Resideo Technologies (REZI) Q2 2026 earnings call transcript

Thank you and good afternoon everyone. Thank you for joining us for Residio's 2nd Quarter 2026 Earnings Call. Joining me on today's call is Tom Saran, Residio's Chief Executive Officer.

We would like to remind you that this afternoon's call 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 Residio's filing 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 10K and other SEC filings. In addition, we will discuss non-GAP financial measures on today's call.

These non-GAP financial measures which can sometimes be identified by the use of adjusted and the description of the measure should be considered in addition to not as a substitute for or an isolation from our GAP results. A reconciliation of GAP to non-GAP financial measures is included in the Financial Data Workbook which is accessible on the investor relations page of our website at investor. residio. com.

Unless stated otherwise, all numbers and results discussed on today's call other than revenue are on a non-GAP basis. With that, I will turn the call over to Tom.

Thank you, Chris, and thanks to everyone for joining us today. Before I speak about the quarter, the entire team would like to thank Jay Gelbacher for his service as CEO over the last six years. During his tenure, Jay applied his operational and technical expertise to help Residio to get where we are today both strategically and operationally. Jay led us through two major acquisitions. The recent spend and provided a steady hand through a dynamic market condition. Jay's interactions with customers, partners, and employees have created a tremendous company culture and strong enduring relationships that will benefit Residio for a long time. Also, earlier today, we announced Shane Harrison as Residio's next CFL.

I had the opportunity to work with Shane during our time together and clear, so I know firsthand the kind of leader we are bringing into Residio. Shane is highly capable, dedicated, and execution oriented. He consistently took on challenging assignments, delivered exceptional results, who was a major contributor to clear success.

He combined strong financial and strategic capabilities with sound judgment, a willingness to dig into details, and a focus on getting things done. I also know him to be a person of high integrity and someone who works extremely well with others. Shane will be joining us on September 1st. As you were aware, we completed the ADI Global Distribution Spinoff on August 3rd. As in prior releases, our discussion of the second quarter results, however, will be at time on a consolidated basis as the products and solutions and ADI business segments both operated under Residio in the second fiscal quarter of 2026.

As usual, we will also discuss the results of each segment on a segmented accounting basis. As has been the case in the past, these segmented results do not include a full allocation of corporate costs borne by the business as a whole.

Finally, there is also information in our earnings material that refers to Residio's standalone results, which are presented as if the ADI spinoff was completed on January 1st, 2026, and include adjustment to certain financial line items to reflect management estimates of what our results would have been. We have provided a bridge from P&S segmented results to Residio's standalone results in our earnings release.

Starting with our third quarter financial statements, we will classify ADI as discontinued operations for that quarter and all prior periods. I will discuss Residio's consolidated second quarter results before I hand the call over to Chris to speak about the balance sheet, cash flow, and ADI. Chris will then hand the call back to me to speak about the products and solutions segment results and Residio's 2026 standalone outlook. In the second quarter, we were pleased with a continued execution demonstrated by the entire team as we exceeded the high end of the second quarter outlook ranges for all metrics, both the consolidated and business segment level. Total revenue grew 2% year over year to just under $2 billion, a new quarterly record.

Total adjusted EBITDA through 19% year over year to $249 million, another new quarterly record. Adjusted EBITDA includes the favorable impact of $27 million of tariff refund during the quarter, primarily received by ADI. Total adjusted earnings per share grew 26% year over year to 83 cents. Overall, we are pleased with both the top and bottom line performance for Residio in the second quarter.

Now, let me hand the call over to Chris to discuss the balance sheet, cash flow, and ADI.

Thanks, Tom. Total reported cash provided by operating activities in the second quarter was $148 million versus the $200 million generated in the same period last year. The year over year decrease was driven primarily by approximately $45 million in payments for non-recurring business separation activities and settlements, including the termination of the Honeywell tax matters agreement. There was also a $20 million use of cash for higher cash interest paid. The decrease was partially offset by higher net income and less cash taxes paid. Consistent with our investor day messaging, Residio started deleveraging on August 3rd, paying down $900 million of outstanding principal under the term loan B credit facility. We expect to make an additional repayment of approximately $200 million on the term loan B credit facility in the third quarter following completion of the post-closing cash adjustment under the separation agreement with ADI.

