Hi, good morning, everybody. Thank you for joining the Oppenheimer Technology Conference. We have a fireside chat today with Resideo. We have an outperform rating on them. We just upgraded the stock, based on several very exciting announcements. With me today is Jay Geldmacher, the company's CEO, Rob Aarnes, the President of ADI, Tom Surran, the President of Products PNS , and then also Chris Lee, who is the Global Head of Strategic Finance and Investor Relations. With that, guys, thank you very much for joining us.
Thank you. We're excited about being here with you guys.
All right. Jay, maybe we could get off with you. You know, it's been a pretty exciting time for you guys recently. Maybe walk through the two big events that just occurred and basically what it means to Resideo.
I think exciting times is an understatement. It's a super exciting time. I mean, these announcements that we made really give us an opportunity to do a lot of new things with the company, very transformational. As you might guess, we've worked on some of this for quite a period of time. I'll just start with, you know, one of the first big announcements was the agreement with Honeywell. As you might guess, that's something that we've been working on with them, and it didn't happen overnight. We really, and we were asked some questions after, you know, during some of the Q&A after our various announcements about, you know, how did this all transpire? As I said, it wasn't something that was done in 24 hours. We've spent a lot of time with our relationships with Honeywell.
You're going to hear from Rob and Tom today, but Rob's business, they're one of the larger distributors for Honeywell in the commercial fire security area. That business has grown and Rob has great relationships with that part of Honeywell. Tom sells a lot of products to Honeywell and same thing, a very strong commercial relationship. Mike has taken, in the time that Mike's been with the company, which has been over a year now, he has developed nice relationships with his counterparts at Honeywell. I've been here now for over five, over five and a half years and had a relationship with Darius. Vimble and I, when Vimble took over, we've spent quite a bit of time together.
With all these different things as part of the strengthening and developing the relationships, I think we came to a point where we thought it was the right time for both companies. As you know, there's some transformational things going on in Honeywell. We were very pleased to reach an agreement. The Honeywell agreement unleashes us, takes constraints away of transformational capabilities that we were somewhat restricted on when the Honeywell agreement was still in place. Now with this, it takes the shackles off. That was a big part of these announcements that we've made over the last couple of weeks. The other big announcement we made was the intention to separate ADI. We've had questions over the years, at least since I've been here, about, you know, we have a distribution, a very successful distribution business. We have a Products and Solutions, engineering, manufacturing, business unit.
The question that always has been raised was whether or not those should be separated or not. The two businesses have worked very well together and will continue even after separation. There are two distinct different types of businesses. As I said, one is a big commercial distribution company, also with a piece and a portion of the business in residential, especially now after they bought Snap , they bought Snap last year. Then you have Products and Solutions, which is the total home ecosystem with the product, with brands that I think you're all familiar with, the Honeywell Home brand, the First Alert brand, the BRK brands. It's a house of brands.
This separation will really help both these businesses perform well on their own, but also give it with their own individual capital allocation strategies and just frees them up to do even more, even be more successful as we separate the two companies. Those were two big, it's a big value creator too. I don't want to miss that for both these announcements in terms of value creation for our shareholders as we've acted upon these and we're taking actions upon these. The other piece of this was, we also announced a very good, strong Q2. We did that last week. As I said in my prepared marks when we did earnings last week, I'm really proud of the team. Great continued great execution by both those divisions, by both the business units.
In the case of Products and Solutions, it was the ninth consecutive quarter of gross margin expansion, which is really exciting. Tom can talk a little bit more about that when he speaks today. I've been at every earnings call for probably at least the last year or so. I've explained to all our investors about this MPI velocity really increasing. Tom will talk more about that, but bringing a lot more new products to market and expanding our total home ecosystem, which is really making a difference for us in the marketplace. On the ADI side, it's been now over a year for the Snap One acquisition and that integration is going real well as we've been reporting. Rob will talk about their success, even though we're playing in tough macroeconomic or uncertain macroeconomic environments. Rob's business on the commercial side of things has been very positive.
I'll say one other thing before I wrap up my section, unless you have another question for me, and that is on the PNS side, between MPI, be that, be them taking some share in the marketplace. They've been doing a good job in markets that have a level of uncertainty because of the macros that are out there. It was an exciting two weeks, to say the least.
