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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome, everyone to Resideo Technologies Fourth Quarter 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. [Operator Instructions]
I would now like to introduce Mr. Matt Giordano, Vice President and Treasurer. Mr. Giordano you may now begin.
Good morning. Thank you for joining us for Resideo's fourth quarter and full year 2019 earnings conference call. On today's call we have Mike Nefkens and Bob Ryder joined by Andy Teich, our Lead Independent Director. You can find a copy of our earnings release and presentation materials on the Investor Relations page at resideo.com.
We’d like to remind you that this morning’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.
Additionally, during our call today, we will refer to certain non-GAAP financial information. A reconciliation of our GAAP to non-GAAP results is included in the company’s earnings press release and accompanying presentation, both of which can be found on the Investor Relations section of our website. We identify the principal risks and uncertainties that affect our performance in our Annual Report on Form 10-K and other SEC filings.
I’ll now turn the call over to Mike.
Thanks Matt and good morning everyone. For today's call, we'll start with a review of our business at a high level and also briefly discuss our market opportunity. Andy will then provide an update on the financial and operational review being led by the board as well as our governance initiatives. Bob will discuss our Q4 and 2019 results and outlook for 2020. And Andy will close with a few remarks before we take questions.
Now turning to Slide 3, Resideo had an established global leadership position in residential comfort, thermal and security solutions, as well as the distribution of security and low voltage products. Resideo products are in over 150 million households and we finished 2019 with revenue of $5 billion. We go to market via two business segments, Products and Solutions and ADI Global Distribution, targeting total addressable markets of over $39 billion.
Our Products and Solutions segment had significant brand equity under the Honeywell Home brand, and a history of delivering innovative, reliable, easy to use, easy to install solutions for the home. The value what solutions deliver is supported by our unmatched scale over 100,000 contractors, 3,000 distributors in more than 1,200 OEMs, major retailers and online retail partners.
Through our pro partners we installed close to 15 million system and components per year and have over 6.7 million connected customers. We also operate a leading global distribution business ADI, which has over 200 store locations across 17 countries. ADI is focused on pro security and connected home installers. ADI is the number one global distributor of security products.
Now turning to Slide 4, we'll go a bit deeper into the two business segments in the markets they served. In Products and Solutions our multi-category leadership, deeper relationships, robust install base and trusted brand recognition stand a solid foundation, we're looking to expand our presence in estimated $17 billion dollar addressable market. This is a growing market and one that fills a critical need for people in their homes.
We serve three primary markets in our P&S business. First comfort, where we focus on thermostats, temperature controlled products, indoor air quality and water leak prevention solutions. Our annual revenue for 2019 is approximately $1.1 billion, making us a clear leader in this market. Second is RTS, Residential Thermal Solutions, a roughly $600 million business in 2019, focused primarily on boiler systems, water heater controls and furnace systems. Lastly, our pro security business, with approximately $800 million in annual revenue in 2019, focused on pro security panels, peripherals and software.
On the distribution side, ADI is an industry leader in an expanding $22 billion distribution market. Our breadth of products, large retail footprint and close contact with over 100,000 pros around the globe, coupled with the ADI reputation for service excellence provides a significant competitive advantage. To that end, we recently announced the acquisition of Herman ProAV, a leading provider and distributor of integrated audio visual products and services.
We've been successfully building our internal capabilities to serve this market over the past couple of years. And this acquisition strengthens our existing platform and complements our go to market strategy. For ADI this space is margin accretive and allows us to offer critical service component through our offerings. Herman is one of the preeminent companies in ProAV space. This acquisition greatly accelerates our entry into one of the fastest growing segments of the ADI market.
So with that, I'll now turn it over to Andy.
Thanks Mike and good morning, everyone. Moving to Slide 5, as Mike mentioned, Resideo has a strong competitive position in the residential comfort, thermal and security markets, as well as a leading global distribution business. Our foundation is built upon a history of delivering trusted and reliable products and technology with trusted brands which are installed in millions of homes across the world. Despite the strength of our solutions and brand coupled with good continued performance at ADI 2019 proved to be a challenging year.
