Welcome, everyone, to the Resideo Technologies Third 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. Michael Mercieca, Vice President of Investor Relations. Mr. Mercieca, you may now begin.

Good morning, everyone. With me today is President and CEO of Resideo, Mike Nefkens; and Chief Financial Officer, Bob Ryder. You can find a copy of our third quarter earnings release and presentation materials on the Investor Relations page of resideo.com. Before we get started, I’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. 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. I’d like to start by stating clearly that I’m disappointed in our third quarter results and revised guidance. While our ADI business delivered another strong quarter, results in our Products and Solutions business did not meet our expectations. As we’ll walk you through in detail on this call, Products and Solutions results were adversely impacted by lower sales volumes in both our Comfort and Residential Thermal Solutions businesses, gross margin pressure due to product and channel mix, lower factory productivity and inventory write-downs and high security rebates from a pre-spin contract. We have identified the specific factors that impacted our third quarter performance and guidance, and we are taking aggressive actions to address those items. Furthermore, we have launched a comprehensive operational and financial review to drive opportunities to simplify the company and rightsize our cost structure, which will be overseen by our independent directors. We will discuss this at the end of our call. So let’s move to the agenda on Slide 3. First, we’ll update you on our overall results for the quarter, then we’ll discuss the results for our two business segments. Bob Ryder, our CFO, will go deeper into the financials and provide specifics on what has changed since Q2 and address our full year guidance. Lastly, we’ll provide an overview of what you can expect from our financial and operations review, which is well underway. Turning to Slide 4. For the third quarter, revenue came in at $1.23 billion, up year-over-year 2% on a GAAP basis and 3% on a non-GAAP constant currency basis. We were pleased that our growth in ADI Global Distribution was on target. As mentioned earlier, performance in our Products and Solutions business was below expectations,…

Thanks, Mike, and good morning, everyone. It’s great to be joining Mike’s team at Resideo, and I look forward to meeting many of you in the near future. We certainly have a lot of opportunities for improvement, and I’m excited by the challenge. The fundamentals of the business and categories in which we compete remains strong. And the management team and the full Resideo employee base, together with outside experts, are laser focused on dramatically improving our business and creating significant shareholder value. I spent the last couple of weeks here, and the energy around driving better performance is palpable. As our first slide, let’s take a look at the pieces that drove the reduction in full year sales and EBITDA guidance that was communicated on October 22. First, let’s congratulate ADI on some great year-over-year performance through Q3. The guidance anticipates ADI to continue their strong revenue growth and to continue leveraging their fixed costs to drive EBITDA growth at over 2 times revenue growth. We did not really change our expectations for the ADI segment from our previous guidance. In Products and Solutions, we called down both revenue and profit estimates. On the revenue side, Resideo communicated downward adjustments to the Comfort, RTS and Security businesses as revenues in Q3 came in lower than anticipated and Q4 is expected to continue these trends. As Q3 came to a close, the sales of our higher-margin thermostats and the RTS trade channel sales were much less than anticipated. In addition, we had a specific customer that delayed Q4 security product shipment, driving a security revenue estimate reduction. On the EBITDA side, we also reduced our guidance due to Q3 results and Q4 estimates. The sales reductions to our previous guidance drove approximately $48 million of expected profit shortfall. That is…

Thanks, Bob. So in closing, we are confident in the fundamentals of our business. Our ADI business is running well and performing, and the items we’ve identified in 2019 in Product and Solutions are being addressed and fixable. Our commitment is to execute on the financial and operating review and lock in a plan that drives gross margin improvement, rightsizes our G&A, connects our products in a unified way with pros and homeowners. We look forward to sharing details of the review in our Q4 earnings call. Thank you, and I’ll now turn it over to Michael to open up Q&A.

All right. Thank you, Mike. So let’s take our first question.

Thank you. [Operator Instructions] And we’ll take our first question from Ian Zaffino with Oppenheimer.

Hi, great. Thanks. Okay, great. Thank you very much. Question would be on the inventory write-down. What was maybe the amount you could tell us? Also on the rebate, what was maybe the amount there and if that should continue into the future? And then I have some follow-ups.

Yes. We took some – this is Bob speaking. We took some write-offs in the third quarter, and we’re assessing potential actions on inventory that we still have in the balance sheet for the fourth quarter. We’re not going to get into details on the specific numbers, but most of them are around the products to which Mike referred to in our Comfort and RTS businesses.

Okay. Also can you tell us maybe what the consulting fees have been year-to-date and maybe what they are going forward? And then also maybe a bigger question just on the Honeywell relationship. I mean considering the numbers are significantly below where they were initially, is there anything in the indemnification agreement that would allow you to maybe renegotiate that? Is there any type of triggers where you could do something? Thanks.

