Bright and early, we've got a nice full room, so really appreciate that. I'm obviously very happy to have the team from Resideo here. I'm Adam Tindall. This is a part of the connected devices group. I cover Alarm.com, I cover Arlo, and a lot of these ancillary areas. Mike Carlet, who's CFO, Rob Aarnes, that's how you say it, right?
Aarnes. Yeah.
Aarnes, okay. Close enough. President of ADI Global Distribution, and Chris from Head of Strategic Finance in the audience with us. A lot of changes going on in this story, so we're gonna cover this via a fireside chat. Chris does have some slides for our education here, but gonna kinda keep it light in a fireside chat. If you do have questions, please feel free to raise your hand along the way. With that, Rob, Mike, for those new to the story, if you could just start with the elevator pitch on Resideo, the company background, core market and size, and key value proposition.
Sure. I'll start with the overall company, and Rob can hit on, you know, his ADI segment. Resideo is a, you know, pushing $8 billion revenue company, spun out of Honeywell eight years ago. Operates in two segments. We have our Products and Solutions segment that is focused on providing control and sensing products to residential homes. All right. There's other pieces I touched, but that's their main focus. Think about brands like Honeywell Home thermostats, things like First Alert smoke and fire detectors. Think about leak detection products, and there's a piece of the business that's tied to, you know, OEMing like combustion for water heaters and boilers. Very much a product development company, innovating on the product side, developing products to be sold to installers.
We think about our products as going to the professional installer, the folks that are, you know, the professionals that are tasked with installing, making those decisions. We manufacture just about everything ourselves. We have, you know, almost double-digit manufacturing plants throughout the world, near shore basis, so we try to put our manufacturing close to where the markets are that we serve. Each one of those markets that we're in, oh, I didn't mention security as well, big security line of products out there as well. Each one of those product lines, you know, has its own set of competitors, its own market characteristics, but we think that we are have lots of growth run, right? We're a leader in many of the markets that we serve, but we're a leader in a particular piece.
If you think about the HVAC world, you know, we're the leader in thermostats, but there's a lot of other areas in the HVAC system that we can touch on and grow into. We are in some of those, like filtration or air quality, but other places to go. In each one of the categories that the Products and Solutions team is in, there's opportunities for, to continue to grow those businesses. Then we have a distribution business, ADI, that Rob runs that I'll turn over to let you talk about.
Thanks Mike. Good morning everyone. I'm Rob Aarnes, President of the ADI Global Distribution business. Been there about 14 years, been leading the business for 12 years. For those of you that don't know us, we are the largest low voltage distributor of security products worldwide, with very strong positions in adjacent categories of professional AV as well as data communications as well. Roughly 70% of our revenue is commercial. That is our primary focus. 30% is residential. We are an omni-channel distributor. I'd put our e-commerce user experience up against anybody out there. It's one of the areas we've invested in heavily over the last few years as our customer buying behaviors have really shifted to online versus kinda what they need in a store environment. Always be digital first going forward.
Roughly 100,000 customers, no end users, all professional installers. About 1,000 brands. We carry all the security categories from fire and life safety, access control, video surveillance, commercial intrusion, as I mentioned, ProAV, Resi AV, and data communications. Our two geographies, mainly, 80% of our revenue is here in the Americas, U.S., Canada, Puerto Rico, and then the rest is spread between Europe, you know, Australia, and some APAC business as well. Last thing I'll end with is something probably we're most proud of is a really strong record of performance, over the last, you know, 10+ years.
mid to high single-digit growth, same thing on the actual operating profit side, and we look really forward to the opportunity to spin out and become our own publicly traded company here in the coming months.
Perfect. You're hearing obviously, this was a combined company that is in the process of a spin into two different companies. Mike, if you could talk about some of the key financial metrics that you follow for the company, how would you suggest investors focus their financial model be, to be consistent with the way that you manage the business?
It's a lot of mom and apple pie. You know, this business is about top line growth. How are we thinking about the top line? What are the macro drivers of the top line? We think on the Products and Solutions side, it very much is a macrocycle business, very closely tied to housing. Most of those products are tied to the housing market, both the new construction as well as the R&R market. We think we have opportunity to gain share in each one of the segments that we're in. There's been a great trend of gross margin accretion at the Products and Solutions business over time. When we got spun out of Honeywell, you know, there were some disparate products. We didn't have a consistent supply chain.
