Good afternoon. My name is Yilma Abebe, and I am the Industrials Analyst at J.P. Morgan. This afternoon we're pleased to have Resideo Technologies. From the company on my near side, we have Mike Carlet, CFO, and my far side, Chris Lee, Global Head of Strategic Finance. Gentlemen, thank you for coming.
Thank you.
This is gonna be a fireside chat, you know, format. I'm gonna have, you know, questions for management, but I will leave time for folks to also ask questions, so keep that in mind. The way I envision this conversation is, you know, I'll first start off with, you know, high-level, overview type questions, you know, followed by, you know, perhaps the strategy side and touching on the, you know, the separation from, on the ADI side. Maybe touch on tariffs, and then product-related, you know, questions, and then wrap it up with recent, you know, performance and outlook. Does that sound okay?
Sounds perfect.
Great. I guess maybe, you know, you know, firstly, you know, I guess for folks that may not necessarily be familiar with the Resideo, you know, story, can you provide a high-level overview on what Resideo's businesses and their market positions, is? Maybe can you touch on some of the key items that differentiates the company in the marketplace?
Sure. We won't use many slides, but I think there's a good slide here that gives a bit of a general overview of the company. Resideo is a two-segment business today. Background, Resideo was spun out of Honeywell about eight years ago. Honeywell was getting out of their residential products businesses. They had thought about spinning off ADI as a distribution business. Really didn't fit in the portfolio. Honeywell spun the company off eight years ago. We operate in two segments. Our Products & Solutions segment, just over $2.5 billion of revenue last year, with such leading brands as, you know, Honeywell Home on the thermostat side.
We have First Alert Smoke and Fire and products in the security space, products in the water and leak detection space, products that are tied to combustion around boilers and water heaters. Very much a product company. We manufacture our products ourselves. We have, you know, close to double-digit manufacturing facilities throughout the world, where we are innovating on those products, manufacturing those products, bringing those products to market. On the ADI side, ADI has historically been a commercial distribution company, the leader in the commercial security, fire and AV side. They bought a company called Snap One about 1.5 year , almost two years ago now, which really got them even more onto the AV side, the very high-end AV, both Pro AV and on the high-end residential AV side.
Together, those two businesses, you know, getting close to $8 billion of revenue on a run rate basis, and really, really strong performance, both leaders. One of the things that ties them very closely together, both the businesses are very, very focused as the installer as their customer. We don't think about the, end user, the end customer. They're important. We were designing products for those people. Really, our go-to-market strategy is built around the professionals that install and service those products. That's what really differentiates us in the market and allows us to really perform very, very well.
Thanks, Mike. I guess maybe, you know, touching on, some of the demand, you know, trends, can you touch on what you're seeing across, Resideo's, end markets? Perhaps touch on the residential side, non-residential side, repair versus remodel. If you can give us a bit of an overview in terms of what you're seeing there.
Sure, absolutely. The P&S side of the business, you know, we view ourselves as the leader on control and sensing in the residential space. If you think about products and solutions that go into the home and are built into the home. They're your HVAC system, controlling your HVAC system, controlling your security system, water and leak detection, those type of products that are built in. Obviously, very closely tied to some kind of event associated with that home. You usually don't wake up in the morning and say, "Hey, I wanna change my security system," or, "I'm gonna put a new smoke detector in." Like, those things are typically tied to some kind of event, whether you're buying a home, whether you're remodeling a home. Very closely tied to the residential space.
Probably at about a 3:1 ratio. You know, it's much more repair, remodel based than it is tied to the new build, but new build's obviously a big driver of the business as well. Again, putting our products into those spaces that are out there. Those markets have both been, I think we would classify them as, you know, pretty anemic over the last three, four years. There has not been a lot of growth in those businesses. I think most analysts would say that the U.S. remains under-housed. Mortgage rates have been a bit high. Supply on the residential side, on the resale side has been a bit constrained. I think the administration recently has been talking about things that they wanna do to try to influence that market, understanding how it's a growth driver of the economy.