We experienced issues with our Products and Solutions business, including issues related to product management, value engineering, and new product introductions. To address these challenges, we're making changes and investments needed to improve execution and performance. The strategic objectives we're focused on include improvements in our new product introductions, value engineering and product management, which we believe will drive long-term growth and value creation.
Starting with new product introductions or NPI, we prioritize the development of certain hardware product categories within our core business that we expect to deliver improved margins, quality and customer acceptance. Our NPI process is being revamped with a rigorous stage gate process, improved design to value and a rich integration of the voice of the customer.
In terms of value engineering, we are focused on lowering our product costs and improving quality and functionality for selected existing platforms. This will be achieved by leveraging our global supply chain scale to standardize common components, as well as better aligning our products to customer and market needs. Additionally, we have a benchmarking and platforming analysis process underway to identify additional opportunities for cost reductions, increased reliability and improved competitive positioning.
Relative to product management, we are also making organizational changes to better serve end customers and make more informed decisions. This is achieved in part by new systems and processes that link sales, inventory and operations planning. We also have invested in analytics and other tools to enable product lifecycle management, pricing optimization and segment station.
Turning to Slide 6, as we'll discuss there is a tremendous amount of work being done under the oversight of the newly formed strategic and operational committee, which is comprised of four of Resideo's independent board members. Together with leading outside experts in supply chain optimization and an organizational strategic excellence, we've been analyzing every aspect of our business through a financial and operational review, the result of which will drive our strategic initiatives.
We prioritize the initiatives with the most meaningful impact on the business in 2020. At the same time, we have line of sight to the mid to long-term initiatives in 2021 and 2022. That will develop the structure and capabilities to achieve our goals and set up Resideo for long-term success. I'll speak more about these efforts in a few moments.
We're committed to having a board with fresh perspectives and in December we welcome Brian Kushner as a new Independent Director to our board. Brian has decades of experience spearheading corporate transformations, including more than a dozen assignments as a transformational CEO. Together with Brian's appointment to the board, Niccolo De Masi a non-independent executive of the company has resigned from the board.
Within management in our Products and Solutions segment, Sach Sankpal was named President in December of last year. Sach has already proven to be an invaluable addition to the Products and Solutions team and we look forward to his many contributions moving forward. In addition, Bob Ryder joined Resideo, was interim CFO following Joe Ragan's departure last November. We have an ongoing search for a permanent CFO. And finally we also continue to make progress on our search for Mike's successor.
Turning now to Slide 7, let me dig into our financial and operational review, which has three areas of focus, gross margin and revenue growth, SG&A optimization and structural efficiency and working capital management. The first phase of the process consists of a set of rapidly executable high impact initiatives, some of which have already been implemented in Q1. To improve our gross profit margins, we're focused on direct purchasing efficiencies and we are cutting our SG&A costs by streamlining the organization, improving internal processes, aligning R&D with NPI and enabling indirect procurement savings.
These areas will provide the most meaningful cost savings in phase one of our implementation. As part of the first phase, we've looked at roughly 70% of our direct materials spend and use predictive analytics to challenge our suppliers to drive down pricing. We expect to begin to see margin improvements coming from our spec optimization work in 2020 as part of our value engineering effort.
In future phases will move forward with plans to create efficiency for more complex processes. That means streamlining our product portfolio, looking at opportunities in platforming, optimizing our supply chain and footprint, realizing the benefits of our revamped NPI process and further improving value engineering. Many of these initiatives are already underway to deliver the impact we expect in 2021 and beyond.
The company expects the transformation to deliver $30 million to $40 million of incremental EBITDA for fiscal year 2020 and $80 million to $120 million of EBITDA in fiscal year 2021. Overall, the total program is expected to drive greater than 200 million of incremental EBITDA in fiscal year 2022 and beyond.