Yes, certainly. Thanks for a lot of color. I guess, just maybe as a follow-up, can you maybe talk about something that you weren't able to do because of either the indemnification payment or the fact that these two businesses were still together that you might have done if you were allowed to? Basically, what was, yeah.
The indemnification agreement had a lot of constraints in terms of things that did not allow us to do some of the transformational type things that we would have liked to have done. It's obvious as soon as we announced the indemnification, you know, solving for the indemnification agreement, at the same time, we announced the intention to separate ADI. As I said, even though the two businesses do, you know, one thing I didn't mention, but I think I mentioned it maybe during the earnings call, Tom is one of, Tom's products going to ADI. ADI is one of Tom's biggest distributors. That inner relationship has always been good, and the two businesses have grown together. Even as a separation, they'll continue, they'll definitely still have that. As I said, this just really frees us up to do a lot more things that we couldn't do before.
That is, you'll hear it, we'll do more, the intention to separate the businesses is one of the big things, but it also, and by doing that, we're going to be able to look at both businesses from the standpoint of what's the optimal capital allocation strategy, which is a big deal. There won't be pulling between the two because we had to make decisions as being overall Resideo that both those businesses are part of us, right? Now, as we separate, they'll be able to manage their own individual capital allocation strategies, their strategic direction, their strategic plans, where prior to that, there was some restrictions there. It really frees us up to do a lot of different things, and we'll share those as we move forward in the months ahead, leading up to the separation.
I believe Rob and Tom will talk about that a little bit in terms of them as standalone businesses as we go through the materials today.
Thank you. Rob, let's kind of turn it over to you. Maybe walk us through some of the high-level strategy ADI is going to have as a standalone company and maybe what you weren't able to do then that you're now going to be able to do going forward.
Yeah, great question. I would say from just a strategy perspective, not a whole lot would change between what we're doing today versus what our focus will be for the first few years coming out of the transaction. To answer your first question, the high-level strategy is really rooted on a mission of becoming the indispensable partner of choice for our customers and our suppliers, really by delivering on five key strategic pillars. Number one, delivering the best-in-class, world's leading omnichannel experience for our 100,000+ customers. We do that with a very robust e-comm offering, which is one of the fastest growing parts of the business, as well as the store experiences that we provide across the globe and all the areas that we play in. We've got over 200 locations where our customers want to come in and shop, pick up inventory.
Also, just kind of all the things that go behind that with regards to upgrading our entire enterprise stack across the board. We just went through a pretty significant ERP transition in the Americas business a couple of weeks ago. That's going very, very well. We had a 40-year-old system that held us back across a number of fronts, but that now will unleash a lot more capabilities for us versus having to rely on older technology, the ability to deploy AI across the entire business, master data management, WMS, TMS, some of those things, digital tools for our salespeople, all in an effort to create that best-in-class experience for our customers. Number two, innovation, really doubling down on our MPI engine, and that includes both branded products as well as our exclusive brands line.
We've got 500,000+ products available to our customers, about 50,000 of which we stock every single day, and about 3,000 of which are exclusive brands, which obviously offer significant margin upside and a benefit to our customers. We want to continue to ramp up and be that kind of source for new technology for our customers. Number three is services, and I would divide that into two halves. One, value-added services that we offer for free that help our customers compete at the end user level. Everything from staging, kitting, same-day delivery, 24-hour access to products through our stores, to kind of services that we actually charge for. Services for installation, post-installation services, tech support in some cases, nice little growing RMR part of the business. That's number three.
Number four, continue to capitalize on the kind of technology convergence that's happening in the industry, specifically in the commercial security, pro-AV, and datacom spaces, where a lot of the integrators today play across all three of those versus in the past, maybe just focusing on one. We are in a great position to help our integrators that play across all those categories win. I mean, commercial security, pro-AV, datacom, as I mentioned, as well as helping our customers international or grow internationally if they want to do so. Number five is really just execution. That is our namesake. We're a very high-performance, focused business.
