To have the Janus team here, representing the company. We got Anselm Wong, the CFO, and then Sarah on the IR front of things. Well, Anselm, it's a pretty dynamic environment out there, potentially we have some rate cuts that could be helpful, but kind of, talk through what that could mean for you because there's two folds, right? It's the institutional customers as well as potentially, the end consumer and liquidity and all that great stuff. Just kind of help us think through that.
Sure. Yeah. Thanks, Phil, for having me. And, you're right. It's a different impact here. I think for the larger guys who have, you know, well-established liquidity, I think minimal impact. They're doing their thing. They can get access to capital today at a deep, reasonable price. I think for that smaller and mid-market, that's where you'll see a meaningful impact. You know, a couple of things to note for our customers. They usually look at the 10-year Treasury in terms of a rate point of view if you're looking at what helps them, because they're going to the local mom and pop to get their cash. And that's kind of what usually the interest rates they pay are based on.
So, you know, it'll have to be something meaningful, you know, not one cut, but maybe like if you get, you know, 75 basis points, 100 basis points, that'll help at least move the trend in the right way. I say that because the last time you saw the rate cut, the 10-year Treasury went up, not down, and that would not be good for them. So hopefully if you have a consistent trend of rates that come down, you'll bring them back in the market because right now they're all out of the market right now. So they're not building, they're not, you know, doing any work right now. So that's a big chunk of the storage market that's really inactive right now. So that'll help move the needle there.
And even for the middle market customers, the rate cuts will make them have, you know, projects that will pencil better, but also increase their liquidity because that's one of the biggest things that impacted our industry. It's just rate cuts by itself wasn't the issue. It was just liquidity. Just banks actually asked for higher deposits because of the higher risk they felt. So that impacted a lot of customers that could be good customers that were building, you know, four or five projects at one time. And when you ask for deposits that went from 10%, 20% to 30%, 40%, or 50%, you can imagine, you know, their funding going down meaningfully. So they're not able to build as many projects at once.
How quickly could you see this impact your business in terms of the lag impact?
Usually, you know, I would expect it. Look, you know, I can't predict it perfectly, but usually the Fed rate cuts, you know, usually a couple of months lag to something that happens to the Treasury, 10-year Treasury rate. So you can imagine how fast they speed it. You'll add a couple of months to see that impact to that piece of it. And I think if you look at projects, you've got a lot of money on the sidelines right now, at least on the smaller guys waiting to come back in. Because obviously, if you're not building anything right now or you're not doing any R3 or work, you're not, you know, earning any revenue right now. So I think a lot of people are waiting to get some of these projects that pencil better for them once the rates come back in. And you need a mix.
Like if you look at a healthy market for self-storage, you always had the big guys in there doing it, but you also had that middle and smaller guy there. So you had a participation from the whole segment. Right now you only have participation really from the top and kind of the middle right now.
How are the big guys and the middle guys managing the business at this point? I mean, obviously you have a pretty balanced portfolio between R&R and new construction, but how are they kind of managing through this right now?
I'll tell you the large guys are really just being opportunistically smart about kind of how they're spending their money between new construction and R3. And the one thing that all of them have been public about is just, you know, this is a good time for acquisitions for them, meaning buying smaller operators. There's so many operators right now, if you look at the smaller ones that are not as liquid or well capitalized that it makes great opportunity for them to acquire some of these facilities. And keep in mind, the occupancy rates for the large guys are high because they're well run, right? They're all mostly in the low 90s, 91, 92% occupancy rates. If you go to that middle to smaller storage operator, you're probably okay with 70%-80% occupancy rate because generally historically breakeven has been about 60% occupancy in.
So after that, you're positive. So they run less efficient, so they're there. So you can see the opportunity for the larger guys to say, hey, look, if you have these targets that are available looking for cash, they want to sell. They not only buy the property, get more capacity, but they can apply their operating rhythm and process to them, improve the occupancy rates, and you get the payback from that as well.
So in an environment where a lot of your smaller mom and pop competitors don't have that full solution, and we were just talking about this before coming in, how you're traveling all around the world to kind of manage supply chain, what does that mean for you? How has the competitive landscape been shaping up and your opportunity to take share in this environment?