With respect to the ADI segment, we have provided its second quarter segment results in our press release. ADI and will speak about its results and outlook in more detail on its earnings call. ADIG will present its results derived from Residio's accounting records and presented on a carve out accounting basis.

On behalf of the entire Residio management team, we would like to congratulate Rob and the ADI team on the completion of the spin and their new life as a standalone public company. They will remain an important partner to Residio. Let me hand the call back over to Tom to discuss the products and solutions segment results and Residio's 2026 outlook on a stand-alone basis.

Thanks, Chris. The products and solutions segment continued its strong operational execution despite soft housing trends and inflationary input costs. The team achieved another quarter of year over year revenue growth and the 13th consecutive quarter of year over year gross margin expansion. Product and solutions reported revenue growth of 4% year over year, including an approximate 35 basis point favorable impact from currency. Revenue grew across substantially all of our sales channels and product families driven primarily by volume from customer demand. Let me walk through our performance by primary sales channel.

First, in the retail channel, we experienced another quarter of strong year over year revenue growth driven primarily by increased volumes for higher value products. Adoption of our combination smoke and CO detectors and our new thermostats continues to be strong and ahead of our expectations. Our point of sales volumes at our key accounts continues to be strong and is supported by healthy levels of channel inventory.

In the OEM combustion channel, also reported as energy category, posted its seventh consecutive quarter of year over year revenue growth against a tough comparison.

Growth was driven primarily by continued demand for higher price products primarily in amia. In the HVAC distribution channel, revenue returned to year over year growth. Revenue growth was driven primarily by volume led by another quarter of strong customer adoption of the Honeywell Home Elite Pro, our new premium smart thermostat. Demand continues to exceed our expectations and is resulted in our increased presence in the high-end connected segment of the market.

In addition, our new dehumidification and water filtration products increase our category penetration and continues the positive momentum generated from the execution of our strategy. Conditions in the residential HVAC market remain stable versus last quarter. Our channel inventory remained healthy and increased modestly from the prior quarter. The electrical distribution channel had another quarter of year over year revenue growth, driven primarily by volume. We saw continued demand for our BRK branded non-connected safety products primarily in the maintenance repair and operations market, but also the manufactured housing market. Our content per new residential bill home remains stable, quarter over quarter, amidst the continued soft market per new home bill.

Revenue from the security distribution channel was flat year over year given the continued soft market for security installs related to the resale of existing homes. OEM security sales were down slightly year over year due to reduced volumes with a large OEM security customer. This was in line with our expectations for the corner and with our strategy to focus on higher margin branded business.

Moving on to profitability, our gross margin percentage was 43.6% up 70 basis point year over year and up 100 basis points sequentially. Gross margin expansion was driven by volume increases, favorable manufacturing and supply chain variances and tariff refund, partially offset by product sales. We also incurred inflationary input costs which we do not believe are permanent but are only partially offset by the price actions we announced last quarter. PNS segmented adjusted EBITDA through 6% year over year due primarily to higher gross profit dollars. As discussed at our recent investor day, R&D continues to be approximately 5% of total segmented revenue as we invest behind new product launches and speed to market. Operating expenses increased due primarily to higher legal settlement costs.

Before I provide our full year 2026 and third quarter financial outlook for standalone Residio, let me walk you through some of our current market perspectives and assumptions. First, we believe Residio can continue with steady execution through a residential macroeconomic environment that is persistently soft. We also anticipate continued demand for our products and year over year revenue growth across all channels other than OEM security during the second half of 2026. We anticipate some continued weakness in the OEM security channels. Our current outlook reflects lower volumes from a large OEM security customer which we expect will result in 40 to 50 million dollars less revenue in the second half of 2026 versus the same period in the prior year.

