Hello, ladies and gentlemen. At this time, I'd like to welcome everyone to the Resideo Technologies Fourth Quarter 2023 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. It is now pleasure to turn today's call over to 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 fourth quarter 2023 earnings call. On today's call will be Jay Geldmacher, Resideo's Chief Executive Officer; and Tony Trunzo, our Chief Financial Officer. A copy of our earnings release and related presentation materials are available on the Investor Relations page of our website at investors.resideo.com. We would like to remind you that this afternoon's presentation contains forward-looking statements. Statements other than historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Resideo's filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. We identify the principal risks and uncertainties that affect our performance in our annual report on Form 10-K and other SEC filings. With that, I will turn the call over to Jay.

Thank you, Jason, and thanks, everyone, for joining us today. We finished 2023 on a strong note. Q4 revenue and profitability were above the midpoint of our outlook and cash generation was strong. With full-year operating cash flow of $440 million. We built momentum throughout the year in order activity within products and solutions. We also made significant progress on our key strategic operational initiatives and in meaningful reducing structural costs. During 2023, we made substantial progress reshaping our portfolio and operations. With the divestiture of Genesis and the outsourcing of our casting facility in San Diego. Work continues on rebalancing our product portfolio, manufacturing operations, and ADI footprint to help position the business for profitable long-term growth. We expect to have more to share on both fronts as we move through 2024. We also advanced the ball on the partnership front, strengthening our relationship with major insurance providers establishing new relationships in the energy management market, including our recent announcement with Ford and meaningfully expanding the depth of homebuilder relationships. We have spoken previously about our progress building content with home builders. This work is led by our First Alert and BRK professional brands. We have expanded content with existing builders and increased the number of partners we're selling to, adding over 20 new builder partners in 2023. We believe we are well positioned to drive growth in this channel, as the new construction market recovers. We also expect this additional content will have positive long-term benefits to our potential replacement base. Our innovation within products and solutions, we significantly improved our new product introduction cadence. This included new video doorbell and outdoor camera products for our professionally monitored security offering, launching Pro Series for the EMEA security market. First Alert branded connected water leak detection and shut off…

Thank you, Jay, and good afternoon, everyone. Fourth quarter financial results exceeded the midpoint of our outlook range for a second consecutive quarter led by continued momentum in the products and solutions business. We drove sequential improvements in gross margin in P&S, for the third consecutive quarter and generated $263 million in cash flow from operations. For the year, cash flow from operations was $440 million, a record since then. Over the past three years, we have converted 89% of GAAP net income into free cash flow, demonstrating the strong cash flow characteristics of our business. Resideo fourth quarter revenue of $1.54 billion was 1% lower than Q4 last year, but flat excluding the sale of our Genesis wire business. Operating income for the quarter was $147 million, an increase of 50% compared to last year. Adjusted EBITDA was $136 million, up 11% compared to Q4 of 2022. Fully diluted earnings per share or $0.56, and $0.48 on a non-GAAP basis, compared with $0.26 and $0.25 respectively last year. Non-GAAP EPS exceeded the upper end of our guidance range for the quarter. Products and solutions fourth quarter revenue of $683 million was 1% lower than the fourth quarter 2022 but up 2% when adjusting for the sale of Genesis. Price realization added approximately $16 million to revenue and overall volumes excluding the Genesis impact, we're down low single digits. First Alert delivered a strong quarter particularly in residential new construction. And we also saw growth year-over-year in water products. Orders were up sequentially following the stabilization experienced in the third quarter. While channel inventory remains elevated in some areas. We believe order activity and point of sale data indicates channel inventory overall is normalizing. Products and solutions gross margin in Q4 was 39.5%, up 110 basis points compared to last…

