving, and I think it's really important and we're excited about that.
And you've heard us talk, not just in the recent months, but really for the last two years of how important and upfront our customers are with us and our relationship building that we've done in the last few years. So, we're much closer to our channels than I think we've ever been and it's just continuing to improve. So that's why is that important to this discussion, because we're that much closer to the finger on the pulse of what's going on out there with our customers and getting good feedback from them.
Great. Thank you. Very helpful.
Thanks, Paul.
Your next question comes from the line of Brian Ruttenbur from Imperial Capital. Your line is open.
Yes, thank you very much. Just a couple of clean-up questions. You stated I think in last quarter that inventory in the channel should level out in first quarter. And I didn't know if you could maybe comment on that that you're still very confident that the channel has leveled out and that second quarter, we should see at least stability, and then third quarter recovery. Maybe you can give us a little more color on that?
So, I'll make a few points. First of all, the point we were making last quarter was that the financial impact on us of the shakeout of HVAC distribution channel inventory, to be precise, was likely to kind of trough out in terms of the negative impacts and headwinds in Q1. We still think that's the case. That channel, as I mentioned in answer to another question, it's kind of ebbed and flowed. We've had some -- like I said, in the last four months, we've had some strong periods and we've had some periods where orders have slowed again.
And so it's a little bit hard and it almost gets to a customer-by-customer level in terms of where people are relative to their desired inventory and sort of how they're feeling about the market. It feels more dynamic maybe than it has been. And we haven't -- I wouldn't say that we've seen that consistent up arrow yet in terms of consistent kind of demand growth there. Having said that, we don't expect an inventory sort of an HVAC distribution channel impact that would be significant in terms of our outlook for Q2, for the remainder of the year.
The other point I want to make is the OEM channel which also had excess inventory. That does appear to have leaned out and reached the levels that we and our customers expected them to get to. So, we do see a little more of a sort of dynamic flow clean from our order book to the end customer without any dynamics embedded in that channel.
And I would also add, I think we'll continue to level out through Q2. And also, I think I may mention of it, but our delinquent backlog is coming down. It's not quite where we want it to be yet, but it's coming down significantly. And so that helps in taking a look at the picture that's out there. And so all those things, along with what Tony said, I think, hopefully, helps you understand a little further.
Yes. Thank you. And then just one other follow-up question briefly. Roughly at least in my notes, residential is about -- of your end customers about a third and commercial is about two-thirds roughly. Have you seen that kind of change recently where commercial -- everything that I'm picking up on is driving very fast still, and residential seems to be going in the opposite direction. Can you talk a little bit about the mix of your kind of end customer?
Yes. So that mix relates to relates to the ADI business, the distribution business. And commercial has held up meaningfully better than the more residentially-focused parts of that business. The residential-focused parts are the residential AV and the residential security. And they have been -- they were down in Q1, while our commercial business did grow in Q1. It was slower than what we had seen, but it did grow in Q1.
But just as a reminder to everybody, the Products & Solutions business is almost entirely residential. So that -- there's -- in that business, I think maybe the mix that you're thinking about is we've pointed to new construction being somewhere in the 20% zip code, and repair remodel more in the 80% rate.
That's right.
But it's heavily residential.
That's right.
All right. Thank you.
Thanks, Brian.
There are no further questions at this time. Mr. Jason Willey, I turn the call back over to you.
Thank you everyone for your participation today. And as always, if you have any additional questions or follow ups, please feel free to reach out. Everyone, have a good rest of your day. Thank you.
This concludes today's conference call. You may now disconnect.