Yes. This is Bob. I’ll take the first half of that. So there are consulting fees that we’re assuming for 2019. But that was kind of just the original assessment that the consultants are doing. So we haven’t agreed on the larger contracts that – we’ll probably have consultants in here for a couple of years helping us figure out our go-forward path. So that’s still to come. I’ll let Mike answer the Honeywell question.

Yes. So on Honeywell, no, there’s really no recourse for us regarding the indemnification. So we – the indemnification is subordinate to some of the other debts, so we’ve got flexibility there. But we’re always looking to discuss items with Honeywell to see what options there are. But at this point in time, there’s really no recourse for us.

Okay. And then just a final question on the security delays you mentioned. Can you get in a little bit deeper into what drove that? Was this a product-related thing? Was this like a customer-related thing, an end market-related thing? Just maybe give us a little more detail on that. Thanks.

Yes. So I think in the walk-in Bob referred to, we had a – it’s a customer, a single customer, a new customer. We had forecasted and had an order for over $20 million for Q4. That customer – there are no product issues, quality issues. We are ready to go. They decided for reasons on their side to delay. And we are working with that customer obviously to work through that and to get product shipment as quickly as we can.

And next move to John Lovallo with Bank of America.

Hey, guys. Thank you for taking my question. The first one is the 4Q revenue guide puts you pretty close to the high end of your 2% to 4% range for 2019. So I’m just wondering how confident you are in that. And why not be more conservative, given some of the past performance?

Yes. So this is Mike here, John. Thanks for the question. Look, I think one of the things that we really did at the beginning of Q3 when we saw some of these issues coming is we went very deep into the forecast with our teams. We didn’t just trust the sales forecast or the forecast in the system. I actually drove the teams to go out to our big customers and to validate exactly what they see coming. We have used that versus the sales forecast in salesforce.com, et cetera, to really lock in on Q4. So we’re very confident in the numbers we put out there in Q4 now. And the range that we gave, we feel we’ve got a really good line on. So a little bit different forecasting that we used in these numbers, where beforehand, it was everything that was loaded in the system and sales forecasts, et cetera. In this, we did a very detailed scrub with our customers to ensure that we would be within the range that you just provided.

Half of it is that ADI is driving a lot of that, right, with 9% sales growth in there?

No, roughly 50% of the sales. So – and in fourth quarter, we expect P&S to be a little bit better but certainly not numbers we’re happy with.

Got it. Okay, thanks. And then your press release indicates $6 million of additional spin-related costs that were identified and retroactively put back into EBITDA, but you maintained the full year outlook. So it seems like you’re implicitly lowering the fourth quarter guide. Can you comment on that?

Sure. So – and I had a little bit of it in the script, and I know it’s confusing. So as we look at the revised guidance, I’ll say, in that one bucket that I think was $20 million in Slide 6, okay? And what’s going on in there is we had 2 good guys, okay? We upped our cost reduction program from a $10 million estimate to a $15 million estimate, and people have been really working hard to bring that to fruition. And the other good guy from an adjusted EBITDA perspective – but this wasn’t real cash, I’ll say, right. It was just as we closed Q3 and started looking at all the numbers coming in, we saw some spending that was obviously spin related. And the decision was made. Look, this spin, we want to keep kind of clean between spin, nonspin, so that next year, we get a proper reflection of year-over-year. So those numbers were taken out of adjusted EBITDA. Gap stayed the same, okay? They were taken out of adjusted EBITDA. And you’re correct, the net effect of that was to give us a positive as we looked at the adjusted EBITDA forecast. Both of those things were more than offset by our inventory risks that both Mike and I referred to on our scripts around the products that we referred to.

Okay. Got it. And then recognizing that you’re currently renegotiating the terms of your debt covenants, I just want to make sure I understand the mechanics. If you were to breach the max leverage covenant, you could defer paying the environmental claim for a period of time. But I guess the question is how long could you actually defer it for and what would be the repercussions with Honeywell.

Yes. So that is true. I’ll raise my hand here and say that I haven’t analyzed that complicated relationship or contract. But we can kind of obviate the payment to Honeywell. I would say that based on negotiations or discussions to date with the banks that we don’t think that we’ll approach that. And we think we’ll arrive at a mutually beneficial arrangement with the banks. And essentially, what we’re trying to do, given how we’re really analyzing the fundamentals of the business and as we do the operational and financial review, there’s going to be a lot of decisions that we want to make for both the betterment of the short term and the long term of the business. And we don’t want to have to make suboptimal business decisions because of covenant restrictions. So we’re just trying to get freedom from the banks to make the best shareholder value decisions based on numbers and not based on covenants. So I think we’ll end up in the right place.

And next, we’ll hear from Jeff Kessler with Imperial Capital.