We didn't have a integrated manufacturing base. The company spent a lot of time over the last eight years working to bring that together. That's generated 11 consecutive quarters of year-over-year margin accretion, which has been great to see on a percentage basis. We're not gonna have 100 quarters of that. At some point, you know, it'll slow down and we're not all the way through that. There are still operating efficiencies to gain. As we think about the NPI engine that we're launching there, that's gonna create some opportunities, which is a third piece of this is how do we think about that product life cycle? What is the NPI engine? What new products we're bringing to market? How is that going to impact both the growth rate and the margin rate that's there?
Can we do it in a way that increases operating leverage in the company? Obviously, investing, you know, to grow the business from an NPI standpoint, there's an R&D investment. How do we leverage that R&D investment? How do we think about it driving growth? Obviously, cash flow. Cash is always king. How do we think about the free cash flow characteristics of the business? ADI, very similar. Rob, you can jump on this, but I think, you know, ADI, as Rob said, has over 100,000 customers worldwide. You know, a couple really key categories in video and some of the others. Looking at that customer, you know, engagement, looking at our omni-channel piece of the business. Omni-channel, you know, when we buy online, when our customers buy online, our margins are better.
It's better for them because it's easier. We really push them onto online because I think they believe it's better for them. We do get more consistent margins online, so that's great to see. Again, it's generating the operating leverage. You know, having watched ADI for a decade, I joined the company about a year and a half ago when ADI bought the Snap One business I was previously with. For the decade I was with Snap One, we looked at the ADI distribution business just as a, you know, phenomenal operating machine. Just the go-to-market strategy, the operating cadence that they drove, the operational execution was just phenomenal, and I think that continues to be, you know, a guiding light there. We do think the top line, you know, has growth opportunities.
We think we'll be growing, as Rob said, for 10 years, mid to single digits. We think we'll continue to do that, and we think we can do that in a way that continues to grow the bottom line. The last piece at ADI is our exclusive branded products. You know, partly even before the Snap acquisition, but really invigorated by the Snap acquisition, a significant part of our business, you know, double-digit percentage of our business is our exclusive branded products. Those are products that we source directly from manufacturers, usually on an OEM or JDM basis. Significantly better margins on those products, those products fill a need in the market that the third-party manufacturers that we distribute don't meet. We look to that as another growth engine of the company to continue to drive margin up.
You just reported results last week.
We did.
Maybe just a brief recap.
We did.
... about the quarter and then your view on fiscal 2026.
Yeah. The quarter was, you know, pretty much in line with our expectations. Our expectations were lowered a little bit at the end of Q3. There were a couple things going on in the company and outside that, you know, we were looking at that caused us to, you know, slightly moderate our expectations. We delivered results that were, you know, a bit ahead of our expectations, which was great. I think within that, ADI, you know, right in line with our expectations of performance. We can touch on it. We touched on a lot of the call. ADI's been through, over the last six months, a system conversion. You have to go through these things every, I think ADI.
Every generation.
... 40 a year. Yeah, every generation. it's been a long time, but we moved our store ERP system from an old green screen AS400 system. We thought it was about time to, you know, point and click and do some other things. We made that change. It's always a bit painful. The systems issues went fine. You know, this wasn't a system. You always worry that you're gonna, you know, flip the switch the next day and something's gonna happen. We didn't have any of those issues. There was always a little glitches, but the system's up and running. It's really just a learning curve and training issue. Going through that for 6 months always creates a little bit of a headwind.
We think that headwind is totally behind us at that point, that did compress our results the 2nd half of last year. It's pretty much in line with our expectations. On the Products and Solutions group, you know, a lot of really strong performance at retail, a lot of strong performance in a number of categories. There is some specific market dynamics going on in the HVAC market as the entire industry switches over to a new refrigerant. Our products don't have refrigerant. They're thermostats. They don't have refrigerant in them. That, you know, created a lot of noise within the channel from a stocking standpoint, from inventory management standpoint, which created some headwinds again. Those headwinds are almost behind us. We think they'll be gone by the end of Q1, but the rest of the business performed really well.
