Ladies and gentlemen, at this time I'd like to welcome everyone to the Resideo Second Quarter 2021 Earnings. Today's call is being recorded. All participants will be in a listen-only mode, until the formal question-and-answer portion of the call. It is now my pleasure to introduce, Mr. Jason Willey, Vice President of Investor Relations. Mr. Willey, you may now begin.

Good afternoon, everyone, and thank you for joining us for Resideo's second quarter 2021 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.resido.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 now turn the call over to Jay.

Thank you, Jason, and good afternoon everyone. Our Q2 performance reflects positive market trends, the strong position we've built with our customers and solid execution across the organization. We grew revenue 44% year-over-year, as both Products and Solutions and ADI continue to benefit from positive residential spending trends, with ADI also seeing a healthier commercial backdrop. Significant improvements in operational execution has allowed us to successfully manage the difficult and dynamic supply chain and logistics environment. Profitability expanded meaningfully year-over-year in Q2. Both segments leveraged higher revenue and continued focus on cost management, to deliver improvement in gross margin and operating margin. We continue to make progress with our value and cost engineering programs within products and solutions. Additionally, our investments in technology to improve customer support, sales force effectiveness and digital tools are showing benefits within both ADI and products and solutions. We continue to manage through significant logistics and supply chain challenges, and these dynamics are creating some headwinds to financial results. While we believe the team continues to do an excellent job delivering for our customers in this environment, our backlog grew in the second quarter and remains at elevated levels. The entire supply chain team, along with senior leadership including myself, are actively engage with our suppliers and focus on continuing to ensure that we are able to procure more than our fair share of critical components. Our freight costs are also running well ahead of 2020 levels, as the tight supply chain situation and unpredictable ocean freight conditions are necessitating more expediting in air freight. We currently expect challenging component supply and freight dynamics through at least the end of 2021. During the quarter, we continued our strategic work and business transformation efforts. As part of this, we unveiled Resideo's overarching vision and purpose to…

Thank you, Jay, and good afternoon everyone. In the second quarter, we again delivered strong growth in revenue and profitability across Resideo. Consolidated Q2 revenue was $1.5 billion, an increase of 44% compared to Q2 last year, which was negatively impacted by the emergence of COVID-19. Q2 gross margin of 25.8% was up 290 basis points from Q2, 2020. Consolidated operating expenses were $260 million in the quarter, up just 7% from last year, despite sharply higher revenue and a $16 million expense related to the pending shareholder litigation settlement we announced on Tuesday. Operating expenses were 18% of total revenue compared with 24% in Q2 2020. Operating profit for the second quarter was $121 million or 8.2% of sales compared to a loss of $6 million last year. Products & Solutions' second quarter revenue of $598 million was up 50%, due to continued strong demand across our major product categories, geographies and channels. Products & Solutions' gross profit margin in Q2 was 38.6%, up from 33.9% in the second quarter of 2020. P&S operating profit was $129 million or 21.6% of sales, compared with $42 million or 10.6% of sales last year. The improved margin performance was primarily due to fixed cost leverage and productivity improvements, net of the negative impact of recent materials price inflation of approximately $8 million, as well as $20 million of higher freight costs year-over-year. Gross profit also benefited from a $7 million reversal of an inventory reserve. Operating expense was up 10% year-over-year, due to higher sales commissions and incentive compensation, as well as incremental investment initiatives. ADI Q2 revenue of $879 million, increased 39% year-over-year. Demand was strong across commercial and residential markets, with over 30% growth in each of ADI's six largest product categories. ADI's investments in e-commerce and digital selling…

Thanks, Tony. We continue to take advantage of the positive business performance and market momentum to increase our investment in the business. We are focused on building out systems and tools, to better understand and support our customers. We believe these investments will better position us for future growth and profitability expansion. While we expect supply and logistics headwinds to continue to create short-term challenges, our teams are focused on ensuring that we deliver for our customers, and turn these macro challenges into long-term opportunity for Resideo. This concludes our prepared remarks. Operator, we are now ready for questions.

[Operator Instructions]. Your first question comes from the line of Ian Zaffino with Oppenheimer. Your line is open.

Great. Can you guys just maybe talk a little bit about ADI? It's positioning in the market now, during an inflationary environment, do you expect it to benefit from that similar to maybe some of your other distribution peers? And then how do you think about pricing and recouping margins, is it margin dollar you think about, margin percentage you think about. Just maybe a discussion on that will be helpful? Thanks.