Input costs such as memory, metals, printed circuit boards, semiconductor and shipping continue to increase, educate greater than originally expected due to dynamic global conditions. While we proactively instituted price increases during the second quarter, our outlook incorporates a slight headwind to gross margin due to higher input costs anticipated in the second half of the year compared to the most recent quarter. We do not anticipate material cost increases related to tariffs after conducting our assessment on the recent trade actions announced by the US administration on July 24th. We also do not anticipate receiving any material care free funds for the remainder of 2026. Due to our corporate accounting calendar, there is one extra day in the third quarter of 2026 and four fewer days in the fourth quarter of 2026 both versus the same period last year.

Now as to our outlook. We are initiating our outlook for Residio on a standalone basis. Starting in the third quarter of 2026, Residio will no longer consolidate its former ADI global distribution segment and results for that segment for all periods prior to the ADI spin-off date will be reflected as discontinued operations.

Our outlook is presented as if we had operated as a standalone company for the first half of 26 coupled with our standalone outlook for the remainder of the year. This outlook includes sales to ADI as an external customer and approximately 80 million dollars a full year corporate cost allocated to standalone Residio. The full year of sales to ADI are anticipated to be approximately $175 million dollars. In our earnings press release, earnings presentation and financial data workbook, all of which can be found on our website, we have included a revenue and EBITDA bridge from reported segment results to a standalone basis. During this short transition period, the standalone outlook we are providing is for revenue and adjusted EBITDA on.

We intend to provide our outlook for adjusted earnings per share and cash from operations upon completion of certain activities including the post closing cash adjustment under the separation agreement with ADI that is to be calculated in the coming week. We intend to once again provide outlook on these metrics starting with our third quarter earnings call.

With that, our standalone outlook for 2026 is as follows, revenue in the range of 2.9 to 2.95 billion dollars, adjusted EBITDA in the range of 605 to 625 million dollars and our standalone outlook for the third quarter of 2026 is as follows, revenue in the range of 705 to 730 million dollars and adjusted EBITDA in the range of 145 to 155 million dollars.

Looking forward, I would like to reiterate some of our key themes from our recent investor day. The new Residio was focused on its mission as a pure play building technologies company. We believe we have tremendous market momentum from the recent introduction of new differentiated products that strengthen our customer value proposition and in turn will fuel the near and medium term financial targets we laid out today and at our investor day. Those targets reflect the business with higher gross and operating margins than the historical Residio coupled with continued strong cash flow generation.

We're very excited about the launch of new products in the second half of 2026, including our new smoke and CO detector platform and our new video surveillance and intrusion security products to name a few. And as we discussed at length during our investor day, we have several levers we are pulling that are intended to strategically optimize our operations throughout the remainder of this year and beyond. With our track record of execution, our stellar team and our focus go forward strategy, I am extremely confident in our profitable growth overhead.

Now let's open the call for questions operator.

Okay. So the math is a little bit off. So I'd have to go through exactly how you did your calculations. But no, but the assumption what was said was that the things with the two segments would have similar growth for the year. We did not specify that it was PNS coming up in its revenue growth versus ADI coming down.

But the projection that we have for PNS, A, the growth is higher than the number 2% that you've stated. So overall, for the year, it's almost 3%. Now, in terms of how, if you want to talk about exactly your math, we can get through that. But generally, that's in line with what our expectations have been. Now, in the second half of the year, we do have the issues that we described about OEM security, which were something that came about in the mid part of the year. This is what we talked about before. It's one that's determined by a third party.

And so we have to respond to that.

Hey, Eric, it's Chris. The one other thing I like to add is if you look at the first half performance for products and solutions at the segment level, we outperformed our expectations given growth across most channels. And we still anticipate growth in the second half of the year across many of our channels with the exception of the OEM security channel like Tom just mentioned.

Yeah. So I think in terms of because of the input cost that we've talked about, the biggest rate challenge for us is Q3. So we said it always said it was never going to and I think Q3, we're going to see probably that most of the temporary input cost going up before all of the pricing catches up to it. So it's probably going to hit us most in Q3. But we're not talking that fear. I mean, most of this is going to be recovered by pricing, but there will be some, I'm not sure that we will get gross profit for 14th consecutive quarter. It's well within the possibility, but it's not something we're focused on right now just because of those activities.