Thank you. I’m wondering during – one of the things that you talked about during the spin and going forward was that you had lost some of your value engineering people. I’m just wondering what was talked about during the spin, given the fact that you have to obviously hire and now you have – and train and get people up to speed on the products you have out there and also, in addition to that, get people who are developing new products. Are some of these going to come from Honeywell? Or was there a discussion pre-spin with regard to who is going to go where? And why did you kind of get shortchanged on this?

Yes, Jeff, and thanks for the question. This is Mike here. So look, I think the lines were drawn pre-spin sometime back about who was coming over and who wasn’t. So not certain of exactly how those decisions were made. And what I can tell you is that the talent and the value engineering that came over was very small compared to what was required. Our business is going through a transformation right now from products that are more mechanical into products that are more electronic. And we basically did not have the right people on the pitch post spin to continue to value engineer those products. One of the poor assumptions we made was that we have those capabilities and we have the right talent to drive those. And I think we saw pretty quickly in Q3 that those teams were not making the right progress, and we had to make some pretty significant changes to go drive that. So we have begun that on three of our major lines of products. We already have new teams in place. As you alluded, the problem with that is really the value engineering that should have been done 12 to 24 months ago, we would have started to see the impact now. Now that we’re restarting that, it will take some time as new raws, new materials, new components will have to come in, will have to be manufactured. We’ll have to move all the previous stocks that we have before we start to see the benefit of that, and we expect that to take 12 to 24 months. But I just want everyone on the line to know that for three of our major lines, we have new talent in place. Some of the external help that Bob referred to earlier is on the pitch as well helping us, and they have world-class expertise in this. We’ve done multiple product teardowns. We know exactly where the opportunity is. We just have to drive that through the value chain now.

Okay, great. One follow-up question is one of the things that I’ve been focused on is the – are the new – let’s just call it the value proposition that is going on in verifying alarms so that they are on an electronic basis, not on a human basis, so that police can respond to alarms and not have them be 95% false. There’s a lot of onerous new laws being passed by small cities with regard to charges and people being cut off. You – Honeywell bought a company called Videofied a couple of years ago, which was one of the specialists – the few specialists in being able to determine essentially whether or not something was actually happening that was an anomaly or a need and would be – and actually be related to some type of real or false alarm and could determine between the two. Have you been – have you talked to Honeywell about the – given the fact that you were doing stuff for the home and that’s where most of the surge in false alarms are coming from the DIY area, are you doing anything to build up the product line that will deal with verification?

Yes. So great question on security. Look, as you’re aware, in Europe, for example, you must have a motion viewer before an actual proof that there is motion or movement in the home before there’s an alarm signal and before the police are called out. We have those capabilities. The – when you take a look at what we’re going to be launching in our GRIP general market launch in the year 2000, we will have the motion viewers attached to that. Obviously, false alarms are a huge issue in the industry. So when you look at pro monitoring where – we are going to make sure that we have that capability and in installation as well. So we’d obviously like to see some mandates in North America on the requirement for motion viewers, which should be very helpful for us. But we are working with partners, and we have the capability to be able to drive that. And Jeff, just a last statement on that. This is where when you take a look at our value prop and what’s happening in the DIY world, this is why we truly believe that pro monitoring is really what municipalities, police stations, et cetera, will require because the DIY products that are out there are just not good enough to provide that kind of verification to have the police or emergency services come out.

And our next question will come from [indiscernible] please go ahead.

Hi, guys. Thanks for the question. My question was just around the operational leverage of the business on the product side. It seems like there’s a lot of fixed costs in the business, and I’m wondering if this is true. And what are you guys doing on the manufacturing side to kind of help ease those fixed costs? Thanks.

Yes. So absolutely, there’s a lot of fixed costs in the business which can help you when sales are growing and actually don’t help you when sales are not growing. But I think part of the operational and financial review will be looking at all the fixed costs across Resideo and looking at the return on capital. And from a product SKU and geography perspective, is our footprint appropriate? And do we have the capability of creating shareholder value in all these facilities, geographies and SKUs that we’re playing in right now? And most likely, there will be some pretty big changes to those footprints, but we’ll hear more about that on the February call.

Well, with that, thanks for the questions. I’m going to now hand over to Mike Nefkens for any closing remarks.

All right, guys. So thank you for the questions, always appreciated. I just want to close quickly by saying obviously we had a really good quarter in ADI, a lot of confidence in that business. A lot of work to still be done in Products and Solutions. As I stated in my remarks, we have addressed some of those core items. Work is already underway. So – and also if we take a look at the financial and operating review which is also underway, we are clearly focused on creating a plan that will address our gross margin and drive improvement. We’ve got to rightsize our G&A. We saw some progress on that this year. But we’ve really got to move this structure from a mega-cap structure to a small-cap structure, and the review will address that. And we’ve also got to make sure that we continue to make great products and solutions for our customers. So thank you for being on the call today, and we look forward to our report out in Q4 and have a great rest of the week.

And that will conclude today’s call. We thank you for your participation.