Sure. Good afternoon Ian, it's Tony. So, thematically in terms of how distribution operations work. Yeah, I mean inflation should be something that ideally you are able to pass along your cost plus margin on the incremental cost. Our approach at ADI really isn't focused on that. I mean, we're really focused on execution in that business. To the extent that we see some benefit, because we're passing through price and able to leverage a little bit of margin out of that, we'll certainly take that, but that's not part of the outlook that we're laying out here, and it's kind of not part of the strategy. We do think about that business from the standpoint of margin percentage, because that's always reflective of your execution capabilities in the business. For example, I talked in the script about the MVP pricing initiatives that we've undertaken about digital selling, about e-commerce, and those kinds of things should support above market revenue growth. But over time, they should also support some reasonable amount of margin expansion, and that all tracks back to what we talked about at our Investor Day back in March, where we think this business has ways to go there. And, we talked about the fact that we're putting investment against it this year, and that's clearly impacting margins. We knew it would, it was in the guidance and the returns that we're seeing on those investments, thanks to the ADI team, have been terrific. So we're going to continue to do it.

Okay, perfect. And then just another question, can you just - and I know in your prepared comments, you mentioned a lot about technology, leading with technology, I think were the words, maybe not. But either way, can you help us understand what maybe your product line up looks like as far as, what's out there, that you might not talk about, that will be introduced or maybe the areas, where you will find that, and does that mean you need more M&A or can you do it with the resources that you currently have? Thanks.

So I'll start, and Jay may have something to offer here too. But we've been pretty clear, that we'll talk about new products, when they're ready for the market, and when they're hitting the markets. And we really don't want to get out over our skis on, talking about things that are coming some period down the downtime. We're really going to be focused on execution in terms of our NPI, and driving that and talking about that when it becomes real. For sure, our NPI is going to need more technology focused, because that's how you drive margin, and that's how you drive differentiated product and innovation. So for sure, I think you're going to see a bias in terms of our R&D and new product introductions to more innovation, and more sort of embedded technology, whether that's sensors or software or AI or anything of that nature, those are the logical trends. In terms of M&A, yes, that's an option we have available to us. That's why we fixed the cap structure and there may be situations, where it's appropriate for us to make acquisitions that contribute to our technology portfolio, as opposed to trying to build it ourselves.

I'd also add Ian, this is Jay, that as you know from our discussions over the last year, I brought in an individual by the name of Jeff Frank, who heads up our entire innovation ideation area, which has been brought a lot to the table, in our NPI process, as well as I brought an individual in, from the outside, who heads up not only - also covers all of Global Engineering, but he has Product Management. And as part of that, has done some quite a bit of the organizational changes, to streamline the NPI process, make it more efficient. And we talked about that during the Investor Day. And what I talked about during our opening comments about the alignment on product management into two groups with the integrated Home and Building Solutions and OEMs Partner Solutions, another big step there, because we really do believe that in the area of - with P&S in terms of taking a look at things holistically, and in a total ecosystem across all the different products we have, we're going to bring more value to our customers, and there is more opportunities to bring more products to market. So, customers look to us for a complete basket of goods, as this the entire - this particular space evolves and grows.

Perfect. Thanks for all the color, guys.

Your next question comes from Amit Daryanani with Evercore. Your line is open.

Hi guys, this is Michael Fisher on for Amit. I wanted to dig in a little into your comments on some price increases. Is this purely done as a response to cost inflation you're seeing? Or, is this more you guys taking a look at the portfolio and maybe identifying some areas where you're not really being properly compensated for the value provided?

I'd say yes, it's a combination of both. I mean there are chunks of our business where it's difficult to move price, because contracts are limiting. But in terms of places where we can take critical opportunity to look at what we're bringing in terms of value, and driving that through the marketplace. This is an environment where we would focus in those areas, in terms of price increases, right, because you have a market that is generally oriented toward seeing more price inflation. So, some of it is strategic in the sense that, we feel like we're maybe not getting fully compensated for the value that we were bringing. And some of it has to do with the fact that, people understand that our costs are going up, and they are going up substantially and our customers and partners need us, in terms of supporting the implications of that for our business.

I'd add also, through the challenges that are going on out there, in the global supply chain, which has really started toward the very end of last year and of course all of this year. And as I mentioned in my comments, that it will continue forward and probably into the beginning of 2021. So, how Tony phrased, I think is perfect.

All right. Thanks. And then just on revenue guidance. I think, if I plug into your 3Q guidance kind of implies the December quarter revenues, may be around flat year-over-year. Obviously, some pretty tough comps looking against December '20, but I'm just curious, is that - are you just maybe being a little bit more cautious, given the tough comparison or is there something specific you're seeing there?