Moving to Slide 8, let's spend some additional time on longer term focus areas starting with revenue growth and gross margin improvement. We're focusing on improving sales tools and practices and driving increased returns on our marketing dollars. We're also targeting new customer segments and taking advantage of strategic cross selling opportunities. By prioritizing tactical opportunities in 2020, we're confident in our belief we can increase attach rates in our comfort and security businesses, enhance customer lifetime value and further drive revenue gains.
On the gross margin side, we assess our product portfolio, and as a result, we decided to rationalize certain underperforming products. Furthermore, we are instituting a pricing policy to close margin leakage. In terms of SG&A optimization, from an organization perspective, the changes will be implemented in several phases. We've made a difficult but necessary reduction in our US workforce last week. These initial credentials were focused in North America for increased financial and operational flexibility.
As an example, we've shifted away from the previous regional setup of support functions and move such functions closer to the individual business functions. This not only allowed us to further integrate these critical capabilities into the core product business units, but also gave scale to our functions to further create Centers of Excellence. In the months to come, we will further simplify our internal processes and harness new tools to create more efficient business operations in North America and other regions.
On the indirect procurement side, the teams have gone through a rigorous and zero-based budgeting process to identify the optimal spend for various services and supplies within the company. In parallel, we are conducting a strategic review of our real estate footprint, which will provide longer term financial and operational benefits. In total we anticipate a 15% reduction in indirect procurement spending in 2020.
Finally, our third focus area is to improve our structural efficiency and working capital management. During the transformation, it is imperative that we balance near term financial benefits while positioning Resideo for long-term success. For example, in P&S, we are optimizing processes for product development and effective product management through the refinement of our NPI process.
Similarly, our value engineering analysis suggests that there are multiple opportunities to lower product costs, improved quality and reliability, while delivering a better user experience across many of our existing products employees. On the ADI side, we're seeing an increasing number of our customers expanding their online engagement with us. As such, we're investing in our digital capabilities and further improving our ecommerce channel to lower sales costs and provide better customer experiences.
To further improve our operational performance, we're investing in tools to give our managers better quality data to make decisions with. This will ensure we identify and address challenges quickly and effectively. Our focus on improving working capital use will be bolstered by better tools for inventory planning and management and by adjustments to our commercial terms and policies. As we advance these initiatives, I look forward to sharing more with you.
Moving to Slide 9 to summarize, we're executing the initial set of changes based on the financial and operational review and are taking the appropriate measures to improve Resideo's business. The current focus is to drive 2020 phase one initiatives that will both lower costs and improve processes and systems related to our core products and P&S. Series of phase two initiatives are currently under development and slated for execution later in 2020 and 2021.
We believe these initiatives will lay the foundation for improved execution and operational performance in the years ahead. We also intend to engage with Honeywell on our agreements. We periodically get inquiries from investors regarding our various agreements with Honeywell and the constraints and opportunities they provide to the business. We have provided information on some of the terms of the agreements in an appendix to this presentation. We've also made available on our website a more detailed summary of certain terms of some of the agreements. These materials are not intended to replace the language of the agreements.
And we encourage investors looking for the most complete understanding to read the language of the actual agreements themselves. We have highlighted the dispute we have with Honeywell relating to whether the amended credit agreement turns that became effective in the fourth quarter automatically applied to the corresponding provisions in the indemnification and reimbursement agreement. While we want to ensure investors are aware of the dispute, as I hope you can appreciate our ability to comment in more detail on a pending legal dispute is limited.
In closing the strategic and operational committee, our management team and our external advisors continue to work diligently to best position Resideo for long-term sustainable growth and increase returns to shareholders. There's still more work to do, but we can confidently say we're on the right track. We look forward to updating you on our progress. Thank you for your time this morning.
And I'll now turn the call over to Bob to review our financials.
Good morning, everyone. In my section of the call I will cover the fourth quarter financial results briefly summarize 2019 full year results and provide guidance for 2020. Our fourth quarter results were driven by ongoing strong execution at ASI where robust global revenue trends and disciplined cost management are driving adjusted EBITDA growth and profit margin expansion.
We finished Q4 ahead of the revised guidance we issued in October to the better than anticipated mix at Products and Solutions. However, Q4 and full year 2019 compared unfavorably to the prior year. The financial and operational review was initiated to address the issues underlying the sub optimal performance.