We hold our teams accountable for continuing to grow year over year and execute at a high level, ultimately culminating in being able to provide that great experience for our customers, being the easiest to do business with, and helping our customers grow faster than they would had they been dealing with another distributor. That's the high-level strategy. To answer your last question around some of the things that maybe we could move faster on, the first thing that comes to mind is really just strategic M&A. You heard Jay talk about capital allocation. I think with two big businesses as part of one company, there's things that I've wanted to do. There's things that Tom has wanted to do, and we've kind of had to balance exactly what's the priority at the time, what were we capable of doing today versus maybe helping the other part of the business.
We'd like to think that in an environment where the businesses were split, we'd at least have a little more of an unconstrained viewpoint in terms of what we needed to do and be able to strategically prioritize those things without necessarily weighing other parts of the business as to whether we could do this or have to wait some other time in the future.
Okay, thanks. That's helpful. Can you maybe just talk about specific product categories that are really the ones that are growing the best and kind of what's really driving that in those forms? Maybe also the opportunities in those categories as well. Thanks.
Yeah, I would first start by saying, I mean, let's just look at really, if I look at Q2, Q1, and even Q4 of last year, I mean, on the organic growth side, they've been great stories. They've been, what's the primary driver of that organic growth is our commercial security business. When I say security, I mean video surveillance, fire and life safety, and access control. That represents the majority, the largest mix of the business. When I think about our top 20 customers that are out there, this is where they play for the most part. As I look at the last three quarters, and I kind of measure that organic growth, those are the big categories that are driving it, meaning leading with security, the ones I just mentioned.
A close second and third, you could even say for pro-AV and datacom, the actual growth rates have been higher. The mix of those product categories is not nearly what you'd see on the security side, but we've only been in those places, we've only been in those categories for, you know, I'd say roughly five years. We really had to grow at least the first few years, organically. In recent years, two or three years, we've been able to actually execute some nice little tuck-in M&As to really fortify our presence in those two categories. When I look at everywhere we play commercially, those have been the drivers. In terms of upside, security, I think there's still a tremendous amount of upside there. Datacom and pro-AV, as I mentioned, those are very large TAMs, $20 billion in size, and we're going in a great clip there.
I would say the ceiling there has yet to be reached, and nor will we reach it anytime soon. Plenty of opportunity to keep growing in those two, what I would call adjacent space categories. As I think maybe one level further, it's what's going on in our e-comm business. We have seen a seismic shift, as the term I keep using, in the way our customers want to buy, no matter where you play, whether you're on the commercial side, whether you're on the residential side, and all the categories in between. We continue to see very robust growth in our e-comm business. That's not by accident. For the last five years, we've doubled down on the user experience. I would put our website experience, the content, what we're able to deliver to our customers. I put that experience against really anybody out there across industrial distribution.
It's really, really solid. Those investments are now really, really paying off for us. I expect them to continue to do so, not just in an effort to generate revenue, by the way, but also as an indication of the business's operational excellence and the signal that we're a high-performing business. The more you can deliver, the more you can move transactional revenue to online, the more time it frees up for your existing team to spend time with the customers that need them the most. All that goes hand in hand. I think we've got great upside to continue growth, both to finish out this year as well as any point in time after the separation.
All right, thanks. Maybe also give us an update on Snap One. I know, Jay, you talked a little bit about Snap One, but, you know, Rob, talk a little bit more about that and, you know, how the integration of it, and then maybe just some of the drivers of its solid performance.
I got to tell you, I mean, we hadn't done an acquisition this big and, well, never, ever. This is the biggest one by far we've ever done in the history of the business. We assembled a great team and I got to tell you, I'm thrilled with where we are at the one-year point. The teams have, we had a mantra of bringing these teams together to become what we call even better together. Half of my leadership team is former Snap executives and you can kind of, that looks the same as we go multiple layers down into the organization. I figured that was the only way we could really bring the best of these two organizations together, but also move as fast as we needed to move to drive synergies versus tipping the scales one way or the other.
In my opinion, it's been a terrific success in terms of the way the teams have delivered on synergies, right? The fact that while we committed to $75 million, we said on the, I think the earnings call before this one, after we got done with Q1, that we were now in a position to deliver north of that $75 million number. That speaks to just the team's ability to execute. We're seeing those synergies come from the OpEx side, as you can imagine, but we're also seeing incredible success on the cross-selling side, specifically Snap One's exclusive brand portfolio, which that was really the gem in this whole thing. We really wanted to get my hands on that piece and scaling that to our existing ADI customers.