Yeah, it's helped us because I think one of the big things is that obviously Janus is committed to being around for a long time. We're not going anywhere, and I think for our customers who have been in the industry a long time, there is starting to be questions about some of the newer smaller operators just from a business capability point of view as well as long term because you can imagine like when business is getting tighter and the overall market's tighter, there's not as many projects going around. So you do a couple of things to get your share, you lower your price or, you know, you do better delivery or quicker install.
A lot of our smaller competitors are lowering their price to the point where a lot of our customers even question, can they actually honor those prices? Because when you get one of the deals, it's not like tomorrow you start building, right? Usually the planning process is three to four years and then you lock down Janus or a competitor to do the door, hallway, et cetera, the rest of the build. By that time, that could be another year, two years later. If you, if you're putting prices out now that you can't hold or sustain, it's not going to make sense when by the time you come to delivery, that supplier might not be around. So you know, your project's stuck and now you have to find another supplier.
You can imagine you're not going to have any leverage to negotiate the price because you have a project you got to complete. So we've had several customers come to us with competitive offers that were lower than our price point. We're always a premium to the market because we have a higher quality product, but they're even saying to us, I don't even know if some of these guys will be in business when I need them to actually deliver. So it's not worth the risk to actually engage with them, even if it is lower price.
From a procurement standpoint, remind us how you're set up, particularly in the steel side. I mean, do you guys hedge out? How far do you hedge out? And, you know, why is that important, I guess, especially in the environment?
Sure. So I would say we have a strong buying program with our steel providers. Obviously, we buy a lot of steel. So we're able to negotiate a way to buy the product where it goes through the service center, it gets held in a certain amount. We lock in certain prices and volume so that we always have steady supply at a fair price. If you look at how the typical smaller guy does it, they're buying on the spot market. So if you follow steel this year and even last year, it's fluctuated a lot. And part of the reason why is demand has dropped a lot and the steel providers are trying to raise the price.
And what they do is, if you notice, they try to raise the price and then there's no demand and it comes back down. Well, guess what? The guy that's buying on the spot price, they have to buy in the price that's offered, obviously. So it's going to be a slightly higher price, but then there's no demand after that. So then the market price comes down after that. So you're seeing like a very volatile kind of price point in the spot market for a lot of our competitors who buy in the spot market. So it's not good for them. For the competitors that actually buy foreign steel, obviously with the Trump tariffs, it has not been great for them as well because instantly overnight, the cost of steel went up meaningfully.
And I'm talking about competitors who buy, say, the full steel door or buy the coils overseas. You're obviously going to get, you know, the pre-tariff, pre-term prices may be cheaper, but post-term, definitely not with all the increases that we've seen from the tariffs.
Remind us how far ahead you are from a steel producer.
So we're generally five to six months in terms of when we put a buy-in today, we get the steel about six months later. So generally that's your time period that we lock in for that period. So we're usually five to six months. It's stretched out a little more lately because the projects have stretched out a little more. So maybe it's call it a couple of months longer than that in certain cases, but it's generally in that time period.
So with spot steel prices moving up and ultimately as your hedges roll off, your costs will likely go up as well. So how are you kind of managing and planning to strategize that business going forward? Is this an environment where one, you can take price and do you kind of balance price versus volume and perhaps, gaining share at some of your smaller competitors that are going through, you know, some of these challenges?
Yeah. So we've tried to be strategic about how we've priced so far is that look, we're always going to be a premium price, but how much do we that premium we're going to hold? And because we bought steel at a fairly good price, we're able to actually hold price lower than we normally do just to compete a bit better. I think in terms of longer-term strategy, we're able to adjust price, our contracts, languages, structures that we can raise it if it does go up. But I would tell you just, you know, last week there was a steel conference.
We were looking at pricing and generally most of the indicators show that pricing. They're going to do the same strategy, try to raise price, but I'm not sure how you can raise price when demand is not there overall for steel in general, as well as their increasing supply. So to me, if you're increasing supply and demand's not there, I can't imagine price holding that well for steel. So I think it'll probably going to stay in the same area, you know, unless demand all of a sudden picks up somehow and then it helps them raise the price. But so far we haven't seen that happen this year.