Let's turn the Slide 11. Q4 revenues grew 3% on a GAAP basis and 4% on a constant currency basis. ADI finished very strong and delivered its best revenue growth rates in 2019. This performance was partially offset by sales erosion at Products and Solutions. Resideo adjusted EBITDA declined 25% compared to the fourth quarter of last year, despite excellent EBITDA flow through at ADI.
Turning to Q4 segment results, ADI grew revenues 10% and converted that to 18% adjusted EBITDA growth. Similar to prior quarters, this is reflective of the strong performance and executional culture at ADI. All geographies delivered strong sales growth with security and surveillance product lines leading the charge. Through SG&A productivity ADI was able to improve its adjusted EBITDA margin to 6.5% or 40 basis points better than 2018 in Q4.
Our Products and Solutions Q4 revenue decreased 4% in the quarter, while security revenue grew comfort and RTS revenues declined. Comfort continued to see erosion in its thermostat portfolio and warmer weather patterns dampened the revenue in the brakes fixed trade channel. Higher inventories at OEM customers negatively impacted RTS top line growth.
Adjusted EBITDA at Products and Solutions declined 28% in the fourth quarter. The lower profitability due to negative product and channel mix, inventory write offs, lower revenue and higher production costs. Inventory write offs in Q4 total $25 million, bringing the full year total to $46 million. These write offs were primarily in the comfort and security lines of business.
On the sales mix front, our security sales were heavily weighted towards lower margin new products introduced in 2019. Comfort sales overlap a colder than normal 2018 winter and the discontinuation of a higher margin non-connected thermostat. RTS sales mix was weighted towards the lower margin OEM channel.
Let's turn the Slide 12. We finished 2019 with $5 billion of revenues, which represents 3% GAAP revenue growth and 5% constant currency growth. ADI delivered a great year with 6% reported revenue growth and 7% constant currency growth and 15% adjusted EBITDA growth. Again, strong revenue growth and disciplined cost management delivered an excellent financial algorithm.
At P&S full year revenue was flat on a GAAP basis and up to 2% in constant currency, while adjusted EBITDA was down 32%. P&S revenue growth was much stronger in the first half of 2019, where it grew 3% to 5%, whereas Q3 and Q4 witnessed 3% to 4% sales erosion. For the full year the security business grew a robust 9%, while RTS was down 4% and comfort was down 1%.
As we categorize our 2019 adjusted EBITDA variances to 2018. You see that positive initiatives were more than offset by negatives, resulting in a 27% consolidated EBITDA reduction. We delivered $105 million of volume and price benefits. However, negative channel and product sales mix arising from lower margin new product sales in comfort and security and lower margin channel sales in RTS reduced profits by $100 million.
Material and labor inflation in factories and fixed cost deleverage from lower sales had a $70 million negative impact and $40 million of increased inventory write offs more than offset the volume and pricing upside. We were able to reduce SG&A cost by $15 million to specific management actions in 2019. We also made investments in sales staff and R&D and expanded our ecommerce platform. In addition, we paid $24 million in royalties to Honeywell which was a new arrangement put in place in connection with the spin off.
Let's take a look at Slide 14. For 2020, we expect Resideo revenue to grow 2% to 4% with ADI growing mid-single digits and Products and Solutions flat from low single digits on a GAAP basis. We expect our revenue growth to be backend loaded due primarily to Products and Solutions slow first half of 2020 overlapping a strong front half of 2019.
For 2020, we're expecting adjusted EBITDA to come in at $420 million to $450 million or growth of 16% to 24%. We are providing EBITDA guidance in two categories for 2020 to provide a bit more transparency and bring the appropriate attention to the financial and operational review. We will provide adjusted EBITDA growth generated by the base business prior to the F&O review and additional EBITDA generated by the F&O initiative. We'll also walk you through big year-over-year variants drivers between 2020 and 2019.
