Conference Transcript - REZI 2026-03-03

Adam Tyndall, Analyst — Connected Devices Group

I'm obviously very happy to have the team from Residio here. I'm Adam Tyndall. This is part of the Connected Devices group. I cover Alarm.com, I cover Arlo and a lot of these ancillary areas. So Mike Carlett, who's CFO, Rob Arnes, that's how you say it, right? Arnes, 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 going to cover this via a fireside chat. Chris does have some slides for our education here, but going to kind of keep it light in a fireside chat. If you do have questions, please feel free to raise your hand along the way. So with that, Rob, Mike, for those new to the story, if you could just start with the elevator pitch on Residio, the company background, core market, and size, and key value proposition.

Michael Carlet, CFO

Sure. I'll start over the overall company, and Rob can get in on his ADI segment. But Resideo is a pushing $8 billion revenue company spun out of Honeywell eight years ago, operates in two segments. We have our product and solution segment that is focused on providing control and sensing products to residential homes. There's other pieces they touch, but that's their main focus. So 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, OEM-ing, like combustion for water heaters and boilers. So very much a product development company, innovating on the product side, developing products to be sold to installers. So 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've tried to put our manufacturing close to where the markets are that we serve. Each one of those markets that we're in, 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. So 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 and we are in some of those like filtration or or air quality but other places to go and in each one of the categories that the product solutions team is in there's opportunities for the community to grow those businesses and then we have a distribution business ADI that Rob runs that I'll turn over to what you talked about yeah thanks Mike so good morning everyone I'm Rob Arnes president of the ADI global distribution business been there about 14 years been leading the business for 12. for those of you that don't know us we 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

Rob Aarnes, Other

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 kind of what they need in a store environment. Always be digital first going forward. Roughly 100,000 customers, no end users, all professional installers. about a thousand brands we carry all the security categories from fire and life safety access control video surveillance commercial intrusion as i mentioned pro av resi av and and data communications our two geographies mainly uh 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 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 plus 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.

Adam Tyndall, Analyst — Connected Devices Group

Perfect. So you're hearing, obviously, this was a combined company that is in the process of a spin into two different companies. So, 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 to be consistent with the way that you manage the business?

Michael Carlet, CFO

Yeah, 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? We're the macro drivers of the top line. We think on the product and solution side. It very much is a macro cycle business, very closely tied to housing. Again, 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 there 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 product and solutions business over time. When we got spun out of Honeywell, there were some disparate products. We didn't have a consistent supply chain. We didn't have a integrated manufacturing base. And so 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. Now, we're not going to have 100 quarters of that at some point. 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 MPI engine that we're launching there, that's going to create some opportunities, which is a third piece of this is how do we think about that product lifecycle? What is the MPI 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? And can we do it in a way that increases operating leverage in the company? Obviously, investing, you know, to grow the business from an MPI standpoint, there's an R&D investment. How do we leverage that R&D investment? How do we think about it driving growth? And obviously, cash flow. Cash is always king. How do we think about the free cash flow character or six of the business? So 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. And so 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, but we do get more consistent margins online. So that's great to see. And then again, it's generating the operating leverage, you know, So having watched ADI for a decade, I joined the company about a year and a half ago when ADI bought the Snap-on business I was previously with. And for the decade I was with Snap-on, we looked at the ADI distribution business just as a 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 a guiding light there. We do think the top line 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 of ADI is our exclusive branded products, partly even before the SNAP acquisition, but really invigorated by the SNAP acquisition. A significant part of our business, double-digit percentages 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, but those products fill a need in the market that the third-party manufacturers that we distribute don't meet. And so we look to that as another growth engine of the company to continue to drive margin up.

Adam Tyndall, Analyst — Connected Devices Group

And you just reported results last week. Maybe just a brief recap about the quarter and then your view on fiscal 26.

Michael Carlet, CFO

Yeah, the quarter was, you know, pretty much in line with our expectations. Now, our expectations were lowered a little bit at the end of Q3. There were a couple of 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. But we would deliver 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 a lot about the call. ADI has been through over the last six months a system conversion. You have to go through these things every, I think, ADI is every 40 years. So 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. So 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 going to flip the switch the next day and something's going to 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. But going through that for six months always creates a little bit of a headwind. We think that headwind is totally behind us at that point, but that did compress our results the second half of last year, pretty much aligned with our expectations. And then on the product solutions group, 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. But that created a lot of noise within the channel from a stocking standpoint, from an 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. And even in the HVAC channel where we knew that headwind was going to 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. And so we saw performance that was a bit above our expectations, particularly on that side of the business. So 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 P&S, but both businesses performing well. Continues 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 it 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. And so we had that last year for three or four months. It probably drove, you know, 20 to 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 going to 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 going to see growth at P&S as well, both from a MPI perspective as well as a operating efficiency standpoint. And we think we'll have good growth in EBITDA. And 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, I shouldn't call it, a big indemnification liability tied to Honeywell's environmental mental issues, not ours. And so, you know, we've talked to them for years about settling that, and we were able to do that last year. So historically, it's been about $140 million drag, both on cash and on adjusted EBITDA. Last year, we settled it mid-year, so it was only a $70 million drag on those metrics. This year, that goes away, and so we do get a big boost around both those things.

