Resideo Technologies, Inc. (REZI) November 11, 2026 Conference Transcript

All right. Welcome, everyone. Thank you for being here. My name is Treban Srivastava. My partners and I cover sustainable energy and mobility here at Baird, and I'm very pleased to welcome Resideo to the conference today. I understand you guys have some slides, so I'll turn it over to you guys, and then maybe we can go slides. Okay. We can just dive straight into questions then.

That'd be great.

Yeah. Okay. So maybe just to level set everyone here, I know you guys reported earnings yesterday. So maybe just talk about some of the trends you've seen. And yeah, where do you think about going forward? And yeah. So trends are just trends? Trends, things you've noticed, demand.

So, okay, so I'll give it a brief, and then if you want to follow up, Shane. We just announced Q3. So one of the things that came in Q3, there were some risks we identified in Q2, and we said, here's some things that are going to be occurring in Q3. And there were some challenges. But this past quarter, I think we did a nice job of executing to not only address those issues, but then perform. We have to, we could go through kind of how our business is structured. I'm assuming you guys know, but if someone says, we don't really know, happy to explain more of our business. But we have a core business, which is all of our segments, excluding OEM security. And in those core businesses, we posted 6% growth. In the OEM security, we had a contraction as expected, which was previously announced in Q2. And in that 6% in our core business, what was really great was it was across the board. And so we saw growth in our HVAC market. We saw growth in our retail market. We saw growth in OEM combustion. We saw growth just across it and in our safety business. And so we were very pleased with that. So that's kind of the trends now, of course, you know, in the residential market, which is what we serve. Is everyone familiar with Resideo in terms of what we do and what our business and the core business is? Okay, so I've seen some people shake heads. No. What we do is we provide the control and sensing systems that focus on the critical infrastructure houses of the houses that provide comfort and protection. So what is that? So that's your mechanical system, your HVAC system, could be your boilers, furnaces, those systems, as well as your safety systems. So that's the things that are going to be detecting smoke, fire, nauseous gases, those things, and then security systems. And that's the core businesses. We do have two OEM businesses. One's an OEM combustion business. So if you go to your house and look at your water heater, there's a control valve at the bottom controlling the gas and the combustion flames. We make that for many of the major OEMs. I could go through all the lists. And we do the same thing for the boiler companies in Europe, as well as furnace companies, as well as forced air heaters. So that's our OEM combustion. And then we have a business that we'll be exiting, which is OEM Security. And that's where we historically have made products, designed the products, manufactured the products, delivered the products to our customer who put their brand and then competed in the market against us. We've already exited out of all of the European customers, and we have a remaining major U.S. customer, which is winding down over the next time. So that's the really short version of who we are. Okay, so anything you want to add?

Well, just to kind of cap at the beginning, you started talking about the Q3. I just want to hit on a couple other things that we talked about in the quarter. Tom mentioned 6% growth. Overall, we were 3%. That difference was a non-core product line or business line that we call OEM security. It's been documented well what's going on with that business, but in the core, 6%. From a margin standpoint, like everyone, we were dealing with inflation costs. We did some price increases that we started to realize by the end of the quarter, so they weren't enough to fully offset the, call it, 13-ish million of inflation that we saw in our COGS. So there was a bit of a headwind there, but even with that, we were still able to grow our margins year-over-year from a growth standpoint. And then as you work your way down to EBITDA, we grew our EBITDA margins even better and even faster. EBITDA grew faster than gross profit. So I bring that up because that's part of our model. Our long-term model is 4% or 5% top line. We want to grow margin at somewhere between 180 to 100 basis points a year and then EBITDA at the same while investing pretty heavily in R&D for product, which I'm sure we're going to talk a lot about here in a few minutes. But at the end of the day, we want to grow EBITDA about twice as fast as we grow that top line, and that's the five-year model that we've laid out.

And for those of you not familiar with us, you probably know our brand, and they're probably in your house. One of them is Honeywell Home, and the other is First Alert. So these are brands that, you know, pretty common in every U.S. home. We sell 15 million thermostats per year, about an order of magnitude bigger than anyone else. We sell 24 million smoke detectors every year. So good chance if you go take a look in your house, either your water heater, maybe your thermostat, maybe your smoke detector, good chance we're in there.

Okay. So, thinking about, like, your major markets, your end markets, where are you seeing, like, the biggest traction in growth? Is it in residential? Is it in HVAC? And one of the longer-term opportunities there?

