Welcome everyone to the Resideo Technologies Fourth Quarter and Full Year 2018 Earnings Conference Call. Today's call is being recorded. [Operator Instructions]. I would now like to introduce Mr. Michael Mercieca, Vice President of Investor Relations. Mr. Mercieca, you may now begin.

Good morning everyone. With me today is President and CEO of Resideo, Mike Nefkens and Resideo’s Chief Financial Officer, Joe Ragan. You can find a copy of our fourth quarter and full year earnings release and presentation materials on the Investor Relations page of resideo.com. Before we get started, I’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’ll 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 also in the appendix of the Company's presentation. You can find more detailed in our 10-K which we expect to file with the SEC in the coming days, as well as our other companies filings. With that, I’d like to turn it over to our President and CEO, Mike Nefkens.

Thanks, Michael and good morning everyone. And thank you for joining us on today's call. It's been a busy few months for Resideo and we’re off to a strong start. We completed our spinoff from Honeywell and began trading as resi on the New York Stock Exchange last October. Since completing the spin we've been out on a listening tour with many of our investors, partners, customers and ecosystem stakeholders. It is also been great to continue sharing our story about our business and leading positions in the growing end markets where we operate. I want to personally thank you for the valuable input, feedback and great ideas from all of you, which has influence the path forward for Resideo. I also feel really good that most of the disruption from the spin is now behind us and we have a solid team in place that delivered great results in 2018. I'm really proud the way the team finished the years. As I've shared in the past, this is my third spin and we are on schedule. And in some cases ahead of schedule when I compare to previous spins I've been part of. Our first fiscal year end as a public company is a great time to not only share some of our key initiatives for the year ahead, but also outline Resideo's long-term vision which we’re calling vision 2023. Now to summarize what we’re going to cover on today's call. I’ll start with an overview of our fourth quarter and full year results at both the consolidated and segment levels. Then we’ll provide highlights on our attractive end markets in our business. Third, we’ll talk about how we’re laying the foundation for a long-term vision with key initiatives in 2019 that include investment in our business and important…

Thanks Mike. 2019 is a foundational year for Resideo. We are establishing our strategy and roadmap for long-term growth. We believe there are compelling opportunities for us to focus on and invest in today that will set the stage for even stronger results in the future. To address these exciting opportunities we are adjusting some of our initial assumptions and expected spin to ensure that we are executing today to achieve those targets. So how does that translate into our assumptions and guidance for 2019? For growth, we're guiding in the 2% to 5% range, ultimately, we're still targeting the 4% previously stated. However, in light of some moderating housing metrics and unusual seasonality we expect our growth to be more second half weighted and therefore believe arrange for the year is more prudent. We’re expecting to deliver annual recurring revenues of greater than $100 million this year and we’re guiding to an updated pro forma adjusted EBITDA range of $410 million to $430 million, which takes into account our updated revenue expectation and planned growth investment. It includes a marginal impact from the cost initiatives, Mike previously discussed, which will primarily impact 2020 and beyond. Slide 11 provides more detail around how we’re thinking about adjusted EBITDA growth over time. Let me provide some further color on how we achieve our 2023 EBITDA goal. As we look ahead, we expect to significantly grow our adjusted EBITDA to over $700 million in 2023. We break out the significant adjusted EBITDA growth into two buckets; ADI margin expansion and growth and expected products growth. We expect ADI to contribute an additional $106 million annually in EBITDA over the next four years. And on the product side we expect an additional $188 million annually of EBITDA over the next four years. This…

Great, Joe. And thank you to everyone who joined us for today's call. To close, I’ll leave you with a few key takeaways about our business and why we’re positioned to drive shareholder value well into the future. First, we came out of the spin on time and delivered on the high-end of the range for 2018. This includes revenue, EBITDA and cash. This team knows how to execute. So I'm confident that we have the leaders and team in place to deliver on our vision 2023 strategy. Second, our innovative product pipeline and focus on doubling our high margin recurring revenue stream will further solidify our existing market leadership. Third, our 2019 initiatives are designed to deliver EBITDA and revenue growth to 150 million home installed base in our network of 110,000 do-it-for-me professional contractors setting us up for our drive to vision 2023. And lastly, our financial position is strong and our healthy balance sheet will allow us to be opportunistic and aggressive in our growth strategy. Thank you again for your interest in Resideo. Now, I’ll turn it over to the operator to begin Q&A. We welcome your questions.

