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

Good day 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 first quarter earnings release and presentation materials on the Investor Relations page at resideo.com. Before we get started, I would 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. 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. We're hosting today's call from our Austin, Texas ADI branch. So I'd like to start by highlighting two format changes to our Q1 earnings announcement and call. First, is I hope you've already noticed, we released our earnings material after close of market yesterday that provides you with more time to review the material before the actual call. Second, we'll be extending the time of our Q&A session to accommodate more questions. Since our last earnings call, we met with many investors, customers and other stakeholders and these changes have been made based on their collective feedback. I hope you find these changes beneficial as well. So with that let's dive in and move to Slide 2 in the presentation and begin with a summary of what we will cover on today's call. First, I'll start with an overview of our first quarter results at both the consolidated and segment levels. Then we'll provide insights on the markets and segments we serve. Third, we'll focus on how our previously announced cost actions combined with key investments lay the foundation for our strategy and profitable long-term growth acceleration. And last, Q1 financial details and our progress towards guidance for the rest of 2019. Let's move to Slide 3, which shows highlights of our consolidated first quarter financial results for the business. Net revenue for the business was $1.22 billion during the first quarter of 2019, up 4% from the first quarter of 2018 on a reported basis and up 7% on a constant currency basis. We are especially pleased with the growth figure considering first quarters are usually slower for our business. As a reminder, our operational profile typically weights our earnings generation towards the second…

Thanks Mike. Putting all this together on Slide 7, you can see our full year 2019 expectations. We reviewed our outlook and are reiterating our guidance for the full year. We've reiterated our adjusted EBITDA guidance at the upper end of our $410 million to $430 million range. As a reminder, this EBITDA number includes the Honeywell reimbursement agreement payment, which we discussed on our previous earnings call. We are maintaining our assumptions about inflation. As Mike said, we are executing on our investment programs as planned. So our $30 million investment assumption will stay. We also made a change for our product mix assumption. We are increasing that cost by $10 million as we see headwinds from the rollout of new products. From a market moderation perspective we are reducing this from $30 million to $20 million based on the slightly improved market outlook and we are now accounting for a $10 million benefit from our cost reduction program for the full year. With all of these pluses and minuses, we are forecasting our guidance to the top of our previously announced range. I want to take a moment on Slide 8 to highlight some of the volatility in our GAAP results due to the Honeywell reimbursement agreement and why our adjusted results best represent the underlying earnings of our business. During the quarter, there was a Honeywell sale of one of the properties included in the agreement. This impacted on an income statement basis the other expense line where we normally book the reimbursement agreement, the tax line and ultimately reported net income. The impact of this one entry was a positive $45 million of net income. We've adjusted this item out of our results. Just to illustrate please focus on the other income line. For the quarter,…

Thanks Joe, and thanks to everyone who joined us for today's call. So to close, I will summarize the key takeaways from the quarter and why we're excited about both our progress in our future. First, we had an outstanding start to the year in both our business segments, with strong growth in performance above expectations and key metrics, including adjusted EBITDA and adjusted EPS. Second, we're on track in executing our cost in investment programs and combined there are an essential piece in positioning us is a high margin growth business over the long term. Third, our financial position is strong and our healthy balance sheet will allow us to drive our profitable growth strategy. And last, this is our third quarter under our belt post spin. We're making progress in all areas. But we're being very measured to ensure progress and we're going to walk before we run. So with that for 2018, we're confident in our growth guidance in the upper end of our EBITDA guidance and we remain optimistic. Thank you again for your interest in Resideo, and now, we'll turn over to the operator to begin Q&A and we welcome your questions.

[Operator Instructions] We will take our first question. Please go ahead. Your line is open.

It's Ian Zaffino from Oppenheimer. Question would be on kind of the margin evolution as we kind of progressed through the year. You have this new security platform, I got to believe they have a ton of cost absorption on that, also you are now selling, I guess exclusively to one customer and I imagine as you diversify that with the public at higher margins that way as well. So, kind of, where we now as far as maybe the margin headwind that that's creating and then what is the margins then ultimately look like, and what are the margin expansions we'll expecting as you ramp that product and you sell it to non-exclusive partners.

Thank Ian. The margin evolution over the year as you saw it for the first quarter is not much different for the entire year as we just disclosed in the guidance. We will be seeing some progress on the new platforms so we put out. But at the same time, we are going to increase our investments significantly in Q2 and Q3. So from a profile perspective, we do have seasonality. So, Q1 was actually quite good, Q2 and Q3 are a little bit slower with the higher investment rates and from the new products will get additional scale throughout the year, but for the whole year, we've guided to 8%, which is about what we did in Q1.

