Resideo(REZI) - 2025 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Adjusted EBITDA reached a record high, with net revenue of $1.86 billion, up 2% year over year, including a 1% favorable impact from currency [18][19] - Gross margin increased to 29.8%, up 110 basis points year over year, driven by margin-accretive activities at ADI and operational efficiencies at P&S [18][19] - Adjusted earnings per share was $0.89, exceeding the high end of the outlook range and up from $0.59 in the prior period [19] Business Line Data and Key Metrics Changes - Products and Solutions (P&S) segment net revenue grew 2% year over year, with a 1% favorable impact from currency, marking the 10th consecutive quarter of gross margin expansion [8][12] - ADI reported 2% net revenue growth and average daily sales growth of 3%, with most product categories growing low single digits year over year [13][18] - The HVAC channel experienced a low double-digit percentage decline year over year due to a softer residential HVAC market [10][12] Market Data and Key Metrics Changes - Demand for new products, such as the First Alert combined smoke and CO connected detectors, remains strong, contributing to growth across various sales channels [5][8] - The OEM channel posted low double-digit percentage revenue growth year over year, while the retail channel experienced strong point-of-sales volumes [9][10] - The residential housing market remains soft, impacting the HVAC channel, but conditions are expected to normalize in the near future [10][11] Company Strategy and Development Direction - The company is focused on introducing differentiated new products across its connected home product portfolio, anticipating profitable growth opportunities [12] - Ongoing separation activities are on track to be completed in the second half of 2026, with leadership roles defined for the separate companies [7] - The integration of Snap One continues to progress well, with expectations to exceed the $75 million run rate synergies [16] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to navigate macroeconomic challenges, including inflation and tariff volatility, with no material impacts from recent events like the U.S. government shutdown [6][7] - The company anticipates a rebound in cash provided from operations in the fourth quarter, following the completion of the ERP implementation [19][20] - The outlook for 2026 is positive, with expectations for year-over-year growth in organic revenue and adjusted EBITDA above current analyst estimates [22] Other Important Information - Total reported cash used by operating activities was $1.571 billion, primarily due to the termination payment made to Honeywell [19] - The company is raising its outlook for total cash from operations, excluding the Honeywell termination payment, to $410 million-$450 million [21] Q&A Session Summary Question: Can you quantify the impact of the HVAC regulatory change? - Management indicated that both HVAC and ERP headwinds were transitory and caught them by surprise, but they expect to see improvements moving forward [24][25] Question: Will these headwinds bleed into 2026? - Management believes the ERP issues will be resolved by the end of the year, while HVAC impacts may slightly extend into 2026 but are expected to be minimal [26][27] Question: What growth would P&S have seen without HVAC headwinds? - Management refrained from providing specific growth figures but emphasized strong performance in other areas such as retail and OEM [28][30] Question: Why are HVAC headwinds considered transitory? - Management explained that excess inventory in the market due to regulatory changes is causing temporary disruptions, but demand for HVAC systems will remain strong in the long term [36][37] Question: What are the expectations for operating margins in the future? - Management targets double-digit operating margins for ADI and anticipates 300-500 basis points of operating margin expansion for P&S over the next three to five years [44][46] Question: What factors should be considered for the 2026 outlook? - Management highlighted the $70 million step up in EBITDA from the Honeywell indemnity and ongoing product launches as key factors for the 2026 outlook [60][61]