Thank you. [Operator Instructions].

[Indiscernible] should you allow us to cover as many questions as possible? And I will need to limit call as to one question and no follow-ups at this time. We will of course follow-up with calls and meetings with many of you. And so I want to open it up. Our first question is from Ian Zaffino with Oppenheimer.

Very good fourth quarter, but I want to dig into the guide maybe a little bit on 2019 which was not exactly what we’re expecting. But give us an idea of the increase in investment -- why now and how we expect to see investments going forward and maybe the returns of the investments? I know you have the outlook for longer-term. But how do we expect to see this kind of progress? And again, why now? Thanks.

Hey. Thanks for the question. So, you’re right. There is a lot in there. And there’s a lot of pieces from executing a very solid 2018, very proud of the cash that was generated at the end of the year. As you guys know with the spin this effectively is the first time that we’re having all of our costs under our control. So there is a lot in here. And we are at a strategic inflection point. I would tell you that we are at or ahead of where I expected to be. This market is moving really, really fast. And my biggest concern in the past is when I been asked is been no our ability to operate its speed versus industrial speed. And I didn't want to wait. I didn't want to just sit around and just keep going in 2019. So we made the decision to be more aggressive on cost-cutting which we’re going to go do, which we said here. I feel that'll make us a leaner faster company and we made the decision to pull some investments forward from 2020 into 2019, and that's why we're investing more. So -- and this is not about just helping us keep where we’re at. This is about helping us get ahead. This is about leaping ahead and moving from operating at industrial speed to operating at IoT type speed. That's why we’re doing what we’re doing. We are more excited than ever before about the opportunity in the market. These investments like pulling forward, our platform launch in comfort that we’ve planned for 2020 into 2019 is going to give us the ability to change some of the revenue models that we have into subscription services that’s going to give us the ability to grow recurring revenues quicker and frankly offer a much more compelling set of offerings to the market this year and 2019 versus waiting till 2020. That's why we're doing what we doing. So we are on our toes. We’re moving forward. We’re moving fast. And we’re confident that raising the investment cycle that we’re in right now are going to give us a much better returns quicker than if we just basically waited to the end of 2019.

Okay. Thanks. And then also, can you just touch upon maybe some of the feedback you’re seeing on T9 and T10. Also may be – when you look at kind of your new products at connected, total solution product that you’re probably going to launch, what’s sort of differentiate yourself? It's a relatively crowded playing field. So, why would a consumer use you guys compared to anyone else? Thanks.

Yes. So a couple parts of that. So first off, we have 110,000 contractors out there. And our job is to match the consumers to these contractors. Right now, it is very difficult to get to the -- what we call the do-it-for-me channel. You basically have to go search for somebody start calling around. So you're going to see us being much more of a matchmaker where we are able to connect the 5 million connected users we have to our contractor base. Think of us more as a home advisor type company where we’re going to be able to connect the end user to the contractor. That’s step one. Step two, and that's we’re accelerating the investments this year is we’re going to not only offer the product, we’re going to offer subscription services behind these products in the four areas we mentioned. Comfort, which is a thermostats and focused mostly on energy savings in the home. The second area will be indoor air quality. The third area will be security. And then we have bought no water and safety. So, we’re going to change the model this year and that's why we’re accelerating investments to flip the model to more recurring, more subscription type services. We’ve got to make some pretty major updates to the digital side of our business. And we’ve got to make some pretty major updates to some of our applications. Again, these are things that nine months ago we’re on the 2020 roadmap and we pull those forward into 2019. And again, this is all about getting ahead. We feel. We have the momentum. We have the people. We have the engineers to actually make that moonshot and get ahead now. And we want to take advantage of that. And that's why we’re doing what we’re doing.

Okay, great. Thank you very much.

Hey, thanks Ian.

We’ll take our next question from Peter Galbo with Bank of America.

Hey, guys. Good morning. Thanks for taking the questions. Just wanted to focus on slide 11 that 2019 guidance that you guys updated and put out there; I’m trying to understand two of the buckets that you kind of outlined. The first being the $25 million net inflation headwind, I would've thought that would have to ease going into 2019 just given where copper prices have gone and that it would be lapping kind of some of the tougher freight comps from the first half of 2018? And the second part, on the $30 million demand moderation, we started to see some green shoots out of some of the homebuilders even some of the other R&R focused building product company. So just any commentary you give there as to what you’ve seen so far in January and February that kind of make you see that level of moderation? Thanks.