I think overall, you know, a lot smarter people than us are out there following the new housing market and the remodel market. We follow those same folks that you read. I think most people feel that market has been, you know, pretty constrained. As we think about, you know, last year, this coming year, we don't think it's really changing. It can change. I think there are things that can drive it up. There are things that can drive it down. Over the long term, I think we still view that as an overall tailwind to the business. We think that market over the long term will get better. The U.S. is still under-housed. We think there's more activity coming. We don't expect big changes to that activity in the short term.
We think right now, you know, outside of a drastic change in interest rates, outside something significantly changing, we think the market will just sort of continue to move where it's at. We think there'll be some upside out there in the future for us. On the ADI side, you know, ADI is much more focused on the commercial security and intrusion space. While that is certainly tied to some of that commercial project activity, there's a bit more of a technology bend to that piece of the business as well. Again, at ADI, we're distributing mostly third-party products. We do have a piece of that business we call our Exclusive Brands business, where we are designing and sourcing our own products, generally from contract manufacturers or JDMs, Joint Development Manufacturers. We primarily distribute third-party products.
We do see in that space, you know, as technology changes, as more enhancements come to security, to access control, people will go out there. It's not necessarily tied to a brand-new building. It's tied to, hey, there's some new technology out there that will enhance the security, enhance my ability to control access to my facility, and they will go out there and do a little bit more project work. On the ADI side, we think about, you know, GDP as a proxy, but plus a bit for that technology piece that's out there. A couple points of growth from a market standpoint that's in excess of GDP is sort of the market trend that we see on ADI, and that's been continuing to perform it that way for quite a while now.
Great. I think that's that gives us a good overview in terms of the two businesses. I guess maybe the next set of questions I want to touch on is really around the strategy for separating the ADI business. You know, can you remind us what the strategic rationale is for spinning this business? Maybe you can touch on that.
Sure. you know, Chris and I started about the same time, about 18 months ± . A little bit more. You know, as we started meeting with investors, it was really amazing. Every investor would ask us, "Why are these two businesses together?" I think there's two base answers of why these two businesses are together, maybe three. First of all, every company needs to be owned by somebody, right? Whether you're owned by, you know, Chris, whether you're owned by the public markets, whether you're owned by a private equity firm, everybody needs to be owned by somebody. When Honeywell spun the business out, they thought it made a lot of sense to put the two businesses together. Honeywell made the decision 8 years ago to combine these businesses. Again, they were getting out. Part of the reason they did that is to try to create a little bit of scale.
They wanted to be able to support something called the IRA, the Indemnification and Reimbursement Agreement. When Honeywell spun the company out, one of their strategies there was to have the company indemnify Honeywell for Honeywell's environmental liabilities. Not for Resideo's, by the way. These environmental liabilities were not ones that were on our books. They were not facilities that were Resideo. These were Honeywell's facilities throughout the globe. It was an interesting bit of financial engineering from their standpoint. Every year, every quarter really, Resideo would indemnify Honeywell for 90% of their global environmental liabilities. Someplace in, you know. Pick a location. Anywhere. China. Honeywell will have an environmental liability. They would pay $1, and Resideo would have to reimburse Honeywell $0.90 of that $1.
In order to-- As we look at these businesses, I think for years the management has said, you know, while every business needs to be owned by somebody, these businesses probably shouldn't be owned by the same people, and they certainly shouldn't be the only two businesses owned by somebody. There's not a lot of synergistic overlap. There's, you know, mid-single-digit percentage of revenue of ADI that are P&S products or P&S products that get sold through ADI, but it's, you know, it's a relatively small number. They operate very, very independently. We have strong CEOs, presidents on both sides, Rob Aarnes on the ADI side, Tom Surran on the P&S side, that are running their businesses.
You know, freeing these businesses up to have their own capital structure, have their own boards, be able to make their own investment decisions, we think provides benefit, provides clarity to the markets, takes, you know, whatever sum of the parts discount might exist in our equity price where people can't really value these things separately, takes it away. We couldn't separate it because of that IRA that was out there. We really had to, you know, find a way to settle that IRA with Honeywell to allow us to separate the businesses. For a number of years, we would talk to Honeywell about it, and they were good partners. They would say, you know, "We're, we're happy to help, but we don't wanna change it. We like the way it's structured. We structured it this way for a reason."