Even in the HVAC channel, where we knew that headwind was gonna be there, we got some benefits from weather. It was a little bit colder a little bit sooner. That caused, you know, the smaller customers, the smaller distributors who don't really inventory to buy up. We saw performance that was a bit above our expectations, particularly in that, on that side of the business. Overall, you know, really good performance. As we think about this coming year, you know, we gave our guide. We're talking about top line growth across the business at about 5%. I think 5.1% is the exact number. A little bit higher at ADI than PNS, but both businesses performing well. Continue to see some gross margin growth there.
One of the headwinds we have specifically at ADI on a gross margin basis is in 2025, as tariffs came in, Rob and his team did a phenomenal job of managing that cost, passing along to customers on an appropriate basis. One of the benefits you get as a distributor, you're able to raise your price when they announce the tariffs, but you're still carrying inventory at the pre-tariff price, and so you get an artificial short-term bump in margin. We had that last year for 3 or 4 months. It probably drove, you know, 20-40 basis points of margin in the middle part of the year. Again, that's mostly done. We're on the run rate that we're gonna be on right now, but we've got to overcome that from a year-over-year basis, why margin growth this year is a little bit more compressed.
We still think, you know, we're gonna see growth at PNS as well, both from a NPI perspective as well as a operating efficiency standpoint. We think we'll have good growth in EBITDA. Certainly on an Adjusted EBITDA basis, one of the things we were proud of last year, when we got spun off from Honeywell, we had a big environmental liability. A big indemnification liability tied to Honeywell's environmental issues, not ours. You know, we've talked to them for years about settling that, and we were able to do that last year. Historically, it's been about a $140 million drag, both on cash and on Adjusted EBITDA. Last year, we settled at midyear, so it was only a $70 million drag on those metrics.
This year, that goes away. We do get a big boost around both those things.
Yeah, congrats on that.
Thank you.
I know that was a big hindrance for investors.
It was.
A frustrating point. Yes, exactly. In addition, you decided to, you know, make the decision to, as we mentioned, separate the company. Maybe just talk about the strategic drivers on separating the business and then where you stand in that process and next key milestones for it.
I'm going to briefly, Rob, I'll let you talk a lot about it because, you know, Rob's been asking to do this for a long time.
Since day one.
Yeah.
Day one when I got here with Honeywell, yeah.
I'll give at the 50,000-foot business, every business needs to be owned by somebody, you know, whether, you know, Adam owns it, whether a PE firm owns it, whether the public market, somebody's gonna own every business. These two businesses happen to be owned by Resideo. They got spun off together for a few reasons by Honeywell. They really operate very, very separately. There's a commercial relationship about, you know, mid-single digits percentage. of the revenues of each business go through the other one.
You know, it's not a big percentage. We sit in our management meetings, you know, and Rob and Tom sit there and talk about their businesses, and they're very, very, very separate. There's different metrics around them, there's different characteristics, and so we've always said we think we should separate them. That environmental identification prevented us from doing it. Rob, maybe talk about why you're excited about it.
Yeah. To Mike's point, I mean, we have been owned by somebody since the late 1950s, okay? Going back to Pittway, then Honeywell purchased Pittway, and then of course we spun out with the Resideo team and P&S. As a distribution business, we've never actually been in an environment where it's just pure play distribution. From a strategic focus perspective, a capital allocation perspective, it's always been shared, kind of fighting for dollars. As you can imagine, when you're with a manufacturing business, much higher margins, right? Much more attractive, even though I think, you know, distribution is bright and shiny as well, lots of upside. You know, it's still a fight all the time. Look, we were able to persevere in every single one of those situations.
It made us gritty, it made us scrappy, right? We had to figure out a way to do things a lot more with less, if you will. When we finally announced last year that we were spinning and they had the opportunity to now be our own standalone business, you can imagine the excitement the entire team is feeling. Again, a lot of good commercial relationships on the other side, no issues. To Mike's point, if you were inside the business since I've been here 14 years, I mean, we operate very independently from one another, despite the small overlap in revenue with primarily the Resideo security and some HVAC products that go through ADI. Like I said earlier, the benefits, right? Strategic focus, right?
Our strategy and our plan now is really all we've got to worry about. From a capital perspective, every dollar we make, we're able to now invest back in the business to support that strategy versus, you know, kind of sitting around a table and fighting maybe with our brothers and sisters across the table for those dollar, very, very excited.
Return them to shareholders.