Sure, Peter. This is Joe. On the inflation item that also includes the full impact of tariffs that are expected for the year. So we have been conservative there. I think we have seen some improvement, but overall that'll continue to be a headwind for us. On the market moderation, again, we're just looking at any different factors out there. And you're being fairly conservative there as well. So, I think you're right, I mean, there have been some green shoots, most recent housing start number was a little bit down and we’d actually included that in our outlook. So, I’d say, these are relatively conservative numbers taking into account everything that’s been reported to-date.

Got it. That’s helpful. I mean, I think when we think about it we’re looking kind of at the order trends that builders have reported, so maybe there’s a disconnect on a go forward basis relative to the start number that have been reported. Just maybe the second question, Mike, if you can give any further detail in terms of parsing out the 2% to 5% topline guide, how that looks mixed between products relative to distribution? Thanks.

So, when we take a look at the two areas as Joe said earlier, we’re still targeting the 4%. We basically broaden the range for two reasons; one is most of our growth is and this is traditional for us when you look at the last couple years. 18 was a bit of an outlier. But most of our growth comes in Q3 and Q4 which is the start to the heating season. So that's why we’re being a bit more conservative with the year just making sure as we see some of these housing metrics and other metrics moving around that we’ve got a range out there. But we are targeting the 4% plus that we said before and we’ve got the teams that are moving heavily against that and right now, we’re confident in that range. And I would tell you, I think some of the moderation that we saw at housing, the 200,000 starts that were down here are one of the metrics that we refer to when we talk about moderation. But we’ve seen some other metrics recently that have as you said some green shoots that are showing the other way. So, we are optimistic. We’re going to keep driving and our intent is to do all possible to be at the top side of that range. Looking between the two businesses specifically right now our ADI business as we said is performing very, very well. We continue to expect them to be at the high side of the range. The big item for us this year is going to be our security business. We have the rollout for our new Global Intrusion Platform started in December. That rollout is progressing very very well with our first customers and for us to be at the top of the range. We’re going to need very strong performance from our teams in the second half of the year in GRIP. And then, the third item is going to be as I mentioned in our investments, we’re pulling forward our platform, new platform launch in our comfort business from 2020 to 2019. If we can get some of that into the fourth quarter then I would be very optimistic about where we could be from a growth perspective in our products business as well.

Ladies and gentlemen, I just want remind you, we’re getting close to the end and we’ll just going to keep it to single question and no follow-ups. Thanks.

Let’s go to the next question.

We’ll take our next question from Saliq Khan with Imperial Capital.

Hi. Good morning guys.

Good morning.

Regarding the comfort and care and the security and safety as well, could you give us a bit more details around how those verticals are performing? And what are your expectations are regarding some of the investments that you alluded to as you go into 2019 and 2020?

Yes. So, looking at the investments in our product business, so that’s we just highlighted. Obviously, our biggest investment is our rollout of our GRIP platform. That's the next generation security platform which is already rolling out. So, we have several parts of that. We've got our largest customer that comes up first. Then we have general market in the Americas. And then we moved the general market in Europe. We were not planning a European launch until 2020. We’re accelerating that into 2019 as well. So, we've got investment increase just to make that happen. That’s security. On the comfort side, as I said earlier, we've rolled out several great products; the T9 and the T10 that Ian mentioned earlier, but we are going to have a new platform launch that was planned for 2020. We’re accelerating that into 2019. All this is done to do two things. Number one, it's to accelerate our growth. And number two, it’s going to be the both platforms that are necessary for us to really push subscription services. Our older products did not have the capability to do that. They were multiple applications. This will all be under single app and we’ll be able to launch our first generation subscription services which will drive our recurring revenue north. So that is why we’re accelerating these investments. Those investments are primarily in the product segment and we’ll also be executing as I mentioned in my prepared remarks a few tuck-in acquisitions as well to give us other IP and products that will help us bring those subscription services to market.

Great. Thank you.

Our next question will come from Kim Opiatowski with Oscar Gruss.

Good morning. Thanks for taking my call. Just wanted to flush out little bit more with regards to the growth capital that you’re pulling into 2019? Can you help us think about how we should think about margins going forward giving that you’re pulling $90 million growth and looks like another $50 million one-time charges with most of that $90 million being a kind of out of the expenses. How should we think about the timing of margins going into 2020? Will margins go back to where they were before? And then how do we get to that? It looks like you’re implying potentially a 13% gross margin into 2023? So how do we think about the timing of that through 2019 and beyond?