Over the last year, you know, or really I guess two years ago now, 18 months ago when we were engaging, they said, "We think it's time. We think we can reach an agreement." We worked closely with them. We're good partners, we were able to reach an agreement to settle that liability. Settling that liability took away those impediments to allow us to separate the businesses. You know, because these things don't really belong together, because the markets are confused valuing them, because they do have different capital allocation strategies, one's a product company, one's a distribution company, different margin profiles, different M&A paths forward, we've always said separate them makes the most sense, we're excited to be able to do that now.
Great. Yeah, I think that's a good overview in terms of the indemnity with Honeywell. If you can maybe touch on the commercial relationship with Honeywell going forward for those newer to the story.
It's relatively strong but relatively limited now. On both sides there is a commercial relationship and there will continue to be a commercial relationship between both ADI and P&S post-spin. They are relatively limited in scope. Obviously we're using the Honeywell Home brand name. We love the Honeywell Home brand name. P&S will continue to use the Honeywell Home brand name. It is the leader in residential thermostats in North America. Our license for that brand name goes another 32 years, I don't think in hopefully most of our at least work lifetimes that we'll have to worry about that. That's very strong. We love that brand.
You know, as a result of the spin-off, we have a couple facilities where we sublet real estate to Honeywell. We do still manufacture OEM, a few small products for Honeywell. It's a very small part of the business. There are products of Honeywell's that ADI does distribute as a distributor. Again, it's not a big part of the business. It's a relatively limited relationship, but we think it's a good commercial relationship as we go forward.
Okay. Great. You know, thank you. You know, you briefly touched on, you know, different businesses, different capital structure. Can you elaborate on that, you know, a little bit? You know, what does financial policy look like for the two companies, you know, post-spin? Maybe touch on the debt conference, if you can touch on leverage targets, ratings targets, maybe broadly capital allocations as you go forward here, post-spin.
I think, Resideo today, let's start where we are today as a combined company, because I don't think it's really going to change much, at least in the short to midterm post-spin. Resideo today is a, you know, high BB rated lender. We have a very, very strong credit profile. Because of the Snap acquisition and because of the settlement of the IRA, we have looked to, we've let leverage get up a bit higher, but very intentionally, and we thought it'd make a lot of sense. Leverage today is, you know, around 3.5x , which, you know, higher than we want it to be on a run rate basis, but very, very supportable by the business and very rational if you think about the opportunity to settle that IRA.
We'd like to target leverage at more about a 2x basis. Right now we would say, you know, de-leveraging the company to get down to a net leverage of around 2x, it would be the primary capital allocation strategy of the company. That doesn't really change for either business upon spin. We think both of them will end up in about the same spot. You know, basically, you know, we'll work through this and we'll obviously have Investor Days and bring models out at the right time. At the highest level, you would think that, you know, there's a certain amount of EBITDA in each business. There's a certain amount of cash flow to each business. The cash flow profiles of both businesses are relatively consistent.
We'll take the existing EBITDA, we'll take the existing debt, we'll split it up in a way that makes sense, you know, go through all the gyrations to make sure we have the right debt on each company. Both companies, we would expect that spin to have, you know, a little bit above 3x net leverage. We would expect both to be, you know, good BB credit rated just below investment grade. We think the primary policy of both companies post-spin will be to de-lever to the appropriate point. Right now, we would say that's probably, you know, something below 2x on both companies. You can argue on the product side of the business that there are some peers that have lower leverage, so maybe the target at P&S should be a little bit lower than 2x.
You can argue there's a distribution company, maybe there's a little bit more leverage there. I think as we sit here today, you know, we would say that de-leveraging down to the appropriate leverage level based upon the peers and competitors will be where we focus, and we want to maintain those strong ratings that we have on both businesses.