From an adjusted EBITDA perspective, we expect our base business to grow between $30 million and $50 million. In addition, we expect that the F&O new initiatives will result in $30 million to $40 million of incremental adjusted EBITDA in 2020. The various aspects of phase one of the F&O review will be implemented throughout 2020. So a full year of benefit will not be realized in 2020. The phase one savings are expected to come from reduced staffing levels, indirect procurement savings and COGS reduction initiatives.
On an annualized basis, we expect these phase one initiatives to drive 80 million to 120 million of savings in 2021. As we begin to see full year of phase one and partial and full year impacts of phase two initiatives results in 2022 and beyond, we anticipate over 200 million of savings from the F&O initiative. We have a disciplined process for the F&O, whereby we identify and vet initiatives to ensure they have the appropriate strategic and financial returns.
We create business cases and assign Resideo management accountability to each case. When the business case reaches the appropriate return and its execution is determined probable, we will bake it into our financial forecast and we will update investors as part of our quarterly financial result calls.
Let's talk a bit about expected segment results for 2020. At ADI, we anticipate driving revenue growth from digital, ecommerce and telesales growth acceleration, sales force effectiveness tools, new branches and private label growth. We expect to see another year of adjusted EBITDA margin expansion at ADI, due to continued spending discipline and the growth of higher margin sales channels.
For Products and Solutions, we anticipate flat to low single digit growth for 2020. Resideo impact of 2019 price increases, new product releases for non-connected thermostats and RTS growth later two overlapping the 2019 regulatory change will be somewhat offset by the overlap of our 2019 OEM group launch in the US security business.
Now, let's turn to Page 15 of the investor presentation to discuss big drivers of 2020 over 2019 variances at Resideo. For positive adjusted EBITDA drivers, we anticipate volume pricing mix to drive upsides again in 2020. We anticipate reduced inventory write offs in 2020 and a positive impact of our 2019 staff reduction initiative for a full year. Somewhat offsetting these EBITDA growth drivers are increased production costs from higher direct material and labor.
We continue to invest in our commercial [technical difficulty] functions and strengthen our R&D and digital capabilities. In addition, you see the $30 million to $40 million of positive impact of our phase one F&O initiative. These performance indicators bring us from our $362 million 2019 adjusted EBITDA to our 2020 guidance range of $420 million to 450 million. We generally do not provide quarterly guidance. However, do not expect Q1 to be reflective of our full year 2020 performance.
For Q1, we expect Resideo revenue to be down low single digits and adjusted EBITDA be down 40% to 45% versus 2019. We expect ADI to have a solid quarter of revenue and adjusted EBITDA, but we anticipate all products and solutions categories to have revenue below the previous year as we overlap a strong Q1 of 2019 and we face some channel softness and warmer weather patterns. Our adjusted EBITDA, the lower Q1 2020 revenue, negative sales mix and higher factory costs negatively impact Q1 results at P&S.
In summary, ADI continues to perform at a very high level with better than industry sales, growth and continued margin expansion. Within its financial metrics, it is investing in its digital platform, expanding its physical footprint, expanding its sales force effectiveness tools and its private label focus. We're making significant improvements to our Products and Solutions segment. Many of these issues will take a bit of time to completely ready, but we expect significant financial improvement.
The base business will have a weaker first half of 2020, relative to the first half of 2019. As we overlap these issues and as our F&O initiatives begin to take hold, we expect to deliver a much stronger back half of 2020. The F&O initiatives will have a much more significant impact in 2021 and beyond, as the phase one programs have a full year effect and the phase two programs begin to be implemented.
Let me turn it back to Andy for some closing comments.
Thanks Bob. Let's turn to Slide 16. Today Resideo had the strong foundation to its business, globally recognized trusted brands, deep and loyal connections with the professional installer community and global scale in large and growing product categories. 2019 proved to be a disappointing year with challenges on many levels. With that said, we enter 2020 with a clear commitment to driving improved financial and operating results. We executed a number of governance initiatives and strengthened the board of directors while also making changes at the management level. We are focused on building upon our strong foundation. The 2020 outlook we provided today reflects improvements in our base business, as well as the impact of the first phase of our financial and operational review. We expect to deliver improved profitability in 2020 and further strengthen our business and position Resideo for accelerated performance in 2021 and beyond.