And then you had a very successful launch of the T9 and T10 at CES. Now is that the super connected thermostat or - the supper connected coming afterwards and what's kind of the timing of that roll out?. Thanks.

Ian, it's Mike here. So yes, the T9 and T10 are top of the line connected products that have been in the works really for the last year. So and as you mentioned, we launched those very successfully at CES here in January. The T9 is the kind of the do-it-yourself model and T10 is the pro-model. So the thermostat we've been alluding to we'll be launching towards the second half of this year and that will, that is the super connected one that's in the works right now and we expect to be shipping those next year at the first of 2020.

And then a final question, I guess as I look at your - the segment in the market overview, and thanks for providing this, this is super helpful. When I look at the connected thermostat business, I see a green box and obviously you're competing very well against a whole host of players here. Is there an opportunity to get deeper into the DIY awareness kind of where there's other players there, some of them are similar and maybe see similar performance in the DIY awareness, that you're seeing now connected thermostats? Thanks.

Yes, so on that chart that you referring to the DIY awareness is much more security, right. So this is do-it-yourself install security. It's more cameras it send you alerts when there's motion in that kind of thing, but it's not pro-monitored. So that's the segment we referring to on that chart on security for DIY awareness. And as we said, we've got only a little presence in that area. Looking at your question on connected thermostats we typically launch some of our low end thermostats DIY oriented where you can buy the Home Depot or whatever and install them yourself, if you've got some capability there. But really what we're focused on in our new launches is launching our Pro series type thermostats, which will be installed through the pro-channel and supportive through the pro-channel. We see our thermostats really important piece in the home from a data perspective and our launches this year are going to really show how much more we can do in those areas. So we're looking to really push thermostats we're approaching and as you see on the chart, we have a light presence in the DIY awareness and security.

And we will now take our next question. Please go ahead.

Peter Galbo from BoA. Thanks for taking the question. Mike, I just want to touch on in the updated bridge here reducing the market moderation headwind. I think you guys have called that as 30 million last quarter now at 20 million. The housing data has certainly improved and understanding you kind of want to walk before you run here. But what would kind of give you confidence to remove that bucket altogether is there anything you've seen so far through April and May, that gives you more confidence in that. Any color there would be helpful?

Yes, so there are lot of factors, but the main reason we removed the 10 million out of the market moderation really was just a successful Q1. So I mean that's just kind of the straight up way of looking at it, we really didn't see any moderation. It's finally, we are having some discussions yesterday with some people on Q1 and it seems there was like a 2-week recession where everybody was really worried and then it kind of came back. So we didn't see it in Q1, but looking forward at the year, there's still a lot of year to go. We see, what's going on with China and potential tariffs and everything else that's on our radar. Obviously the housing starts have kind of ping ponged around, they went down to 1 million back up to 1.1 million. So those are kind of jumping around a little bit. So we just want to see some stabilization there as well to give us confidence to remove that. So obviously we go through our Q2 and we have a Q2 like we have Q1 we'll continue to move down, but as you said, be very measured here as there still lot of 2019 left.

And Mike, maybe you can talk a little bit, just given the increase in the mix headwind, just the differential in margin profile when you guys are selling through to an OEM type customer relative to. If you're just selling kind of directly to a contractor or through, through a higher touch distribution model that might come with more margin would be helpful?

Yes, so a lot of people ask me the question of hey which are your high margin products and how do they work. And really the answer is we sell a lot of our products on contract and straight to the OEMs and they integrated into their products. Typically, those are lower margin than when we sell it aftermarket. So aftermarket is when something breaks and they need a spare part. There we typically get a really good margin where when it goes straight to the contract and into their equipment it's a bit of a lower margin. So there is a margin spread on our products where the same product will have a very high margin when sold aftermarket a lower margin at the beginning, so that's that. Now, so obviously there's seasonality involved in that and when it gets really cold and systems break we have a much higher aftermarket sales and that gives us some margin tailwind. The other point on the product mix point, that's really important to note here, is also with the launch of our security platform to right now, which were basically rolling out to one of our largest customers. That is an OEM type contracts it has lower price points. So we're basically rolling that product out first, at the lowest price points while we still have not come up the scale from a manufacturing perspective and that's causing kind of the product mix here so that's how we were looking at the product mix bucket. And as we continue to go faster that's when we've increased the number there.