Thanks, Mike. One more question on sort of spin related, and then I'll move on to other topics. I guess as you look forward here in terms of M&A opportunities, how do you see each segment looking at sort of M&A opportunities post-spin?
I think post-spin, you know, first I would tell you that, you know, having been around this a bunch, you go to a bunch of product managers and category managers and ask them for a list of potential M&A targets, and you will get a list much longer than is ever actionable. We have no shortage of pipeline that we're speaking to. I think you view that pipeline as both the opportunistic pipeline, would we consider this if it came to market? And you have what's really important, what's the strategic pipeline? What are those things that you want to say, "Hey, that would be a great fit, and whether somebody's looking to sell it or not right now, we should be maintaining relationships with them and talking about it." I think M&A will be part of the strategy for both companies.
Neither one of the businesses is a roll-up. I think they are both out there, M&A is strategically important for growth, but it's not a roll-up strategy. On ADI, you know, we have over 100 locations in North America right now. We don't need to go roll up a whole bunch of locations at ADI to grow the footprint. We think there's opportunities to expand into new markets and new products, but not really from a just physical location standpoint. Same thing at P&S. We're in, you know, a number of categories. We think we're well-positioned in them. We think we have opportunities to grow either in those categories or adjacent categories. That we can do organically or through M&A, we'll keep evaluating those opportunities. It's not a imperative to go out there and roll things up.
The only thing I'll say on M&A is, you know, during the spin process, we're actually really fortunate that because the two companies operate very independently, the operating folks, the sales teams, the marketing teams, the operating teams, the product development teams are very, very isolated from the activity around separation. The teams around finance, legal, HR, IT are working at 150% capacity on those type of things. Where does M&A really hit sometimes? It hits all those people. Those are the people who get M&A done. The likelihood of us doing M&A prior to the transaction are pretty limited just from a capacity standpoint.
We can't take those same resources that are 150% working on spin and say, "Oh, by the way, we're just gonna throw an M&A deal in here for you to work on." If a perfect deal comes out, we're certainly not afraid to go look at it. I think right now we're focused on getting the spin done, getting it done right, setting both companies up to be successful, and then let them both pursue the strategies post-spin.
Great. Thanks, Mike. The next topic I want to touch on is tariffs. You know, what has been the impact of tariffs, you know, so far, and how is the company mitigating potential tariff-related risks going forward?
I think, by the way, this could change any day. Let's all just acknowledge the uncertainty that's out there with tariffs. I think last year as we went through the uncertainty of tariffs, the teams executed really, really well. They were not overly impactful to the businesses last year. A little bit more impactful at ADI. At P&S, you know, much more minimally impactful the way they were implemented. At ADI, we do source product both on a 3P basis, our third-party suppliers, as well as on an Exclusive Brands basis out of Asia, some out of China. China's relatively limited, but we do have a small amount of exposure there. Last year we were very, very effective in passing through to our customers any cost increases that we had. Working with our customers, they understand that.
Because most of our business is on the third-party product side, it really impacts all the distributors the same, and we all raised our prices last year and offset that cost. In fact, last year at ADI, we did have a benefit because as you think about the timing of, passing through that price increase, you're carrying a product at $1, you're selling it for, you know, pick a number, $1.20, and the price goes up by 10%, you raise your price, but your inventory is being carried at the lower pre-tariff price. On the front end, you get a bit of benefit. On the back end, if it ever unwinds or whenever that happens, you get a little bit of a detriment. That could be whenever it happens.
We did get a little bit of positive boost last year at ADI, 20-40 basis points of margin enhancement for a short period of time between Q2 and Q3 as we sold through inventory that had a lower carrying cost as we waited for the cost to roll through. That's a little bit of a headwind going into this year that we've got to be overcoming on a year-over-year basis. At P&S, you know, lower impacts, again, very much able to offset the impacts of tariffs with price, with other strategic alternatives, we continue to look. The one thing that we've said is from a tariff standpoint, the biggest risk is in Mexico. 98% of what P&S sells in the United States, we manufacture in Mexico. We have a near-shore strategy around manufacturing.