How do you think about M&A? I mean, you're spending a lot of cash flow despite a pretty muted demand environment. Are there any pockets where you're interested and are there opportunities perhaps to pick up some assets that are distressed right now?
Yeah, definitely looking at that. I don't think it's the right time for some of the distressed assets because what we want to do is we want to see some of these targets play out to see are they going to make it through this cycle or not? And then if they do, that becomes probably a target there. There are other assets that we're trying to look at in terms of Europe. We always talked about expanding to other countries that we're not in today. You know, for the size of Janus, we're still majority in the Americas, in the Americas in terms of business and our international piece is much smaller. There is growth opportunity over there. Storage is starting to pick up in certain countries and that's creating opportunities for us to look at targets that build storage in those countries today.
We're also looking in the domestic market, but I would say pricing is not there yet right now. A lot of the deals that we see, the multiples that people are asking are still, I would say high or inflated compared to where their performance has been.
How does the margin profile look in Europe? And then, commercial, you've had pretty good success this year in terms of growing that business. Can I walk through what are some of the great things?
Sure. Yeah. Europe, you know, you know, unfortunately they didn't have the volume and they had a downturn earlier than the U.S. So if you look at the margin profile, it was pretty low. And last year we're talking low single digits. We actually hired a new general manager there to take a look at the business, really, you know, streamline it, but also not just streamline, but look at opportunities of where we could sell to that we weren't selling again. So he really went through all the business, the functions, the factories, all the customers that we went and re-engaged a lot of customers that used to buy from us, didn't buy from us, figured out why they weren't buying from us and just say, hey, look, we're your partner here. We'll definitely do that for you.
I think, you know, the prior management was a bit more, we're only going to sell you this type of product instead of adjusting to some of what the customers wanted. So our new leader just said, hey, look, we can definitely adjust and build the product better than any other supplier. So that's part of the reason why you've seen the turnaround this year for them. And he's also taken on a lot of costs and said, you know, look, we need to be profitable. We need to be not just single digit, we need to be reasonably profitable. So he, we gave him a task to say, hey, look, I don't know if he'll get to the US margins, but I said, if you can get to like high teens, 20% type of EBITDA margins, that would be a big win in a short period of time.
He's been pretty good so far. He got high single digits in Q1. He got the double digits in Q2. So he's on a good trend there. I think part of it is because he's really looked at, hey, how do we have to, what do we have to do to be competitive to build a product? You know, what can we sell to our customers to get the volume back up that made sense? I think a lot of the customers are reacting positively to him to say, hey, Janus is definitely, you know, high quality product, but they're also willing to take feedback from us to say, hey, if I want a door made of this kind of metal, I'm willing to buy that. Because I think if you look at our prior door, it's not that it wasn't a good door.
It was wanted by the UK market specifically for an environmentally friendly paint system, which made the steel very expensive for that door, but that market wanted it. But trying to sell that, say, into Spain, which is a much more price-sensitive market, that just didn't work. And it doesn't mean that other materials don't work. It's just that, look, this is going to be, you know, still a good quality door made with galvanized steel that works. And that's what he said, hey, we'll build it. We can build this just as well for you. And that's how he's gained back some of the customers. So I think there's more of that to come with him. I think he's, and he's also done a great job with Noke. He was our former Noke leader in Europe.
What he did is, well, it's also sell the value of Noke over there in terms of, hey, we have a large customer of the Green Storage that has been really successful putting Noke in every site that they own or acquire and getting the benefits from having less labor in there or no labor. They actually have extreme no labor, as well as getting the security benefits. So a lot of customers have taken notice and say, hey, this is not a small customer. They, I think they're up to about 80 sites with Noke. So it's a meaningful customer that has proven the model that works. So they've actually started. Other competitors have started to look and say, hey, these guys are actually making it work. How do we actually get involved and install Noke at our site to get the same benefit?