And maybe just one last one, because you guys didn't touch on it in the prepared remarks. Small acquisition that was done in the quarter just anything you'd like to highlight there. And then I believe you announced a partnership with the Chinese telecom company just how you kind of view the market opportunity there. China being such a small part of your business today and any concerns you have maybe around IP protection in that market? Thanks guys.

Yes, so I'll start with the acquisition and so we'd come out and talk about our investment strategy, and really what we were looking for were tuck-in acquisitions to really solidify our portfolio in certain areas are adjacencies. What we did with Buoy Labs is exactly that. We have our own water leak detection equipment that, that goes into the home. But what we didn't have is we didn't have the analytics, we didn't have the application and we didn't have the product that's able to measure the water flow into the home and auto shut-off the water in the home, if there is an issue. So we found Buoy Labs, which is just a great little company that have got some amazing engineers, great IP and a great product and it accelerates our path to be able to get recurring revenue in that area tremendously by bringing them in. So that was the first and we're excited about having them as part of our portfolio, the product is in testing right now and that we're expecting to see recurring revenues from that towards the end of the year, beginning of 2020. Now your question on China let me think here. So obviously we did a partnership with GOME and to sell through retail and kind of think of it as the Home Depot of China. So that's a solid partnership for us, we are slowly doing more in that market and we do see a lot of upside potential there. So we're excited about the GOME partnership and more to come on that.

Will now hear from our next participant, please go ahead.

This is Jeff Kessler at Imperial Capital. Can you talk a little bit about beyond your largest customer on the security side, when you're talking about putting together both a home product selection on the security side as well as integrating heat and cold equipment. When you look at the next level down of companies or both direct dealers as well as channel partners. What are you finding as the sweet spot for what they want? So that you can maximize to some extent maximize your scale and margin, maximize what they want at their end to satisfy their end users the most. Where are you finding that - where are you finding that compromise that mix that would be, maybe the sweet spot for growth in this company beyond the relationship with your largest - your largest buyer?

So obviously, we're really excited about the launch of our approach here security product and this product is redefining the industry with its self-contain wireless panel, it's encryption, it's sensing capability. I mean this is a true classic example of non-creepy type. So we are not listening to the customer. We're not taking video. It's a true sensing product, so that's wireless and very easy to use for the end user and very easy to install for the dealer and it's got user replacable modules. So you don't have to do a truck roll to get that out there, which is going to save the dealer quite a bit of money going forward as technology upgrade. Now, your question around the sweet spot for us, as we roll this out to the rest of our customers and being able to integrate, not only the hardware, but the hardware with our software is going to be key for us and then being able to leverage our platform to move into other adjacencies like the GULI [ph] example that was just given. So, we'll have the capability by the end of the year, beginning of next year. If you are using our application for security products, you're also going to be able to integrate the GULI product and see what's happening with the water in your home and we're going to be able to move into air quality as well. So that's why we're so excited about these platforms. That's why we're accelerating these platforms is because they give us more opportunity to grow our recurring revenue as we go forward.

My follow-up is when it comes to the distribution business. Could you go into some of the other services, value-added functions that the distribution business provides beyond distribution and getting and improving the relationships that you have with the outside world. What are you doing in distribution to create a higher value proposition for that division?

There's so much focus on half of the product and solutions side of our business that we are just not enough questions about our ADI distributor business, which is half of our revenue. Look we are today, we are broadcasting from one of our ADI facilities here in Austin, Texas. And I can tell you that I am more optimistic and positive about the distribution business than I ever had been before. I've been here for two days, I've had a chance to talk to multiple customers that have come in to buy products, it is a clear window to exactly what's happening out there with consumers and how they do it from a pro as positioning themselves to be modern, how they're positioning themselves to really drive value for the consumers. Training is obviously one of the key things at our ADI facility. Our facilities over 200 facilities provided, two contractors when they come in. They're able to train our new products, our new technologies and how to install them quicker, how to be more efficient, they're learning how to work applications for the homeowner et cetera and that's exactly what our ADI team does. So, so we are very obviously excited about our ADI business, it's been a solid grower for us, solid on the forecasting side and look, it is our number one touch point to the customer. We sell about 15% of product through ADI as residual products, our residual teams have to compete to get shelf space on there as well, just like everybody else, and this is a great business for us. In regards to not touching the end user and know exactly what's happening out there at any given point in time.

And ladies and gentlemen, there are no further questions. That will conclude our call for today. We thank you for your participation. You may now disconnect.