If anything causes USMCA to be impacted, that would be impactful to the business. Right now, almost everything we sell is excluded from tariffs under the USMCA. You know, if that changed, that would be impactful. We've got a very long, extensive playbook we've developed sitting in the bottom drawer to pull out if we ever need it, but hopefully, we won't need to do that.
Okay. Thank you. you know, I wanna touch on sort of inflation more broadly than the business. It's somewhat related to tariff, an answer that you've had. If you can perhaps touch on how inflation broadly has impacted the two segments.
I think recently it's been relatively minorly impactful. If you go back to COVID and the supply chain disruption, you know, obviously there was lots of price activity going on there. There were lots of things from a pricing standpoint and margin standpoint that got impacted. Over the last couple years, I think inflation has been relatively low in our business, and we've seen very little pricing activity over the last year or two as it relates to cost inputs. We keep an eye on it. We don't think there's anything today that's dramatic. One of the big things out there today that keep an eye on obviously is the whole memory and chip issue that's out there. We all read about it every day.
You know, we use chips in our products. We like to say that in our products, you know, we have one chip as opposed to a car that's got, you know, thousands of chips in it. It's not, it's not nearly as impactful to us as it is to others, but something we need to be thinking about, less from an inflation standpoint, more from just ensuring we have a supply standpoint. We've got a lot great supply chain team that's really on top of that and really focused about it. Overall, we think the inflation today is relatively small impacts and, you know, generally able to pass through whatever price increases we're getting.
Okay. Great. guess I wanna touch on sort of product-related questions before we move on to some of the outlook and recent performance. you know, can you touch broadly on innovation? You know, which newly introduced products are you most optimistic about, to drive future growth at the company?
There's a bunch. you know, I think again, most of the product innovation's on the products and solutions side of the business. In fact, first, just briefly on the ADI side because it's important there, but it's a little bit less relevant. We talked about our Exclusive Brands opportunities there and how that's a part of the business. That really came out of the Snap acquisition, was very, very focused on the residential AV market. As we now look at the resources we have there, the R&D resources, what we look for on the Exclusive Brand side within that distribution business is: Where is the market need not being met by the third-party providers? Where is the market looking for a solution that third parties are not providing, and how do we add value into that?
And if we think that that value is there, we'll look for that opportunity. And we think, you know, ADI's presence on the commercial side of the business is very strong, and we think there's opportunities there where we can identify market gaps in existing products and bring products to market to allow us to grow there. We launched over 400 new products last year from an ADI standpoint, which is really, really good. We think that will continue to be out there, and those products are in numerous categories. On the P&S side, you know, since the spin from Honeywell, for the first few years of the spin-off, the company was more focused on fixing its operations than NPI.
We had to bring together some disparate product companies that existed within Honeywell, get them on a common operating platform, rationalize the manufacturing base, work on the supply chain. That was really the most important step, probably to the detriment of NPI. Today, over the last couple years, the team has been very focused on bringing new products to market, whether that's our smart SC5 smoke and carbon monoxide detector, whether that's our new thermostats, the FocusPRO, the Elite PRO thermostat on our thermostat line, some new products that we're launching on the security side. All these products are really enhancements, improvements, updating of products that we have in existing categories. While they're really important, we're very excited about them, we can't keep many of them in stock.
They really are more about bringing the products that we're already in up to the current and beyond the current market specs that are out there. As we think over the next three to five-year period, you know, the roadmap we're following is, let's get those products all up to speed. Let's get our existing portfolio where it needs to be. Let's then look for adjacencies within our existing categories, and we've got a number of those that we're thinking about. Surveillance within the security space at P&S is a good one. You know, we've typically been very strong in the historical security side, control panels, you know, access, detection sensors, but we haven't been on the leading edge of surveillance. We think there's some opportunities there. We think about those expansion opportunities within our existing categories.
Then beyond that we'll say, "Hey, what are other adjacencies that we can continue to develop products in?
Let me jump in here for a real quick second.
Yeah.