Thanks for your time today will now open up the call to your questions. Operator
Thank you. [Operator Instructions] We can now take our first question. Go ahead.
Hi, guys, this is John Lovallo from Bank of America. Thanks for taking my call. The first question is on the CEO, CFO search. Can you just describe kind of the profile of the candidates that you're interviewing, maybe the level of building product experience and how close you are to completing this?
Sure John, this is Andy speaking. So the process is well underway. We've hired Russell Reynolds Associates as our organization that is helping us with the process. We're seeing good flow of candidates. And certainly we're looking for candidates that have a demonstrated track record of operating an industrial product segment, hardware centric focused. We're certainly putting additional weight on candidates that have a proven track record of turnaround, performance, margin improvement and delivering shareholder value. And it happens that the pool of candidates that we've seen thus far looks good, the process is well underway, and we look forward to communicating more to the shareholder base as soon as we have something definitive to talk about there.
Okay, thanks. And then, next question, your 2020 outlook seems to imply roughly 17 ish percent Products and Solutions adjusted EBITDA margins. And that seems, while it's encouraging, it seems pretty aggressive, how much of this is low hanging fruit? Maybe what is the cadence of the realization expected? And what is your level of confidence at the high and low end of your EBITDA range?
So I'll address a couple of high level issues on this first, and I'll flip it over to Bob for a couple of other comments. But generally on the low hanging fruit comment there is a fair amount here that it's actionable and those have been brought to light by the work that the advisors and the F&O committees have done for us. The bigger issue on that is timing. Because obviously, it takes some time to implement these changes. But there are a number of actions that come to light fairly quickly here that will result in margin improvement in P&S that can be realized certainly by the second half of the year. Bob, do you want to add another commentary to that?
Obviously, we provide guidance. We take it seriously and long discussions with the board. So the range we provided we expect to deliver. Regarding the P&S margin, that's probably better addressed offline. The number you quote doesn't make that much sense to me. So there's a lot of moving parts. So if you give Matt a call offline, we can probably discuss general trends there.
Okay. Finally, the plans in place that's great. Execution is the hard part. So I'm curious about the measurability of this plan and the progress of it both internally and externally. And how are you assigning accountability internally for kind of getting this done?
So there's a very detailed process and systems that are in place behind the initiatives. And each initiative has a leader and accountability is assigned to that leader. We've also assigned a Chief Transformation Officer role in the business that we have an individual who has a rich history with the business that is overseeing that and his sole responsibility is to link the data that's contained in the initiative plan to the responsible leaders that are responsible for executing comments. I think there's good connection and accountability will be realized from that process.
Alright, thanks very much, guys.
Thank you.
Thank you. [Operator Instructions] We'll then move along to our next question. Your line is open caller. Please go ahead.
Hi, this is Jeff Kessler at Imperial Capital. And I just want to say, hi Andy, it's good to talk with you again.
Yeah. Nice speaking to you as well.
Yeah. I've a couple questions here. First is on ADI, during the latter part of the year one of your major competitor in distribution business was sold to – another company took them over. There's obviously integration going on there, a couple of the companies you do dealt with that with your competitor have dealt – they had to deal with those lower inventory levels than they were expecting. Did ADI and will ADI until that is settled, which could be by midyear – in by the midyear, will ADI – is it are they benefiting from what is going on and had annexed there?
Yeah, Jeff so, I mean, those situations I think are always kind of result in short-term benefit for other players in the industry from a market share standpoint because there's always some disruption that comes from the combination like that. But that said, ADI is executing extremely well, it's a very well run business, a very well managed business and we have a plan for investments this year in ADI. It's a business that I think has been under invested in historically. So we're going to target some specific areas that have been mentioned in the commentary previous to the Q&A section of the call. And most importantly, I think the opportunity to improve our ecommerce business and also improve our sales force effectiveness in ADI should drive good results. So I think the combination of those initiatives together with things that are going on business environment relative to M&A are both advantageous for ADI and set us up for a good year.