That's where we're seeing some significant upside because a lot of these exclusive brands that Snap sells, which were primarily reserved for the residential AV integrator, have real kind of commercial, what I would say, SMB applications, specifically with power and wire and networking where we've seen a lot of traction there. That's been a terrific success for us. We're only in the early innings there, I would say third or fourth inning in terms of really scaling that product line and then just getting the MPI engine that Snap has. We'll launch 400 new products this year or over that, just in exclusive brands and being able to stretch that now into some of our commercial categories where Snap wasn't playing before, but now has some JDM horsepower to be able to deliver products into those categories.
We're in a great position to continue to grow and I'm very happy with where we are right now.
Thank you. When I just think about the brands that you guys have, and adding them under Snap One, I know they had a lot. How's that helping you? How has that process been going?
I am significantly sorry about that. It had a little disruption. Can you ask that one more time?
Yeah, absolutely. Basically, talk about your exclusive brands, you know, how getting a bunch of those from Snap One has helped you and where has it effectively helped you?
Yep. I mentioned earlier the fact that we have those Snap One exclusive brands that we've been able to scale to our existing ADI customers, which is driving a lot of revenue synergies from a cross-sell perspective. That obviously, with those particular products being two, two and a half times the margin of our base products, the more of those products we can get into our customers' hands, right? Understanding where they play and where they probably can't play. Look, are we going to have exclusive brands that play at the enterprise video surveillance level? No, but there are a lot of applications, mounts, wire, things like that, products like that that scale across really all the categories that we play in. There's real upside there as we continue to introduce the Snap existing product line to our 100,000 plus existing ADI customers.
We've kind of gone out there and said, we think that at some point this could be a billion dollar category for us. When you look at the legacy ADI exclusive brands, plus what we picked up in Snap, that is well within our reach within the next few years. Any, the more of those we can sell, obviously that's a greater margin upside for us, being mindful always that we got to make sure we protect our branded products, branded product suppliers as well. We've been doing a good job balancing the two thus far.
Okay. Last question, I'll let you off the hook here. Maybe talk about tariffs, the tariff impact. What are you doing to mitigate any of the incremental costs you might be facing or issues?
Yeah, great question. For us as a distributor, it's pretty simple, right? Not as complex. I know it's what our manufacturing partners have to deal with, but we simply pass those price increases right through. From any kind of margin effect on us, it would not happen, especially on the third-party product side, where again, we pass those right through. We are able to leverage some of our favorable terms with our suppliers. In many cases, with our large suppliers, we're required to be given 30 days' notice for any kind of price increases. While tariffs may take effect, based on those terms, we might have 15, 30 days before they take effect in the channel, allowing us to maybe buy some more inventory to lower the average cost and take advantage of that. Now that's a temporary margin upside, but it's something we do.
On the exclusive brand side, we just make sure that when we do get price increases from our JDMs or our CMs, first thing we do is go back and see if we can't get them to actually take on some of those price increases. We've been very successful there. When we finally get our products to the channel, we are very diligent about making sure that, yes, we have to raise prices for our exclusive brands, but making sure we're never in a position at the SKU level where our exclusive brands would be higher priced than, say, a third-party brand that's right next to it. We would just spread that around a little bit so that we are never in a position where we're not competitive in the channel from a price perspective, but we're also not eating any of the tariff impact.
Tom, thanks for being patient while I interrogated Rob, but it's your turn now. Tom, maybe walk us through the high-level strategy for PNS as it moves to basically a standalone business.
Yeah, it's similar to Rob. Our strategy doesn't change. In fact, the fact that these two businesses have very distinct strategies, very distinct markets, very distinct execution. For us, the strategy we've been executing over the past year and a half plus doesn't shift at all. That strategy is to become the leader in residential control and sensing. We're going to do that by accelerating the development of differentiated solutions to provide our customers comfort, protection, and savings. We're going to do it through leveraging the scale we have to provide superior value to our customers. We're going to expand geographically, and we're going to do this by focusing on the pros. That's the top-level strategy, and that does not shift one iota.
Okay. Maybe help us understand how you think about the business, the different business lines inside PNS, but maybe help us with what are they, you know, how large are they, and you know, what are the opportunities both near-term and longer term?