Thank you. Looking back on 2023, both businesses navigated significant market headwinds, with an almost 20% reduction in existing home sales in the U.S., leading to the weakest housing turnover year since 1995, with that negative implications for our residential security business within both products and solutions and ADI. Consolidated sales fell only 2% in 2023, despite these headwinds, because of our strong product offering and customer relationships, we were able to drive price realization within products and solutions and ADI's broad commercial market exposure provided diversification. We finished the year with strong cash generation, improving order trends, and gross margin momentum in our products and solutions business. As Tony noted in his remarks, we'll be winding down the existing contractual hardware portion of our longstanding relationship with ADT. Since I arrived at Resideo almost four years ago, our team has built a collaborative constructive relationship with ADT from the executive level down. While, we are wrapping up this legacy contract, we believe these relationships have created a strong shared foundation for continued collaboration and partnership. As you looked at 2022, the products and solutions, we are focused on executing further portfolio and facility optimization efforts, as well as increasing velocity of MPI. With our costs, actions and transformation work, we believe we are well positioned to drive improved margin and profitability as market conditions improve. At ADI, we will continue to expand our digital initiatives and build upon our adjacent market and exclusive brands expansion opportunities. Our focus remains firmly on executing our key strategic initiatives, while driving profitability, expansion and strong cash flow. I want to again thank the entire Resideo employee base for their outstanding efforts during 2023, and I'm excited to continue to build on the momentum together in 2024. Operator, we are now ready for questions.

I wanted to start with the comments about order activity improving and stabilization in the market. But it looks like the first quarter revenue guide is maybe a little softer than we were thinking, Tony, is that just seasonality or maybe talk about the cadence and how you see sales progressing in '24 maybe it's a stronger second half?

Yes. Hey, Ryan, it's Tony. So yes, there is an element of seasonality in Q1. There's also security sales are going to be lower because of the [indiscernible] we just made about ADT, and our expected reduction in revenue from them during Q1. And also the impact of Genesis in Q1, which is at $25-ish million somewhere in that zip code. If you look at what I call the trade channels, it's still a little bit up and down. But by and large, we've seen inventories begin to work their way down. I think there's still some normalization in some areas, it's got to happen in the next couple of quarters, and that's certainly contemplated in our guidance. But then, beyond that, I think things really are starting to settle out a little bit as well. So yes, all those things are affecting Q1, and that's why you're going to see a little bit of a ramp as we go through 2024.

Okay. That's helpful. And then the gross margin and P&S stood out just curious, you're going to be able to build off the fourth quarter level as we think about '24, just talk about the pluses and minuses and sort of the direction of gross margin for P&S?

Yes. So I think the two things we were most excited about in 2023 was our ability to generate significant cash flow, a little choppy, but we certainly did a great job, I think, over the course of a year. And the other was a sequential improvement in gross margin in P&S. We expect that to continue, if you look at it year-over-year, quarter-to-quarter again, you still might see some variation. But we've really made a lot of progress. underneath kind of all of the volume declines, and all that sort of stuff in our fundamental cost structure, and we talked a little bit about that in the scripts in terms of what those things are. And the expectation of 0.5 to a 1 of gross margin expansion in P&S this year, is predicated on basically flat volumes. So we really feel like there's an opportunity, if we see volumes begin to grow, again, for some really meaningful margin expansion in that business.

Yes. I would add also, Ryan, that I talked, I think we've been talked about in our last call together, that is supply chain has continued to improve, the input costs continued to be trend in a favorable fashion. And that has continued, including between material componentry, and, of course, freight, which is a good thing. And that's just going to continue. And that the various actions that we've talked about that you guys are just talking about, over the last couple of quarters, cost actions, impacts, provides a benefit to us on the gross margin expansion. So I think between what I had said, as well as what Tony had said, that, we feel very positive about the opportunity there for further margin expansion.

Your next question comes from the line of Erik Woodring with Morgan Stanley.

I have two. Maybe one just on the clarification point on ADT. Just to confirm the North American hardware business seems to be gone after 2025. You're kind of very clear on the trajectory of that. But is there anything else with them because, Jay, you mentioned kind of other areas of collaboration and partnership. And so just want to kind of understand one level higher how you think about the relationship with ADT after 2025, if there's anything that you can do that's incremental, or if you still have a relationship, just how that stands? And then I have a follow up. Thank you.

Yes. Thanks, Eric. As we indicated, this legacy hardware program that Tony talked about in terms of end of that program into 2025. But as I've not just stated today, but I've indicated for quite some time, our relationship with them is very good. And we spend a lot of time on that. And so we're continuing to talk about other opportunities. And we'll keep you guys informed.

Okay. Yes. That is very clear the. Maybe it's for Tony, any update to how to think about the ceiling for P&S gross margins. If I just think about some of the comments you've made tonight, you've obviously taken cost actions on that business, you're getting leverage in that business, despite flat volumes, it seems like getting rid of Genesis and ADT will be margin accretive and I'd imagine that when volumes recover that's all positive for P&S gross margins. And so anyway, to think about the longer-term trajectory? Or there any headwinds that I'm missing that we're not necessarily considering, as we think, again, 1, 2, 3, 4 or 5 years out? And that's it for me. Thanks so much.