I think one thing to keep in mind about the Products & Solutions strategy tied in with new product introduction is about differentiation, and it's about the, you know, the features and functionality that we provide relative to the comp set in a spec-specific product family or product cohort. You know, we're attacking the market tactically, as Mike said, with the Elite PRO. That's really targeted for the high end of the thermostat market to go up against the peers who produce products in that set. When we launched the Focus PRO over 12 months ago, that was targeted at the low end of the thermostat market, and that's been very successful. It's gained a lot of adoption.
It also allows us with, you know, when we come out with new features and functionality to allow us to price for the value we create for the end user. When you take all this into account with some of the structural efficiencies that we've been gaining on an operational standpoint, that sustained the 11 consecutive quarters of growth of year-over-year gross margin expansion.
Part of the work that Tom, our leader of the segment has been spearheading is to make the operation, the assembly, the production even more efficient and to re-platform down to, you know, one or two platforms per product family, which will then allow for even more profitable production downstream. This is core to the current strategy as well as the long-term strategy and one of the underpinnings of continued margin expansion that we see in the future.
Thanks, Chris. That's very helpful. I guess maybe the last question on, sort of on the product side, you know, AI, very topical. You know, we have multiple panels here over two days on AI. Is Resideo using AI and how?
I've never heard of AI.
Me either. Hi.
Listen, I think there's two ways you think about AI within Resideo. How are we using it in our products, and how do we use it in our company? Within our products, there's lots of opportunities for AI. I think the, probably the easiest one to talk about something like smoke and fire detection or or surveillance, I'm sorry. You know, distinguishing between when a squirrel crosses your product, your property line versus when a person crosses your property line, is the beginning of it. It goes way beyond that to understand, you know, what's happening around your house. Surveillance becomes the new security over time, and AI's got a huge role to play. How do you put that at the edge? How do you think about managing that?
That's an easy one. I think in many of our products, we think about the data that we capture, and how do we analyze that data. AI plays a huge, huge part of that. With across our product portfolio, there's a number of ways we're looking at AI to enhance the value of those products. What's really good about our products from a disruption standpoint, you know, almost everything we do has to be installed. We build a product, that hardware has to be installed, and we're talking about the installer having to go do that. AI can do a lot of things, but it cannot yet go out and, you know, put a smoke detector in your ceiling or can it go and put a camera up in the corner here.
We think we're really protected from the disruption of AI in a lot of ways because our hardware is what captures the information that enables AI to be productive, and we think we're in really well positioned to benefit from that. Obviously internally, you know, we get lots of data, whether from our customers, whether from our products, and how do we analyze that data to know how to make better products, how to better serve our customers, how to better, you know, meet the needs of both our direct installer customers as well as the end users is something we're constantly looking at, as well as sort of just the general infrastructure of the business and things you can do to optimize your sort of internal processes and deploy AI where you need it. We're looking at all those.
I get most excited about, you know, just the amount of data that we have. Our products are capturing data, our smart products, the things that we're doing. How do we look at that data in a way, how do we analyze it? I think AI is a real enabler around those things.
Great. I want to touch on sort of recent performance and outlook. You know, after this and this, you know, question that I have, I do want to open it up to, for the audience. If you do have questions, prepare them, and we have mics that can help you. You know, I guess, you know, starting off on the recent performance, you know, the company's fourth quarter performance exceeded your expectations. What are some of the key drivers for that results exceeding your expectation?
If you remember for those who were there, we actually took down our expectations at the end of Q3 when we guided Q4. You know, we felt we were doing great the first half of the year despite the tariff disruption. Coming into, you know, Q4, we saw two things out there that were providing some headwinds. One was we were going through a system implementation at ADI and all the headwinds. Everybody who's done something like this knows you go through some headwinds. Then two, the HVAC market at on the P&S side was really being impacted by some regulatory changes that were out there. As we thought about expectations for Q4, I think most things were pretty much in line with our expectations. We got through the implementation of the ERP system at ADI. That's behind us. The system's up and running. We're good to go there.