Yes. So, let me start with the business part of that and Joe, I’ll turned over to you for the margins here, we'll tag team that. So first off, the $90 million of investments; what we've done is if you take a look at chart 11, there's only 30 million of that is incremental. We have worked very hard for this about $60 million of spend, so that is – those are projects that we’re to halt. Those are people we’re moving over into these new initiative areas to really be able to execute on the $90 million. So we've been very smart about how we redeploy costs internally. So, we’re basically going to be able to pull things toward 2020 into 2019 and we’re doing that with the $90 million. The $50 million you refer to is actually not additional expense. That is a cost that we will be exiting this year to basically trim our overhead. So in a spin you're basically giving your cost base by the company that spun you. Now that we have our own P&L, we have identified many areas of cost that we can drive out. It's going to take some time and effort because it's not easing. A lot of that is doing some changing of business processes, the way that we do new product introduction, lot of other pieces. So that's why we’re guiding to seeing the full benefit of that in 2020 as we go forward. So, all of those things are designed to help us drive improve margins. Now as we roll out new platforms there's a lot of beta testing, there’s a lot of expense upfront before we get the revenue. So the new platform launches gives us a bit of a headwind and then the cost-cutting that we just talked about and the new subscription revenues et cetera will give us a margin tailwind. So those two things together will get us back to where we want to be margin wise in 2020. So Joe, do you want to add any details there.

Sure. Kim, the margin uplift for next year when you add in the incremental EBITDA that we’ll get from the cost take out, as well as having gotten through that initial investments about 150 to 200 basis points. And we are very focused out, naturally just the products business outside of that the ADI businesses is expected to really perform much stronger and we’ll see margin uplift there as well. So, when you're looking at 2021 it's 150 than 250 basis point uplift from where we are today.

Right. Ladies and gentlemen, this will be the last two questions that we’ll be taking this morning. Thanks.

Our last question will come from Jeff Kessler with Imperial Capital.

Thank you. Recently there was – there’s been a number of court rulings regarding let’s call it, false alarms particularly in the South in the Atlanta region. And I'm wondering what you folks are doing to – since the number of your clients are -- a number of your dealer clients are in that area and this will probably spread across United States with regard to making sure that these are better verification. What tools have you been developing and you’ve shown some of the trade shows. What tools have you been developing to go into the marketplace and make sure that your client base is not going to be hit by my onerous fees and charges and better police response?

Yes. So thanks for the question. And look, I think we’re always working with our dealers, right to help them eliminate false alarms and to help them obviously not have to roll trucks et cetera. I mean, we're working on a lot of support verification, most of that is a video motion viewers. And this is actually why we are confident that our products are the best products in the market. The problem with a lot of the do-it-yourself products out there is that they don't have video motion viewers. They don't have the connection to the central stations that we have. So in this case we feel that our products are the strongest in the market and provide least number of false alarms and it's something that when she pushing with our dealers to actually move customers from a lot of the DIY products that are causing these false alarms to our products that are much more pro-grade type products that will actually help the dealers eliminate these issues.

Thank you very much.

Yes. We got time for one question more. We’ll do one more then we’ll wrap it up.

At this time, there are no addition callers for questions.

Okay, great. Well guys let me close real quick. This is Mike. So, as I said at the beginning of my prepared remarks, we had spent a lot of time listening to all of our constituents from our customers to our investors, to our employees. We have heard very clearly from our customers that they are excited about Resideo. They love our products. But they want us to move faster. We have to get out of this industrial pace and get into a higher pace. As a result of that we are moving faster. We are accelerating a lot of the investment that we had planned for 2020 into 2019. We're making aggressive cost moves to right size our cost structure post spin. And I can tell you I couldn't be prouder of the team and where we are right now. We delivered our numbers in 2018 as we said we would and we are going to deliver on the growth and margin expectations we have put out here. You can expect some very exciting news from us happening later this summer about what we’re going to be doing on a subscription side and how we’re going to be more than doubling our recurring revenues going forward. And it couldn't be a more exciting time for Resideo. So thank you for the questions today. Thank you for the time and looking forward to our next session.

That concludes today’s call. Thank you for your participation. You may now disconnect.