Okay. On the commercial side, I mean, the end markets remain very challenged, but it seemed like you put a positive growth. You're doing some great things. Can you expand on what you're doing there?
Sure. Yeah. If you unpack the commercial market, I would say it's different pieces that just contribute to the whole. One of the pieces was rolling steel. That's our asset business that competes in that larger commercial market. So that's fire doors, Performance Series doors, that's motor operators, which is basically the opener that opens and closes the doors. So we've done a lot of market inspection looking at what's available out there, how do we improve on reliability, as well as look at the product offerings and say, hey, look, we can build a better product that performs better, lasts longer at a much more competitive price, as well as get it specced.
So, one of the things we've talked about is trying to get specified, and it takes many years, and we finally started to get specified because people have really looked at the product and say, "Hey, this is a really good quality. It meets the specs, and it can be replaced." That's really helped grow that rolling steel piece, and that piece has been steady and growing well. We've been happy with that. The other part was that carports and sheds market. We all talked about the big correction and downturn of that market. For us, it was a pandemic darling high. Everyone wanted to build a carport and shed. Then after the pandemic came down, it just, you know, collapsed just as fast, unfortunately, because it was just normal demand after that.
So, one of the things we had to decide is, are we going to really be in this long term in this business? Do we want this business? Because we really got a big bump just from selling the doors, shipping it. And one of the big investments we made last year was we needed to open a site in Mount Airy, North Carolina, which is where all the carport manufacturer sellers are. So we said, look, if we're truly going to make this a business, make sure this is long term, let's invest in a business. Let's put a site there. Not only did we not, we invested in that site there, we also looked at, hey, what the standard strategy of Janus is, how do we add more content? So if you look at a carport and shed, it's not just a door, obviously.
We were just selling a door. Then we said, hey, we can sell the trim. We can make structural tubing that goes into a carport and shed, and now it becomes a more one-stop shopping for the carport customers so they don't have to go to multiple vendors, so that's helped us gain share back in that market to say, hey, it's Janus, it's quality product, and they're selling more products around the carport so that you have a more full offering to sell them, so that's helped out a lot. I think the one part that hasn't been doing as well is the commercial sheet door, and that's the self-storage door that we sell into the commercial markets.
That part of the business, you know, you have larger customers out there that resell our product and that commercial sheet door market has been a bit softer there, but I think the other two pieces have been good. I think the last piece I'd highlight is TMC. TMC is the acquisition we made in the terminal maintenance that rolls under commercial as well. Now that business was always lumpy, like we said when we acquired it, still is lumpy today. I wish it was smoother, but that really goes ebbs and flows with their customers, and if you know that market, a lot of the LTL carriers have seen a lot of reduced demand because of the tariffs in terms of how much flow is coming through.
Now, luckily that business still, you will still need the maintenance and R&R they do, because that's a key item that TMC does. They don't build new, they generally maintain and repair facilities. So that's still going to happen. So it's just going to happen as lumpy as it was before, where you might have a quarter where you don't get any of the big jobs, you have a quarter with three or four large jobs. So just keep that in mind, because that will unfortunately show a little fluctuation for our commercial business, because even though it's a small business, moving, you know, several projects that could be worth $4 million or $5 million can move the needle from quarter to quarter.
Pivoting back to your self-storage business, I think, you know, despite this air pocket in demand, I think you've generally said backlogs have been fine, not a lot of project cancellations. So let's say we wake up tomorrow, early next year, liquidity is much improved. Is there like a massive, like lag in terms of like the planning process, or there are a lot of projects that were paused that you could kind of, your customers ramp back up? I'm just trying to gauge, is there a long lead time to kind of rebuild that business and ultimately you're, you're closer to the back of the cycle?
Yeah, sure. So there, I wouldn't say there's a long lead time. I think the good thing is that, because of the way we go to market, we are at the beginning of the planning cycle for a lot of new storage facilities, even if we don't have the art, the order yet. So our process has always been, hey, look, we build everywhere across the country, build everywhere in the world. So we know what works for certain facilities. So we know unit mix that has been working for one customer versus another. So they come to us, a lot of customers, and they know that fact. So they're planning out the site, but they're also planning out the unit mix for that site. So they get us involved and say, hey, look, what has worked in this area that you have built or maintaining?