Adam Tyndall, Analyst — Connected Devices Group

Yeah, and congrats on that. I know that was a big hindrance for investors. It was. Frustrating point. So yes, exactly. And then, in addition, you decided to 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.

Michael Carlet, CFO

I'm going to briefly, Rob, I'll let you talk about a lot about it because, you know, Rob's been asking to do this for a long time. Since day one, day one when I got here with Honeywell, yeah. At the 50,000 foot business, these two business, every business needs to be owned by somebody, you know, whether, whether, you know, Adam owns it, whether a PE firm owns it, whether the public market, somebody's going to own every business. And so these two businesses happen to be owned by Resideo. They got spun off together for a few reasons by Honeywell, but 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, but, 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. And so there's different metrics around them. There's different characteristics. And so we've always said we think we should and separate them, that environmental identification prevented us from doing it. But Rob, maybe you can talk about why you're excited about it.

Rob Aarnes, Other

Yeah, so to Mike's point, I mean, we have been owned by somebody since the late 50s. Okay, going back to Pitway, then Honeywell purchased Pitway, and then of course we spun out with the Resideo team and P&S, so as a distribution business, we've never actually been in an environment where it's just pure play distribution. So from a strategic focus perspective, a capital allocation perspective, it's always been shared, kind of fighting for dollars. And 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. And so, but 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 and so 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 the excitement that that the entire team is feeling again a lot of great a lot of good commercial relationships on the other side no no issues but to Mike's point if you were inside the business for the last year 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 residual security and some HVAC products that go through ADI. But 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. And then 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 and fighting maybe with our with our brothers and sisters across the table for for those dollars or return them to shareholders what's that or return to shareholders yes thank you very much Mike thank you very much we certainly want to get to that point no question we want to get to that point but that's why it's exciting for us and I think is it you know yes 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 talk to bankers and that's what the benchmarks are but so the benchmarks they take 12 to 15 months.

Michael Carlet, CFO

That's the time we should expect. That's about the timeline we're on. We're going through all the steps through that process. We feel good about it. There's some long poles in the tent. You've 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 well on path and we're excited about doing it in the second half for this year. And, 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. And so, you know, we're right on path.

Adam Tyndall, Analyst — Connected Devices Group

And investors are going to have kind of a choice, you know, between two different assets. You know, I suppose they could own both, of course.

Michael Carlet, CFO

We would love for them to own both. We'd love for some of them to own both.

Adam Tyndall, Analyst — Connected Devices Group

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 want to share with investors who may be thinking about that side of the business?

Rob Aarnes, Other

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, there are a number of key objectives, but that industry benchmark across all of industrial distribution. 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, investment banking community says that 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. And 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. But to be that kind of what I would call class of category killers. And then 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, but we've always been a part of another organization, right? So as we think about now standing on our own, we want to make darn sure that the subsequent quarters after we spin, we are proven to the world that we can actually operate, operate at a high level and build credibility that we are capable of standing on our own right and 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've 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 the mid-teens in terms of mix and that's about two and a half x the margin of our base product so we've got a lot of opportunity there that's more residential focus today to shift into kind of you know like 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 and then our growth in adjacent space categories as we leverage technology convergence now all systems right a lot of end user requirements are requiring all systems all products right security pro av data com to be on the same network we are the one-stop shop for uh for those large integrators and then 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 and 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 uh um a lot of that performance offerings to our shareholders and i know it's early but i'm going to pause for a second see if anybody has a question shy group i know it's every time i had the

Adam Tyndall, Analyst — Connected Devices Group

second presentation slot yesterday no questions we'll get there getting warmed up we're getting they're warmed up warm you guys up um mike uh you know one of the other uh opportunities for shareholder value creation on the equity side is your capital structure and decision to return cash to shareholders um you mentioned the liability pay down maybe just recap the balance sheet capital allocation kind of priorities uh right now for um residio yeah i think as we sit here today um and by the way we expect both companies post spin to follow you know generally the the same capital allocation strategy as we have today.

