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…

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…

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…

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.