We'll share that information and say, hey, look, sounds like this year is, for example, could be like 75%. They want 10 by 10 instead of a mix. So we'll say, hey, this is how you have to consider your build. So we get part of the upfront insight into, hey, they're planning to build a site here. They might not even have the groundwork broken in, but it gives us some visibility. Say, hey, people are still thinking, and that's the thing that we've been talking about, is that we're the difference since the last kind of major downturn. Ramey, our CEO, said the biggest thing he saw was that back then you saw that pipeline shrink incommensurate to what the market said. We haven't seen that. We have seen people still planning, building.
I think part of the reason you're still seeing the planning proposal stuff, maybe not ultimately built into the backlog yet, is because I think everyone's been pretty happy with the occupancy rates now without having the biggest driver, which is mobility around housing in the market. They're all saying, hey, look, if we're at low 90s right now, and historically it was 80%-85%, once mobility comes back for some reason, if housing people start moving or the rates get better, they could see that just increase right away demand. A lot of them don't want to get caught flat-footed like the last time in 2008, 2009. They're trying to say, hey, look, we might not have to, we might not build like we did during the pandemic, but we have to maintain some because we can't create it overnight.
It takes three-to-four years from the ground up to build a storage facility. So they're still doing their planning, looking at sites. And generally, if you look at self-storage, once they find a site that is good for self-storage, it's a good site, meaning it's meeting certain requirements, it's close to certain, you know, residential neighbors, et cetera, where they want. So they've already determined the site is good. So if they can, you know, spend some money to start to get some of the, at least the groundwork done, then it's, it shortens the time to get to the build side of the equation so that hopefully it won't be as big of a lag. But I can tell you, there's a lot of people planning, waiting because everyone knows that it's going to come back sometime. They're just not sure when.
Okay. What about your ability to ramp up?
We've been always flexible and we ramp up pretty quickly, up and down pretty quickly. So I don't think there'll be an issue for us. If you told me demand was going to increase, you know, exponentially tomorrow, we'd probably meet the demand right away. I think that's the one thing they know they can count on Janus on is that we're able to flex the lines as well as our capacity pretty quickly. And we're doing the same thing, right? Capacity planning, saying, hey, look, let's consolidate our location, but at the same time, we're looking at being able to flex up if we need to.
Typically new construction slows down in this environment. Your R3 business actually does better. But I think what Ramey said on the call is at least the outlook seems a little more constructive for new construction versus R3.
Yes.
Can you give us a little more perspective?
Yeah, what we're seeing, like we would have expected, like if everything was holding steady, you would have expected new construction to contract more than it has already. And in other times, that's how much it did. But I think we're seeing, like I said, people being strategic and holding projects and building a bit more than you would expect. So that's why we're seeing new construction hold up a bit better than you would expect in a market like this where you think that there's enough supply already, but they're still building a lot. So, you know, we don't have a preference which one you build because we make the same margins either one. But I think if you look at it, R3 has been holding up a little more, meaning not increasing as fast because they're just directing.
Even for existing customers that are large customers that have a bunch of R3 work that they want to get done, they're still having us do some of their new construction stuff right now because they want to complete certain projects as well in certain areas that they know they can start ramping up. It's been a balance. It's been a learning process this year to say how fast are they going to transition. I think eventually, you know, if the market stays where it is, you'll eventually transition to more because I don't think anyone's stopping acquiring. I think they're going to continue to acquire more and more smaller operators, which will generate more and more backlog for rebranding and remodel work.
Okay. And then, your Noke. Oh, watching the audience. I saw people stretching. Okay. On your Noke side of things, you know, you have a new product rollout. Can you talk about, you know, new offering, how that's been received? And, you know, I think you need a certain critical threshold in terms of units before you really see, a needle mover from a profitability. Is 2026 within reach?