There is nothing specific other than the fact that, we've got to plan for a supply constrained dynamics, with respect to revenue, rather than a demand constrained dynamic, with respect to revenue. We have seen our backlog increase, our outlook calls for our backlog to continue to grow. I made a reference a minute ago about our customers partnering with us, I think that's one of the meaningful steps that we've made in the last 12-months is, we're very engaged with all of our customers about what's happening in the marketplace, doing everything we possibly can, to satisfy their need and making them aware of where we have supply constraints that are preventing our ability to drive more revenue.

I'd like to add to that, I mean I really commend the organization of being super close to the customer, and that's really - I mean it's always important. Your depth of relationship to your customers to grow together. But during these time, it's even more so and you can work together to help from the standpoint and make sure you are doing the best job you can of supplying to them, but also dealing with the areas that Tony was talking about. Inclusive of that is the suppliers, how important is it to be working with our suppliers through this, and the depth of relationships there. And as I mentioned, it isn't just the supply chain organization, that's myself personally involved, Phil Theodore or Scott Ziffra, the Head of Engineering and many others in the organization to help make that happen. And we are doing that.

One other thing I'd mention, and it's not trivial from the standpoint of revenue dollars, ADI has five fewer selling days in Q4.

Great. Thanks for taking my questions.

Your next question comes from Erik Woodring with Morgan Stanley. Your line is open.

Hi, this is Sabrina Hao on for Eric Woodring. Thanks for taking the question. First, can you just talk at a high level about some of the demand trends you saw in the June quarter by product? So comfort versus security versus residential thermal? Anything that noticeably stuck out to you, would be helpful? And then I have a follow-up.

The short answer, Sabrina, is there really isn't anything, we call out that's differentiated from the portfolio as a whole. We got strength pretty much everywhere, really across the board. The other comment I'll make is, we are spending less time focused on the Comfort RTS and Security business lines, and as Jay mentioned, we've taken the business since we've been talking about breaking down silos and really getting collaboration across the business. Moving forward, the conversation we're going to have, is going to be around the Integrated Homes and Building Solutions and the OEM partner solutions. So, it will be a little bit of a different paradigm.

Got it. That's helpful. And just looking into the second-half, what's giving you confidence that demand will hold up? Are there any KPIs that you evaluate and if so can you help us understand, kind of what they are and what you're seeing there?

Yeah, I mean this is mostly a turns business right. Jay and myself and Scott and Phil and Rob, we look at sales every day. We look at bookings every day. And we are I think, meaningfully closer to our customers, than we were three, four or five quarters ago, and we are in consistent dialog with them. And everything we see from all of those indicators, is the demand continues to be strong. I mentioned the fact that our outlook calls for us to be - the same backlog grow between now and the end of the year. And it's an indication of the strength in the market that we see. Ideally, we'd be able to satisfy all of that backlog. But in a turns business like this, you are not really going to have kind of - I mean, you are not going to see backlog. And things like new housing starts and those kinds of things, we are going to be affected by them at some level, but on a quarter-by-quarter basis, that's not something that we really track, as an indicator of where we see demand headed in the short-term.

Great. Thanks so much for the answers.

[Operator Instructions] Your next question comes from Brian Ruttenbur with Imperial. Your line is open.

Yes, thank you very much. Just have a question on the commercial side of the business. What you're seeing? Some of your competitors, obviously a lot of them are seeing dramatic slowdown in new office. But ADT and Alarm, you probably have been monitoring, both reported this week, and they are seeing a big ride on the commercial side, obviously not new office, but everything from churches to schools to everything is on the ride, and ADT is going for market share gains, alarms. Anyway, I want to get your take on what you're seeing in the commercial side of your business, and what's hot, what's not?

So yeah, I mean the things you just referenced are affecting, and it's really ADI, Brian, that's got a significant commercial component to it, that's more commercial than it is residential, backed by a pretty wide margin, and exactly what you just described, is what we're seeing. Schools, retail, government those kinds of commercial projects. And you are right, also most of them are retrofit, most of them are new, are helping that business for sure.

Yeah, Brian. And I'll just add to that, I think it's pretty obvious, but a lot of those types of projects were on hold during COVID, when people couldn't get access to those types of facilities. And so one of the drivers is, just what Tony said, schools for sure, government, retail installations, and so ADI definitely has benefited by that.

Yeah. One of the remarkable things about ADI during the height of the pandemic, was that they posted really strong revenue growth in the face of some pretty significant constraints to the commercial business. And now, seeing same commercial kind of come out of that wilderness, is definitely kind of plus for them. There's not a lot of commercial really on the P&L side. There's not a ton.