And one other thing to mention, Eric, remember last quarter when we talked about the price increase that we were implementing in Q2. We did implement that price increase, but we also said it would have a lag impact because of certain customer provisions that we have with certain customers in terms of a notice period. So, you know, while we have increased pricing, and as Tom just said, the price increase is helping to offset some of the inflationary costs. It's not a dollar for dollar offset.

Sure. Sure, Dan. Thank you. So, let's deal with the idea. So we've got, we're pretty excited about the second half of the year, but for instance, on our Smoke and CEO detector platform that we're introducing, that product will first go into the American market replacing the eighth edition UL products that are out there. It has a better cost profile to it. It'll have a better margin profile to it.

We think it performs well. We think it'll continue to drive revenue growth, but it's really about creating that global platform that allows us to build even further out. Second, we're introducing the Fordic platform to the marketplace and bringing that all the way across all of our products. That's going to be very important. It's a major effort. It doesn't necessarily in and of itself drive revenue immediately, but long term, it's a very key part of our strategy. Some of the security products that will be built out or brought to the market, I think that they will help drive the revenue. But I think the best thing to think about overall is excluding OEM security products. We are expecting revenue growth across all of the other product areas.

That's the first piece. The cadence of the MPI, we are seeing momentum. Generally, yes, we are continuing to see more products coming out with shorter development cycles than we are continuing to have a very healthy pipeline for thereafter. In terms of your second question, the pricing. You're right. If we experience the conditions that we do have experienced recently, memory costs going up, 4x, metal costs going up 35%, and now these shortages of things like low thermal expansion, fiberglass driving, printed circuit boards, and all of these shocks from the data centers, 100%, that that would be, these are significant costs. They're able to be currently absorbed by pricing offsets and certain other efforts to try to reduce the cost of our products.

But they do have an impact. That said, we do not believe that these will be long-term costs increasing. Some of it will stick. But I think long-term, we will see these basically rollback up. We're seeing more memory coming online from some of the suppliers related to, especially the generations and the geometries that we consume. We have a good visibility of what will be happening. These prices are going to start unwinding.

As the competition comes to the market, capacity comes available. I don't think that we're going to see a long-term shortage on thermal expansion fiber. I don't think we're going to see a long-term contraction in the memory supply market. Metals and fuel, those are shocks from what's going on in the world. Those things, yes, they impact the short term, but over a five-year term, they shouldn't be considered a trend.

We have to be a little in terms of discussing some of these things. There's certain sensitivities, but we've spoken about always reviewing our manufacturing footprint and our costs. How can we optimize those things to reduce our product costs and pass that up on customers as well as through our market? That's something we're actively doing. We're looking at all of our operations worldwide to take those actions that we think will benefit the company long-term.

Yes. Again, Dan, just in terms of this, this is a long-term plan. When we talk about this, and thereafter, actually, but certainly in the next five years, we have specific lay actions that we want to take that will make a material impact to the company. We talked about the closing of the T&J so that we talked about the closing of the latter. We're reviewing a manufacturing footprint. We're optimizing our product, the manufacturing, and the execution and all of our and then just the pile on. This is also a schematic to the replatforming that we've talked about moving from tens or hundreds down to one to a handful by product line. These are all levers that are really under our control.

I think that's important to understand and ties back into what Tom said of this as part of the long-term plan. Those actions improve the efficiency of our operations, but they, and then themselves, are only to do that. We talked about platforming, but there's other actions related to the efficiency of our operations.

Sure. The second quarter for us, we were relatively flat year over year. We believe the general market was down, so we believe that our volumes into our sales, revenue dollars represented increased volume, but flat revenue, we believe that we did well in the marketplace, in our position, in the marketplace. When we look forward, what happened last year related to the transition related to the gases and how we refrigerant used in the marketplace and the inventory that has been built up in the channel, and some shocks related to that. We don't see anything like that happening this year. In terms of, I think what we're going to see is a more normalized marketplace. I don't expect large growth right now.

In APH, there's still fundamental drivers for that, but I think really it's on us to create great value products that are able to increase the volumes at our share in the market.

Look, as we talked about in Tom's prepared remarks, the adoption of our new products via the thermostat via the dehumidification product via the water filtration product continues to be positive, and we're going to continue that MPI focus, as Tom mentioned, and when you combine that with pretty healthy channel inventory, I think we're well positioned.