What's that? Return to shareholders. Yes. Thank you very much, Mike. Thank you very much. We certainly want to get to that point.
CFO focus.
No question we want to get to that point, but that's why it's exciting for us.
I think as it, you know, you asked about where we're at in the process. You know, we're chugging through the process. We announced it last year in July. You know, you can all go talk to bankers and ask what the benchmarks are. Everybody say the benchmarks is they take 12-15 months. That's, you know, the time we should expect. That's about the timeline we're on. We're going through all the steps to that process. We feel good about it. You know, there's some long poles in the tent. You got to get all the legal entities set up to spin. You've got to get all the IT systems.
While the businesses operate very separately, there's a lot of back office systems, whether it's HRIS or the network or the SOC or the NOC and those things that we've got to get done. We're, we're well on path, and we're excited about doing it in the second half of this year. You know, we'll have an investor day sometime, you know, a month or two before, or weeks or months before we actually get it done. You know, we're right on path.
Investors are gonna have kind of a choice, you know, between two different assets.
Two different assets. Mm-hmm.
you know, I suppose they could own both, of course.
We would love for them to own both. We'd love for some of them to own both.
Right. Rob, maybe you could speak to the ADI side, following the spin. Talk about your vision for that, what the top priorities will be, and anything you wanna share with investors who may be thinking about that side of the business.
Well, hopefully you can tell the passion in my voice about the opportunity that we have as an ADI business to spin out, become our own business. I don't take that with a grain of salt. A lot of responsibility comes with that, and I think the vision for me and the team really centers around being that industry benchmark. There are a number of key objectives, but that industry benchmark. In all, across all of industrial distribution. I mean, as we navigate and operate the business, we have those set of five or six distributors that we hold in very high regard that like people in this room, right, investment banking community says these are the ones that trade at the highest multiples.
They're capable of mid to high single-digit growth, double-digit operating margins, and they do it consistently year-over-year. That is absolutely the vision for us. I believe we can get there, especially in a standalone environment. I think we have the strategy to be able to execute and get there. It works. We're already seeing benefits of that. A lot of the big technology improvements that we made last year are now behind us, so we'll be able to reap the benefits of that as well going forward. To be that kind of what I would call class of category killers. Immediately after the spin, what I would say is build credibility, right?
I mean, if you look at our track record, we've got a lot of credibility in terms of performance, we've always been a part of another organization, right? As we think about now standing on our own, we wanna make darn sure that the subsequent quarters after we spin, we are proven to the world that we can actually operate at a high level and build credibility that we are capable of standing on our own, right? Then leverage the real-Value propositions that we bring to the market, which I would say there's real five of, and Mike kind of touched on some of them, but real quick, our omni-channel digital first, right, capability, that is a true competitive advantage for us that we have invested in heavily in the last five years.
We will continue to do so because we know our customers want that. Two, the most innovative kind of depth of product offerings out there, both branded as well as Exclusive Brands. I mean, Mike touched on it, but our Exclusive Brands offering is now in kind of the mid-teens in terms of mix, and that's about 2.5x the margin of our base product. We've got a lot of opportunity there that's more residential-focused today to shift into kind of, you know, light commercial services. We offer a load of value-added services. A lot are for free to help our customers win business at the end user level. Some are subscription-based revenue services, which we have the opportunity to expand. Our growth in adjacent space categories as we leverage technology convergence. All systems, right?
A lot of end user requirements are requiring all systems, all products, right, security, ProAV, Datacom to be on the same network. We are the one-stop shop for those large integrators. Lastly, our track record of execution. That's something we've always had. High accountability, high performance, high track record of execution, which we will continue to do so going forward. Those things combined will ultimately deliver the success I think we're looking for to be able to then, right, return a lot of those, a lot of that performance offerings to our shareholders.
I know it's early, but I'm gonna pause for a second, see if anybody has a question.
Shy group.
I know. It's every time. I had the second presentation slot yesterday, no questions at all.
Yeah. We'll get there.
Yeah.
Getting warmed up.
Later in the day.
We're getting there warmed up.
... we'll warm you guys up. Mike, you know, one of the other opportunities for shareholder value creation on the equity side is your capital structure and decision to return cash to shareholders. You mentioned the liability pay down. Maybe just recap the balance sheet, capital allocation, kind of priorities right now for Resideo.