Right. And just a follow-up on that, on the commercial side with ADI. Is it any specific products that are leading the charge in there, that schools are looking for ex versus government versus retail? Is there a total solution? Is it upgrade of an old system? Can you give me some kind of data point?

It's clearly upgrades. But our six largest product lines, all grew more than 30% this past quarter. So it's pretty much across the board; intrusion, fire, video, all of them are showing strong growth.

Okay. Perfect. Thank you very much.

Your next question comes from Paul Dircks with William Blair. Your line is open.

Hi, good afternoon, and thanks for taking my questions.

Sure. Hey, Paul.

So, a couple from me. First one, on the price increases, can you remind us of the dates of implementation for the different price increases you've instituted? And also, how much of your business is on the long-term contracts, that may be subject to a lag here?

So, the majority of the price increase to-date has been in May, June. There is some more pending now, but those have been kind of the two big moves. I don't have a percentage to offer you But a meaningful amount of our OEM business, has effectively negotiated prices in it, that don't contemplate price increases for the term of the contract. So, I don't have a percentage to really offer you, but it's a meaningful chunk.

Got it. That's helpful. And then just on a different note following up on the ADI discussion, is there any way to quantify some of the share gains that you're achieving here? And specifically drilling in on the fact that e-commerce being up so strongly here for the last several quarters, and the fact that the benefit there would be to free up the sales associates. With the healthier commercial backdrop across verticals, is there a way, I mean, perhaps you could just speak to it quantitatively, but if there's a way to quantify the share gains, I'd be interested to know.

There is not really an open source or sort of a public source is looking at share. We have our views as to where the market is growing. We certainly think that we are outgrowing the market by a pretty healthy amount, I mean through the pandemic, we think the market was probably flat to down, and we grew that business pretty meaningfully. It feels like we're continuing to do that, based on what we see. I wish I had a quantitative measure for you, but we really don't.

All right. Fair enough. And then maybe lastly, maybe you could touch upon your conversations with the Pro channel, specifically as it relates to labor? We've heard a lot of comments across industries about the significant shortage of labor, and in some places, it seems to be getting worse than ever. So I know that's part of your strategy to help enable and empower the pros, but maybe you could talk about what you observed here over the last 60-90-days with the channel, and then also, are there any new tools or resources that you're looking to implement here, to help keep the channel vibrant?

So, I think you're right, that there are labor constraints with a lot of the contractors. And they have struggled to keep the volume of people that they want. And you're also right that, our involvement with the Building Talent Foundation and with some other partnerships with some of our major customers, is focused on helping them source talent, and really helping them rebuild the pipeline of technicians, that has kind of been depleted over some number of years. I think a bigger factor frankly though, is the supply constraint. I think if you had regular flow of goods, and we were able to satisfy all of the product demand. Then I think you might see sort of the next constraint being gee, I don't have a crew to go do that job. But I don't think that's the - if you look at it as a pro-rate, I don't think that's the driver there. But we are focused on that. I mean, our view is, if we can support growth of technicians and young technicians getting into the trades, and be a supporter of them early in their career, we get customers for life. And that's something that again is new in the past year or so, but we really have been...

Yeah. Phil Theodore, who is President of Products and Solutions, has been a big driver of that, and done a lot with his organization, to make sure that we are deeply involved in training of the type of people we are talking about here. And not just United States, but global training. And then the gentleman who heads up our service organization, also that's one of his big focuses. So training is a big deal, and is going to help fuel the pipeline for future installers, and then that helps us deepen our relationship even further with the Pro installed base. So a lot of facets are doing that. I just had a comment on the labor thing, I mean as you said, there's many places, many different industries that are all being impacted in different ways of labor shortages, and were seeing that in the installed base like what Tony said. But also we have even seen it in some of our distribution prices also. But, the good news is we're grinding through that and we've been able to help overcome some of those issues, but this training piece that I mentioned before, back one the P&S, that's a big deal. And we are going to be sharing more information with you about that. I think it's fairly meaningful and impactful of what we're doing there.

Very helpful. Thank you, guys.

Thank you. There are no further questions at this time. I will now turn the call back to Jay for closing remarks.

Thank you very much, operator. I wanted to close off things today and thank all of the Resideo global employees for their very hard work and really great execution during Q2, and really the first-half of 2021, as well as their really passionate commitment to serve our customers throughout the world. So, I want to thank them very, very much and that's part of my closing remarks.

Thank you, everyone, for your participation today. And we look forward to speaking with you over the coming months. Have a good rest of your day.

This concludes the conference call. You may now disconnect.