Yes. I think we've always talked about getting to about 500,000 units to get to breakeven for Noke. And if you look at our trend right now, we're at 409,000 connected devices. If you look, just look at our pace that we've added units, we should get there sometime next year, which would be exciting for me because then we finally have a business that's going to be positive, accretive, and rather than burning money right now. But I think, look, every recurring revenue business starts that way where you have to get to that breakeven point where you offset all your fixed costs for setting up and running that business. And that's where we get to there. I think that the best thing for that business we've seen with the new product you mentioned is that we've had it in the market since Q4.
It's been very positive. I think, you know, we're proud of it because this is one of the first ones in Noke that we really took a lot of customer feedback to really say, what did you like about the current product? What don't you like about the existing product? And, you know, it's always hard to take the negative feedback, but you know what? We just told them, say, we'd rather you tell us so that we give you the right offering. And like I said, Noke Ion has hit everything that they wanted. They wanted something with optionality. I don't want everything in it at once. I don't want the motion sensor. I don't want to put it on. I don't want the LED light. I just want basic access control. Got it. I want something that is actually cheaper from an entry point.
If you take out the features, your price point gets cheaper. I wanted something more reliable. One of the hardest things about putting connected devices in self-storage, we've learned over the years of Noke, is you're dealing with a metal, you know, metal facility and a metal box. So you can imagine, you know, wireless signals do not, you know, translate very well. If you ever had a cell phone in a metal self-storage facility, you know, there's no signal in there. And part of the reason is just physics is that you just can't get signals out really well through there. So one of the things we did with Noke Ion is that, look, the best connectivity is direct connection to a router or an access point.
And one of the things we did with it is that we installed. We made it so that the lock is on the interior and not on the door. And that way we have as much room as we want to raise the antenna as much as we want. So if you don't have that, to get connected, one of the things you do is you just extend the antenna. And that's what allows the connectivity to be so much better than the Noke One. Noke One, the antenna is on the board within the metal box. So you can imagine you have a tiny little antenna, tiny little window to get it out. So the way you get better connectivity is you add repeaters, repeaters, which, so you add costs. So the new product just operated much better there. And then reliability goes hand in hand with that.
So if you look at it, you know, enterprise rate to me is it has to be 99.999% uptime minimum for the product. And that's what the new product is. If you measured it, we've been measuring, you know, since it's launched, that's what we've been seeing for the product. And I can guarantee any other wireless product in self-storage that, that is, you know, built around the Noke One type of model is not at that level because it just physically can't be because again, you've got a board antenna that doesn't have enough, you know, signal strength to get that connectivity. So that product has just worked really well, since the launch to the point where even people who put our Noke One are wanting to trade it in for Noke Ion to get the better connectivity.
The last thing is that it actually is hardwired power, which is what was requested by our customers. They don't want to ever change the battery. I get it. If you're in a business, it adds up pretty quickly, the cost of the batteries, but the labor to change the batteries. They, once we built this, everyone said, hey, I want this solution here. It's been really positive, for a lot of the customers, for the new product that have adopted the Noke product.
Once fully up to scale, what kind of profit margin should we expect in this business?
Very excited about it because if you look at hardware, we've always said the hardware margin is about the same as we make in self-storage. So that's not where we're losing money. It was on the recurring side. If you think about recurring, you once you get past the break-even point, meaning you recover the cost of your engineers, the cost of the networking equipment, et cetera, all that cost, every dollar you add is profit, right? So you can imagine when you get to steady state, you're getting margins. The only, call it variable margin you're paying for is maybe a little of the data cost that it goes up with more data usage, but you're talking anywhere in the 80%-90% type of gross margins for the recurring side of the business. And that's what I've seen historically in other recurring revenue businesses I've built.
So we're excited to get past the break-even, get it to scale so that you can start earning that. Because think of it, after your break-even, everything is actually incremental. So it actually helps bring that margin, gross margin rate up. Now, we're not there, obviously there right now, but it, you know, I think at least if you look at a long term, that's the potential of what you can see with that Noke business for the recurring side.
Okay. I'm going to wrap it up here. I know it's been a problem in terms of, the elevator, so we'll call it a day. Thank you so much.
All right. Thank you.