Okay. So think about, because we're focused on residential controls and sensing, the home or house is basically a system of systems. There's a huge interdependency on each of those systems. You can fix one thing, but if you're deficient in the other, you don't have that optimization of that comfort, safety, and savings, right? Those are the things that you have to kind of have that holistic view. In those major systems on the control and sensing, you have air, HVAC, mechanical, you can call it by many names, but it's really that environment air. You have the safety, and there's two pieces to the safety. There's what we call the safety, which is typically fire smoke. That's just basically triggering there. You also have security systems, and we'll talk a little bit about what those represent.
You have your water systems that are in the home, the plumbing systems, and then you have the energy. Each of those, they're distinct markets, they're distinct product categories, but underlying all of those is the systems and platforms. We could talk about that as an ecosystem. Now we have first focused on the product piece, and we're developing that ecosystem at the same point in time, but the manifestation or the market seeing what we're doing there will come. Let's just talk about air. It's kind of the legacy business for Honeywell Home. You know, we invented the thermostat. What had happened over time through maybe a lower investment, maybe in the business as other new businesses were explored, but it's a fantastic business. We have a really significant share.
I'm not going to quote into numbers because the legal would be all over me on the exact numbers, but it is a large market. In the U.S., we have a strong share. We had dropped into kind of the middle market, which is always the largest share of the market, but we don't want to fall into that trip or trap, you know, Clayton Christensen describes it as inventor's dilemma, what have you. We want to control the corners. We want to make sure that we have products across the entire price point so that we can't be disrupted from someone kind of coming in as the entry price point, disrupting from that side, or we don't lose the technology leadership we have. By doing that, that's the first thing. You see us revitalizing the product line in air.
We can go further into that if you want to talk about exactly that. We've introduced the new low-end product. It's crushing it. It's doing fantastic. It's doing exactly what we want. We're about to release the high-end product. We're really excited about what that'll do, and then we'll bring it into the middle and that. As I said in the strategy, we're doing all this by, again, scale. When we create these new product lines and all of these things, we're making sure we're taking advantage of the scale we have in these businesses to provide even more value. For instance, there were 117 different platforms in our air. We're dropping to one platform. Now they have different little tweaks and everything in order to provide different levels of value and cost and benefits. That gives us a huge advantage when you leverage our scale.
That's all new coming out of it. There are new technologies, right? We're getting into the world where you're having variable refrigerant flows and all of these things. We want to make sure we're on the cutting edge of all that, working with all the partners to do it. Those are the big things in air. That's one critical system, just the environment. Let's go to safety. Safety is one of those products, and this will be true for air, but I'll talk about it in safety. There are a lot of advancements. The first products we came out, we were just kind of staying with what's required for UL certification. There are really two very large companies in the market, Kidde and ourselves. We have different distribution partners, but we also have gained strength through construction, residential new construction, the MRO market.
We're making sure we're penetrating all those places that we can. We want to bring a superior offering to our customers, again, through the scale that we have. The numbers are quite large here in this market, and we want to advance it. We've got some products we're very excited about that we'll introduce early next year, that will take us even further in terms of the level of performance beyond where, you know, we're going to skip kind of hop skips a generation there. It's going to have, again, that by focusing more on that scale, it's going to provide a superior value to our customers. It's also the platform for our future because it allows us to do geographic expansion. When we talked about air, and here I'm going to bring it up in safety, we've been super strong in the U.S. market, very strong.
Still room to grow, still room to make it better, but we've been less penetrated, lower share in some of the European markets in those two places. We want to make sure that we have the products that can become international products. We may manufacture them in our international facility, but the same design, same fundamental platform will be a world platform. We're doing that with this next generation smoke detector series. In security, again, through the Honeywell legacy, we were one of, they say, two initial security companies. We've manufactured, you know, security systems for many, many years. What we had focused on was classic intrusion. That's door contacts, breaks, things where there's some form of detection of a penetration into the environment, right? That's intrusion. The world has kind of moved past that.
You know, when you think about a modern security system, you think about it integrating into other things like video to have awareness or analytics to understand how things are changing in the environment. We'll talk even more about that. There, we want to make that move from a pure intrusion play into a full security system. The goal is to provide the protection or that safety for our end users. It's not just to have an intrusion. How can we just make sure that they feel safe in their environment, in their home? That's what we're doing in security. It's our share of it. It's a very large overall market. We had been just participating in just the intrusion. There's quite a bit of room for us to go as we go more into the SMB. We add video, we add access control, and make a complete solution.