Okay. Second question, with regard to one of the problems that the company encountered this past year was the lack of product development people who were in critical in developing some of the newer now perhaps slightly older products that you folks were selling did not come over from Honeywell. From what I've seen and what I've talked to when we've seen the company. It sounds like they've either gotten some people coming over from Honeywell or you've replenished some of the product development folks who were lost. Can you comment on what's going on there in terms of getting the people in place and then getting the products in place?
So I agree with you, Jeff, that posting that there was an opportunity for talent improvement in product development areas of P&S, and some of the lack of that was manifested in our results in 2019. So the problems are now identified and we've hired a new Products and Solutions President, Sach Sankpal, he's got a history with Honeywell in front of the segments. So he knows a lot of the players there. And he's got a good eye for talent. And that's the most important thing is to get the right talent in the right positions and properly motivate them and direct them to focus on the right priorities from a R&D standpoint. And that's job number one for Sach at this point. He's an experienced operator, and I'm confident that he's going to generate good results in that regard. It's a time consuming process. This is not something that happens instantly. But I think it's most important that you have good talent that is well selected and well managed and working on the correct priorities, and that's what we're focused on.
Okay, one final question. It's a numbers question maybe for Bob and that is, on the – on your financial – onto your financial measures you note that the Honeywell reimbursement agreement expense in the three months ended December 31 was $51 million. There's another number in there, though you assume cash payments related to Honeywell reimbursement agreement was at $35 million. There seems to be a $16 million differential there. Can you explain that?
Yeah. Sure, Jeff. So the same thing flows through for the full year where you see the number, you can kind of see it in the cash flow statement. The P&L number is different than the free cash flow statement. And what I'd say is, the amount that hits the P&L is relatively complicated, how it's calculated. If you look at some of the documents, what we're assuming is pretty much the cash will be 140 a year as it has been and the P&L will move around a little bit. So if you're looking at valuations or things like that, I would assume it's $140 million non-tax deductible outflow every year or the decades that's right now [technical difficulty].
Alright, great, I have no further questions. You've got a lot of stuff you on offline. So thank you and I appreciate you taking my question.
Thanks, Jeff.
Thank you.
Looks like there are no more questions in the queue.
[Operator Instructions]
With no more questions in queue, I can put your call today.
Please go ahead.
Yes, good morning. Can you hear me?
Yes, we can.
Sure. I apologize if you've said this, but what was the cost of the implementation of the program? If you get timing related to that, but mostly interested in the cash costs?
We haven't released the cash costs of the program yet. We'll have additional information on that as the program progresses, but at this point we don't have – we're not yet releasing estimate for the full program cost.
As you can see just roughly speak, it will be a large component, something that required you to covenant relief or is it of less significant magnitude without being specific?
Bob if you've got any the commentary on this.
So we're not worried at any project costs will cause any covenant issues under our redundant covenant to the banks. We will update – obviously, if you look at the quarters, we will update the costs of the program, which will generally be in onetime items, so we will not include them in adjusted EBITDA and there's reconciliation tables every quarter. So we will certainly be disclosing them in the historical perspective as the 10-Q come out.
Got it, helpful and then lastly, can you speak to any color on the sell through or the underlying trajectory on non-connected thermostats and residential thermal solutions given some of the noise that you had in the channel, inventory channel?
So we don't go into specific segment level unit sales data, I think you can understand the rationale behind that. But that said, we are specifically addressing some of the challenges that we had in the – on connected thermostat section to include bringing back one of the discontinued products that was a popular product in that segment and making enhancements to other products surrounding that product. And we've got a couple of products that are in development that will be released this year as well. So I think it's safe to say that we're addressing the challenges that affected the non-connected thermostat market segment.
Alright, thank you and good luck.
Thank you.
That concludes today's Q&A session. At this time, I will turn the conference back to the speakers for any additional or concluding remarks. Thank you.
Thanks everybody for participating in today's call and see you next quarter.
That concludes today's conference call. Ladies and gentlemen, you may now disconnect.