Thanks, Eric. So obviously I don't have a number for you in terms of a long-term gross margin target for P&S. And the reason we don't have one is because of the long list of things you just laid out and the puts and takes around them. From where we sit today, there are more from a market perspective and from our own execution and our own sort of position in the market. I think the balance is certainly looking out over a few years more tailwinds than headwinds. We've done a really good job maintaining price, which was -- if you recall back during the inflationary surge, we were basically matching increased input costs with our price increases. And that was diluted to margin because we weren't getting margin on top of it. But we really felt like as input costs abated, we were going to be able to hold price and that has proved to be true. We have made substantial progress in a number of other manufacturing efficiency areas. We have divested some businesses that are lower margin. And we feel like there are opportunities to grow in some higher margin areas. And all of that is happening against the backdrop over the past, I guess, five or six quarters of declining volumes, as the decline slows and as volumes flatten out, you're seeing that in the gross margins, you're seeing a little bit more benefit and to the extent that you begin to see volumes expand again, I think there's a real opportunity for us to see significant margin expansion.

And I'd also add just a couple of summary. Of course, the input cost, I talked about that before in the last call, our cost actions that we've been taking. The price piece that Tony just talked about, of course, the leverage opportunity when the market begins to come back. But just a couple of additional comments, the portfolio optimization piece that we've been talking quite a bit about. And then the proof of the pudding is things like Genesis, as well as operational optimization, like when we closed off the San Diego facility, move that to an offshore third party. We have other opportunities there. And we will share more of those. And the other that I wanted to just mention is because with our heavy focus on MPI, just in terms of bringing more new products to market, but also with that then looking at opportunities with more growth tied to MPI, but also margin expansion with new products. So all those wrapped together, I think, is a great way of summarizing. We're not just relying on one or two pieces, we're, I think we have a good plan of attack with all the different items that we've mentioned here between Tony and I.

That is super helpful. Totally realize there's a lot of moving pieces. So I appreciate all that color, I mean honestly. So thank you.

[Operator Instructions] Your next question comes from the line of Cory Carpenter with JPMorgan.

Hey, this is Danny Pfeiffer on for Cory Carpenter. Thanks for the questions. On the first, given the uncertain timeline of broader macro recovery, do you think you have any further room to take price if necessary? And maybe if so any color on kind of what that cadence could look like throughout 2024? And then on the second, maybe on the pace of product innovation within products and solutions for 2024? Are there any specific verticals to call out for having kind of the most runway? Thanks.

Sure. So thanks, Danny. So on price, our outlook 2024 assumes basically 1% on price. So not a significant factor in our 2024 outlook. I think we'd be cautious about taking a more assertive position there, just as you know, as the market has been a little bit soft, and we want to remain competitive and all those sorts of things. We're not losing price, which I think is really important because we did achieve a significant amount of price, incremental leverage on the price line is probably going to have less of a factor on our results than operating leverage, as we see expansion in volumes.

I would agree with that. And I would just say not losing prices is a very important piece and as the market, we all know we're all watching, what's happening out there in the world in terms of inflation, and with supply chains that have normalized, then you are going to be in -- we're in a situation then that there's a little more competition competitiveness out in the marketplace that we see for both businesses. You also asked about, I think, Danny right on security, MPI or MPI in general? I'll make comment on MPI in general. And I've said it before, but it's worth saying again, I mean, we have MPI is very important to us in terms of capturing additional market share, looking at opportunities to expand our total reach in the market in terms of share with new products. We mentioned, this time and before about content in a home. And we also mentioned about being able to add a bunch of additional wins with our RNC builder community. One of the reasons with that is the expansion of our footprint in each one of those new homes. And as we continue to do that, we will have more new products that are able to expand our footprint there. So focusing on the velocity of new products in each one of the segments we serve is a big focus for us and that's why I have highlighted not just today, but through the past few quarters, the number of new products that we are bringing to market and there'll be more to share.

There are no further questions at this time. I will turn the call back to Jason for closing remarks.

Thank you everyone for participating today, and we look forward to speaking with you over the coming weeks and months. Have a good rest of your day. Take care.

This concludes today's conference call. We thank you for joining. You may now disconnect.