There's water. Water is, again, one of the critical control systems in a home. Everyone uses it every day in their home. The idea is that it's also where most of the damage occurs in homes. Water damage is the number one insurance claim. The numbers are staggering how much. If you want to protect that home, make it safe, make people, you know, have savings, you got to keep the home safe. You got to be very aware of how your water's going. Now there's two pieces to water. There's what we call the potable water systems, which is, you know, the drinking and the showering and that. Then there's a hydronic, which in many markets is coupled to that environment control. It's related to the air. We have connections between all of those. It's an extension. Again, you remember the system of systems. They're all interlinked.
We have both of those going on in water. We are going to be entering more into the detection marketplace. We've got a number of new technologies we're bringing forward to be able to control the water in various ways and intelligently. I can't, I don't want to go too far into some of the things that we've got queued up there, but you'll be seeing them over the next year coming out. Lastly, we have an OEM business. We call it Energy. That is where we sell our products to manufacturers, typically of systems, boilers, water heaters, furnaces, and various levels. Sometimes it's gas combustion control systems, venturi systems. It can be some of our hydraulic valves. It can be many things.
That is a business that we have worked to improve just the fundamentals of and then made sure that we have the right relationships with our customers so that it can be long-term successful for both parties. We've worked a lot over the past year and a half making sure it's set up for that. Those are the products and the categories.
That's very helpful. We'll turn it over to Chris. Maybe give us an outlook on 2025, talk about capital allocation priorities, any potential for M&A, and kind of what the environment looks like. I think you're on mute.
Yeah, thanks. Thanks, Ian. Before we go to answer your question, let me just remind the audience that we provided a raised outlook last week on August 5th, and we raised our guidance to reflect the outperformance in the year thus far, as well as removing the payment to Honeywell. For example, adjusted EBITDA was raised by $100 million from the old midpoint to the new midpoint. Of that, $170 million relates to ceasing paying Honeywell, $35 million a quarter, as well as the remaining $30 million is the outperformance in the second quarter. When we think about our priorities going forward around capital allocation, it remains focused on deleveraging. As I believe the audience knows, but I'll remind you, we are very cash flow generative, and we look to build cash on the balance sheet as part of this deleveraging exercise.
I think when you take that into account, look, we're always going to keep an eye out on the market, especially for M&A that we think could be especially attractive, but it has to reach a high internal hurdle for us to pursue. That being said, we also have a lot on our plate already with integrating Snap One and separating ADI.
Okay, as quickly, we'll kind of turn it over to Jay. Maybe the capital structure you could talk about in the two spins.
Yeah, I think we're still early as we just announced the separation, but as Jay said, we'll provide more details as we near the effective date of each spin. I think what I'd encourage the audience to remember is that the same philosophy we utilize today, we very likely will extend that to each company standalone. What we said is, we want to operate the business at a near investment-grade credit rating, which implies a target leverage level of something at or around two times. That being said, we also believe we want to make sure that each ADI and PNS have enough financial firepower to succeed on a standalone basis.
Thanks. Jay, we'll turn it over to you for some final comments on the business and what you're doing, anything else you want to leave the audience with.
Great. I think that's a great way to wrap up because I saw we only have about a minute left. I'll try to make it short and succinct. I've been thinking about that because I knew we were leading into this. I think one of the punchlines is this. These announcements really, really, everyone's super excited about within the company. I know a bunch of our investors already and our shareholders. This is providing us with the transformational flexibility to unlock shareholder value and the ability to increase shareholder value. As Chris said, and I said earlier, we're going to be excited to share with all of you as we move forward as part of this, the types of things that we're talking about tied to that. The separation of the two businesses is a big piece of it.
When you dig down into this, these are the things we'll share with you as we move forward. We're excited for all the things I mentioned. I know our customers and our suppliers who have given us feedback so far on a very, very positive thumbs up. It's an exciting time for the company. We thank all of you and your support who are out there, and we look forward to talking to you more in the months ahead.
All right, thanks guys. We're out of time. Good luck with your one-on-ones today.
Thank you. Thank you. Take care.