I think on the HVAC side, there were a couple things that were more positive than we expected. One is that the weather helped us. Weather is an interesting thing in there, and you know, the worse the weather, particularly the small distribution customers, they will come out, the small customers come out, and they're buying more for the immediacy of projects. As weather turns, you get some benefit from that. The weather was a bit worse than we thought, so that was really good. The other thing is, you know, as we've said and thought, a lot of our other channels, you know, the retail channel, some of the other areas really were doing quite well.
While the HVAC headwinds that we saw out there were not quite as bad as we feared because of the weather, the rest of the business has been performing really well. We feel good. We think we're taking share in many of those areas. We don't think the market has fundamentally changed, but we think we had a bit more share activity given the new product launches, given our go-to-market actions that are out there that are helping boost up the business a bit.
Great. Then maybe, you know, if we can touch on the outlook for 2026 in a little bit here. If you can discuss some of the key assumptions that's driving your guidance for the year.
Yeah. I think the first one, let's acknowledge we're in a very uncertain macro, right? When you're in uncertain macro, I think our philosophy, my philosophy is don't try to predict the future. Like, you know, we can't tell you, if you asked us three weeks ago, would we be, you know, going, taking action in The Gulf like we are? You know, we couldn't have predicted that. Really hard to predict, and even harder to predict sometimes with the current administration. So our assumptions in our model and our guide are that, you know, the macro is gonna stay relatively where it is today. We were talking about housing earlier. We don't expect it to get better. We don't expect it to get worse. It could change. It could change tomorrow, right now that's our expectation.
we're talking about the business on the top line. It's about a 5% growth company. We've said that we think ADI is gonna grow a little bit more than P&S, so you can sort of split the baby on that and, you know, round to where the numbers come out. It is not 10% and zero, so if you're trying to think about it, that's not the number. You know, we think about the underlying activity being, you know, continued anemic housing performance. We are gonna continue to bring new products to market and do well with those products. We think ADI, particularly in the back half of the year, given the challenges they've had this year with that system implementation, has a relatively easy comp in the back half of the year.
We think we're gonna continue to see improvement there. We'll capture a little bit of share there like we typically do now that the team can really focus on our usual operational excellence and activities around that. Over on the top line, you know, we think we're really well positioned to be executing in a market that we think remains uncertain and, you know, not very in you know growth-oriented. On the margin side, you know, we're talking about margins being up slightly, I think is the way we worded it. Slight improvement more on P&S than ADI. We talked about that headwind we have at ADI from a performance standpoint, given that benefit we got last year from the price increases that went up there.
At P&S, you know, we're gonna continue our efforts to enhance margin. We have just announced our 11th consecutive quarter of year-over-year margin increase. We're not gonna have 142 consecutive quarters of year-over-year margin increase. We think we're still have room to go, whether that's new product launches, continued efficiency in the supply chain, but we think that we'll continue to see a little bit margin improvement. Then cash flow, you know, on our call, I think we said that, you know, cash flow next year will be, you know, similar to last year. You could really word that as at least to be similar and at least or about the same words. We have a little bit of a hard time just given the ability to guide cash flow under SEC guidelines and adjust cash.
We know that the spin creates a lot of uncertainty around timing of cash flow, so we don't wanna specifically guide. From an operating standpoint, we feel really good about cash. A couple of people have asked, you know, we settled the IRA, where's that benefit? It's there, but we also offset that with interest. We had to borrow the money to pay for that IRA, so part of that benefit from an EBITDA standpoint gets offset in interest. Just from a working capital standpoint, we feel great about both ADI and P&S and the cash flow conversion characteristics of both companies. P&S specifically had a really strong working capital cash flow conversion last year.
We think it's returning to more normalized levels this year going forward. Year-over-year, that's a bit of a backwards. It's not a backwards from a performance, it's just getting back to normalized levels.
Great. We have a couple of minutes. Any questions from the audience? All right. Mike, Chris, I think it's a good time to pause. Thank you very much.
Thank you very much.
Appreciate the time.
Appreciate it.
Thank you.
Thank you. Thank you all.