Okay, so you broke up a bit there, Ian. I didn't catch all of it, but you were talking about the comps. Yeah, the comps and each that? Second half. Off to who? Correct. Our expected second half versus last year's. Last year. Okay, we expect growth in the second half of the year in our HVAC market in summary. And in the terms of price and volume, looking at that, you made a comment, I just want to correct a perception that you thought that the improvement in gross profitability was because of pricing. I would not say that was a correct assumption. If you look at actually what happened in the prior quarter, price was not a contributor, it would be there too large at all.

Hey, Ian, I think we provided a guidance in totality. We don't get down to the product level or channel level type of guidance. Look, I think Q3 of last year, those numbers are out there. You can set your estimates on what you think the growth is going to be. But I think what Tom just said is the market is still a little bit muted.

Thank you.

Thank you, Tomo. Thank you. Nice having you.

We haven't really gone into that level of detail and discussing our margins. I did disclose and just talked about the fact that pricing was not the contributor. The volume itself is a major contributor. If you really look at what happened in the profitability of the business, it was the execution and the efficiency of the conversion costs and the conversion efficiency that drove it for a profit improvement.

The end in the period, there were these inflationary costs that kind of were offset generally by a little bit of tariff refund. Most of the pricing inflationary costs will actually start hitting Q3, Q4. In Q2 though, net net net was somewhat everything offset each other. All these kind of one-time events kind of offset all of it. So we saw pretty, at the net of it, a pretty natural level of gross profitability. And so what really drove the improvement with the efficiency of the operations?

Sure. The second app, so the pro, I think you're the pro buys through all of the channels that we have. And really, all of our revenue is driven by the pro. We do have some retail products. We believe that the primary customer even at retail is a profession. So I think you're talking about the distribution channels probably more so than the retail channel. We expect in the second half of the year for there to be growth in the distribution channels overall. So I think, you know, we expect continued performance and retail as well. I think the one channel which we mentioned before that we expect the headwinds is that OEM security channel.

Sure. Thanks, Jay. And I also have you on the call. Okay. So, you know, we think the market is kind of being a continuation of what we've seen today. We're not expecting kind of the rising tide for the market to drive our performance. We're going to execute to drive our performance. And so whether it's the housing market, we're certainly not seeing much change in the sales of existing homes. We're not seeing any improvement in the new home construction level. When we look generally into the market of what people are expecting and either HVAC or security market, it's fairly muted. And I think that's probably the best characterization we can put on it right now. Our goal is to out execute the market.

And that's what we're trying to do. And that's what we expect to do in the second half, the lean into the OEM security, the commentary is about a large customer. So, let's not paint the entirety of the opportunity in that channel negatively. It's one customer who's large that we're talking about.

Yeah, Dan, this is Tom responding. So, the relationship with the customer, I think, is healthy. I think they just have a different direction. They're going, they're pursuing vertical integration. I think the products that we offer to them are still well accepted in the marketplace. I think they're, they like the product. I think they're just trying to do something different with their own business model. In terms of you asked a little bit about the outlook, like you were trying to understand the trend. You know, this clearly is going to have an impact Q3 somewhat, Q4 more so. And then as we go into kind of Q1 next year, it'll kind of be a little more like the Q3 level.

And then by Q2, we would expect it to kind of plateau. But long term, this is not a strategic business front. This is a lower margin business that's not branded, residual, or first alert, Honeywell Home. It's sold by a third party and it competes in a market where we create our own products. It competes in the general market where it's with our own branded offer. So we expect this to kind of have a little bit of a stair step. We are under contractual obligations to execute with this and we're going to do our best to provide great products to this customer and the relationship is healthy in terms of, you know, how we get along and everything is very positive on that.

There's no problems at all related to that. It's just a strategic decision they've made in how they want to execute their business.

And just one other point, Dan, just one other point to clarify, this activity that Tom just mentioned is already baked into our medium-term financial targets that we presented at Investor Day.

Totally separate. Yeah, you got it. Totally separate. Understood.

Oh, no, no, that was great. Thank you, Dan.