Yeah. I think as we sit here today. By the way, we expect both companies post-spin to follow, you know, generally the same capital allocation strategy as we have today. Over the long term, that might, you know, twist a little bit as each business stands alone. Coming out of the gate, we think both of them are gonna be following sort of the same good corporate governance and guidance that we have today. You know, we've got leverage of, you know, a bit above 3x right now at the company. That leverage is driven by, again, settling that IRA. You can argue for years that IRA was basically debt. We paid $35 million a quarter for 8 years on that.
it was, the GAAP accounting was very funky, how it shows up on the balance sheet.
With another 18 years to go.
With another 18 years to go. Yeah. You know, settle is good. We basically converted that very odd financial instrument, which is what it was in my mind, into, you know, balance sheet debt. It's, you know, so we're levered a bit above 3 x. I think, you know, if we were not separating the businesses and we just looked at, you know, running it, we wanna get leverage down below 2x. We think we would be there in 18-24 months. Great cash flow in this business, very predictable. We'd be looking to get leverage down below 2, and then thinking about, you know, the right capital allocation beyond that. We think both companies, ADI and PNS, have lots of inorganic M&A corp dev opportunities. We also know we have to be disciplined about that.
You know, looking at those best opportunities and making decisions, where do we return cash to shareholders? Where do we reinvest in the business? Would always be on the table, but I think in the very short to midterm, it's get that leverage, net leverage down below 2x. I think as we go through the separation, that's still gonna be the core driver. We think both businesses, you know, will have, you know, BB, good near investment grade credit ratings. That's our goal coming out. That's where we are today, and we think that's where both businesses will be coming out. You know, as part of our separation, you go through a process with the rating agencies to sort of get where they think you're gonna be, and we'll make sure we're landing in the right spots.
Both will come out, both will generate cash, and both will be de-leveraging. As separate businesses, I think their actual leverage might be a little bit different, down the road as the market's out there, and who are the peers, and how does each one compare, and where does the leverage need to set? It might not be exactly the same in the long term, but I think in the short to midterm, get it below 2x net leverage and then make the right decisions for the business.
Rob, kind of a two-part question on that. You mentioned earlier some, you know, kind of valuation comparisons that you were talking about for the ADI business from the bankers.
Yep.
What would be a handful as investors try to think about what ADI could be over time? How you operate, what are the main competitors from an operations standpoint? Valuation, comparisons operating competitors.
Well, the primary, I mean, of the ones we look at and benchmark, right, it starts with two things. It's the consistent track record of both organic and inorganic growth in the mid to high double or single digits, right? consistently something that, you know, investors and shareholders can rely on and doing so at double-digit operating margins. I mean, that's the path to highest multiples, right? No secret there. If you look across industrial distribution, it's not like there's hundreds of players that are in that space, which is why you have this kind of core group of category killers that really everybody benchmarks. I believe now we can get to. You know, how do we do that, to, you know, to your question? Really a few different levers, right?
Number 1, the biggest lever that most distributors have is continue with fixed cost leverage, right? We wanna grow, keep our OpEx steady, and then start to leverage, which we already have been doing a lot of AI applications to deliver OpEx productivity. There's a world of opportunity there. Two, we've talked about this a few times, continue to drive higher mix of what I would call electronic commerce. It's not just e-com, like traditional, you know, e-commerce website revenue but also EDI, right? We've got it. The largest security integrators out there, we do business with them. We have the majority of their wallet share. They're all on EDI as well as a lot of larger regional players.
That is if we can drive more of that business to what I would say, you know, something like north of 60%, we're today, we're around 40%, right? We get a lot of leverage from doing that. It's not a cost-cutting play on the sales side, but it's more of I can shift those sales teams to spend more time with customers that need them the most and arm them with best-in-class digital tools. Higher, higher mix of online revenue. I talked about the secret weapon we have, both Mike and I have, Exclusive Brands. Most distributors out there are low single digits in terms of mix. Commodity products, OEM stuff off the shelf.