Michael Carlet, CFO

Over the long term, that might twist a little bit as each business stands alone, but 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. We've got leverage of a bit above 3X right now at the company, that leverage that is driven by, again, settling that IRA. You can argue for years that IRA was basically debt. We paid $35 million a quarter for eight years on that. So the gap accounting was very funky, how it shows up on the balance sheet with another 18 to go it was another 18 years to go yeah so you know settling 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 a you know sort we're levered a bit above three times i think you know if we were not separating the businesses and we just looked at you know running it we want to get leverage down below 2x we think we would be there in 18 to 24 months great cash flow in this business very predictable um and so we'd be looking to get leverage down below two, and then thinking about, you know, the right capital allocation beyond that. We think both companies, ADI and P&S, have lots of inorganic M&A corp dev opportunities, but we also know we have to be disciplined about that. And, 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 two X. And I think as we go through the separation, that's still going to be the core driver. We think both businesses, you know, we'll have, you know, double B, 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, we're part of our separation. You go through a process with the rating agencies to sort of get where they think you're going to be. And we'll make sure we're landing in the right spots. And then both will come out, both will generate cash, and both will be deleveraging. 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. So it might not be exactly the same with long term, but I think in the short to midterm, get it below 2x in that leverage and then make the right decisions for the business.

Adam Tyndall, Analyst — Connected Devices Group

And 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. What would be like a handful as investors try to think about what ADI could be over time And then, you know, actually how you operate. What are the main competitors actually, you know, from an operation standpoint? So valuation comparisons and then operating competitors.

Rob Aarnes, Other

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 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. But 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. And I believe now we can get to. So, you know, how do we do that, you know, to your question. Really a few different levers, right? Number one, the biggest lever that most distributors have is continue with fixed cost leverage, right? So we want to grow, keep our OPEX steady, and then start to the leverage, which we already have been doing a lot of AI applications to deliver OPEX productivity. There's a world of opportunity there. Two, and we talked about this a few times, continue to drive higher mix of what I would call electronic commerce. And it's not just e-com like traditional you know e-commerce website revenue but also EDI right we've got it every 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's that is if we can drive more of that business to what I would say you know something like north of 60 percent where today we're around 40 right we get a lot of leverage from doing that and 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. So 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 products that offer real value to our end users today. And we got a lot of that with the Snap acquisition. You know, 90% of that was focused in residential. We want to shift those R&D dollars, right? Not a way necessarily, but reallocate some of that to like commercial offerings where we've got 100,000 customers that can take advantage of those brands and those SKUs. There's real opportunity there. And then continue with strategic accretive M&A right and you know we're probably not going to 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 seven deals in the last three three and a half years there's a robust pipeline to continue to do those deals and make sure that everyone we we do is accretive to the business and in those kind of high growth categories pro AV and datacom specifically so the culmination of those things Our track record of execution, being out on our own to be able to allocate our capital where we know it's going to return the highest investment for us and our shareholders is how we get there and become a true category killer.

Michael Carlet, CFO

Adam, you just asked about comparison. I think clearly there's ADI and there's Westcombe. I think are the two within the commercial security spot that you would look at and say, those are the two leaders. And that's globally, by the way.

Rob Aarnes, Other

Yeah, those are the two big players, probably combined somewhere north of, I don't know, 60, 70 percent market share right around in that area, you know, something like that.

Adam Tyndall, Analyst — Connected Devices Group

Wesco's been a heck of a story from a stock perspective.

Rob Aarnes, Other

We can replicate that.

Adam Tyndall, Analyst — Connected Devices Group

I'm going to pause one more time. Any audience questions?

Speaker 1

So just bringing to the double-digit margin, I think the pro forma gross margin between ADI and SNAP was around 0.12 percent.

Michael Carlet, CFO

Obviously, right now you're operating below that. can you bridge us just right 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 years is that operating leverage versus tariffs is that 24 percent kind of a normalized number yeah i think on a gross margin basis you know getting back to where it was is is certainly an objective um if you look back actually because you're looking at 23 sort of pro forming where snap and ADI were prior to it. One of the things that happened is coming out of 23, as ADI went through COVID, 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 24-25 as pricing got a little bit normalized and getting to where it is. So right now, we're back at the normal run rate. Again, we think there's growth opportunity there, even outside exclusive brands. We talk about omnichannel and some other things, but there definitely was a step backwards, 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 24, you can sort of see where ADI was stepping down prior to there. Then 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, that residential high-end market has been a bit more challenging than we expect as softer. And so, 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 a growth as you go through the integration. Top line has been a little bit softer. 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, if you look at some of the competitors that are out there and see what's happening as well, has been a bit of a headwind. So put those two things together, that's really what's driven it. But we still think there's lots of opportunity. And then as Rob talked about, while gross margin is 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. Yeah, I think if you looked at the Snap business historically, you know, two-thirds to three-quarters of business was exclusive brands. As Rob talked about, you know, there's a lot of R&D that goes into that. So 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. And 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. So we thought there was still opportunity there to get sales. So 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.

Adam Tyndall, Analyst — Connected Devices Group

Right on time. Perfectly done.

Michael Carlet, CFO

Thank you for the question. That was wonderful. We're in Cordova 5 for the breakout. Thanks, everybody. Thanks, everyone. Thank you.