We have a great group of actual engineers that do a heck of a lot more than that, work with CMs, JDMs, customized product that offer real value to our end users today. We got a lot of that with the Snap acquisition. You know, 90% of that was focused in residential. We wanna shift those R&D dollars, right? Not away necessarily, but reallocate some of that to light commercial offerings where we've got 100,000 customers that can take advantage of those brands and those SKUs. There's real opportunity there. Then continue with strategic accretive M&A, right? You know, we're probably not gonna be able to do a whole lot of that, to Mike's point, right when we spin off, but we've been very successful. I think we've done seven deals in the last 3 -3.5 years.
There's a robust pipeline to continue to do those deals and make sure that every one we do is accretive to the business and in those kind of high growth categories, ProAV and Datacom specifically. The culmination of those things, right, our track record of execution, being out on our own to be able to allocate our capital where we know it's gonna return the highest investment for us and our shareholders, is how we get there and become a true category killer.
Adam, you just asked about, you know, comparison. I think clearly there's ADI and there's Wesco, I think are the two within the commercial security spot that you would look at and say, those are the two leaders.
That's globally, by the way.
That's globally. Yeah.
Yeah. Yeah. Those are the two big players, probably combined somewhere north of, I don't know, 60%-70% market share, right around in that area. You know, something like that.
WESCO's been a heck of a story from a stock perspective.
Yeah.
If we can replicate that.
Yeah. Yeah.
Yep. I'm gonna pause one more time. Any audience questions?
Just bringing to the double-digit margin, I think the pro forma gross margin between ADI and Snap was around 24%. Obviously right now you're operating below that. Can you readjust this first question is, how much of that is tariff versus obviously the residential end market's been a lot weaker than commercial for the past couple of years. Is that, you know, just operating leverage versus tariffs, and is that 24% kind of a normalized number?
Yeah, I think on a gross margin basis, you know, getting back to where it was is certainly an objective. If you look back, actually, 'cause you're looking at 2023 sort of pro forming where Snap and ADI were prior to it. One of the things that happened is coming out of 2023, as ADI went through COVID, you know, there's a lot of noise around pricing and margin, and we actually had our margin rate come down just on an ADI legacy basis in 2024, 2025 as pricing got a little bit normalized and getting to where it is. Right now, you know, we're back at the normal run rate. Again, we think there's growth opportunity there, even outside Exclusive Brands, as we talk about omni-channel and some other things.
There definitely was a step backwards, of, you know, 100 basis points plus or minus at ADI just on a legacy basis. You can see that if you look even at the pre-acquisition early in 2024, you can sort of see where ADI was stepping down prior to there. The other things you talked about, I think the only thing on the Snap deal that's gone, quote, "wrong," I would say hasn't gone wrong, is that residential high-end market has been a bit more challenging than we expected.
It's soft.
softer. You know, we didn't project a lot of growth for Snap coming out of the acquisition. We knew we had a lot of integration. As you're going through these things, you know, you definitely take a little bit of a pause from our growth as you go through the integration. Top line's been a little bit softer, and we don't think that's share. We don't think we're losing share. We just think that high-end residential market, given the softness in the housing markets that's out there, particularly at high-end housing, you can look at some of the competitors that are out there and see what's happening as well, has been a bit of a headwind. Put those two things together, that's really what's driven it, but we still think there's lots of opportunity.
As Rob talked about, you know, while gross margin's a big lever, we also think there's scale and leverage we get off the fixed cost of the operating business as we continue to grow.
Just one follow-up with that. Historically, Snap's had a pretty high SG&A load relative to competitors. You talked about the $75 million synergies 18 months earlier. You know, is there a lot more room, or is there something about the Snap business that requires a much higher SG&A load relative to-
I think if you looked at the Snap business historically, you know, 3, 2/3 - 3/4 of business was Exclusive Brands. As Rob talked about, you know, there's a lot of R&D that goes into that. If you think about versus a normal distributor, like if you're selling your own product, you get a lot more gross margin, but you have to put a lot more SG&A and R&D into it to go. Then there's scale. I mean, Snap was a bit subscale as we were going through. Snap had bought a bunch of local distributors. We had not been able to consolidate them on a common platform given ERPs and all the other fun stuff around it. We thought there was still opportunity there to get scale.
We're thrilled with the $75 million of synergy that we got, and we think we have opportunity to continue to drive that as we bring the footprints together.
Right on time.
Right on time.
Perfectly done.
Thank you for the question. That was wonderful. Thank you.
We're in Cordova 5 for the breakout. Thanks, everybody.
Thanks, everyone.
Thank you.