Yeah. So, we call for a five-year time horizon growth model of 4% to 5%. So, that's given a flat situation and, you know, a non-improvement in the overall residential housing market. And the 4% to 5%, you could say, well, you're doing that in the core. We're saying that's sustainable long-term. In terms of retail versus the professional channels, the safety products are primarily sold through retail. We showed a very nice growth there. That was 15% for Q3, performed well. We introduced a brand-new product line that has the sexy name of UL 10th Edition. But putting that aside, it's actually a great product because it's a platform for us that will then enter into international expansion as well as multi-tenant, as well as some other derivative products. So retail's doing well. The professional distribution channels are also executing well. In terms of the HVAC market, it's done great. It's not including the OEM security. Our general security market is flat. It's not doing that great right now, but... What we're about to just release is a series of products and a platform that it's based on that actually is the first step for us re-energizing our security portfolio.

Okay. So, I mean, in those new products, I mean, where are you seeing, like, the biggest uptake with customers or what's getting the most traction?

Every quarter, it's a little different. You know, we're seeing everything we're building on, right? So I got to the company about three years ago. I joined it. So we were a spinoff of Honeywell, as you can imagine. That's how we came to be. And Honeywell had underinvested in this business, even though you can take us all the way back to the 1800s and the invention of the electronic thermostat. But at the end, it had been underinvested. And when I came in, one of the key things that was obvious is the portfolio needed to be revitalized. And there was a lot of opportunity and massive domain expertise and a distribution channel and pros that were so loyal to our products for what we'd done over the years. And so we're very focused on the pro. We've invested in that massively. And first thing we did is we revitalized the low end and the high end of our thermostat, and that triggered growth right there when we did that. We invested in some securities that gave a little bit of a kick. We reinvested in the safeties with this new addition, and then we do a little more with the thermostat. So we're reinvesting in all of it, and you see just a little bit up this quarter, it was the HVAC this quarter, it was the safety this quarter, it was this. And it's a nice stair step. So if there's a chart that we put in part of our presentation, which shows our core businesses and the year over year growth for the past seven quarters, and you see a nice consistent growth across all of them. And what's happening is each quarter, they're all kind of ratcheting up and down. But everything has been performing well, but sometimes each quarter there may be a star for that quarter. But as new products come out, what have you.

And then just kind of thinking about, you know, the competitive landscape, how would you kind of define where you guys stand in terms of your products, you know, both your legacy and your new ones?

Sure. I think, again, you're going to have to, I'm going to split it into the kind of our comfort products, which is basically our HVAC as well as our water. Europe uses water for delivering energy, so hydronics is done, so that's why those two are together. And I'll group those products together. In the U.S., I gave a comment about the size of our, like, our thermostat. That's just like the face of what's behind it, and the depth of our product line for basically controlling and sensing related to mechanical systems, ventilation, filtration, humidification, dehumidification, zoning, and then there's all these other accessories. I don't think there's anyone that has that depth of an offering, and we make sure those products work. Very well together. So the pros who are dependent on our product, when they go to the field, it's not just a thermostat they're trying to integrate into some random other control systems. It's all a platform, and they know they're going to be able to solution that product with that home with our products. And so in Europe, there's a little more competition. We had kind of underinvested. We're revitalizing that, and the next couple of products are actually going to be focused on Europe. And it's a market that we've done very well, I think, in terms, again, the expertise and the domain and the depth of the product line serve us well. In terms of safety, in the United States, there's us and KIDA are the two big names that participate in the U.S. safety and smoke and gas detection business. In Europe, we have zero market share, and it's for a variety of odd reasons that really don't relate to the marketplace or ourselves. But one of the reasons we created this new 10th edition platform was not only to consolidation and improve margins, but was also that platform that we could then enter the European market. Over there, there's a couple of companies. One's EI, and the other one's Sitterwell, but that's who we'll be addressing in competition. Security is a business. In 1929, we created one of the first residential burglar systems, and that was under a Demco. We didn't invest in that business, and as it grew and it's become a very large business, we still just let others kind of capture share for a market we should have risen with. There is a, we still have a reasonably sized business there, and there's a lot of opportunities. The pros know our products. The things that we are going to be introducing in the next couple of months are going to be pretty foundational for us to re-energize that marketplace.

Okay. So when you think about, you know, the new products that you're launching and your expansion to Europe, would you say that there's like any sort of capacity constraint or constraints on specialized components that you're seeing, anything of that nature?

Well, right now, there's obviously there was a memory, or there is kind of a memory shortage. We've been very fortunate. We saw it coming. We built up strategic inventory of some supplies starting last year. We've had no shortages at this point. We've been able to execute. We've also had to build up certain other integrated circuits, now printed circuit boards of the constraint. There's just been kind of a rolling list of things that have been. We have not been supply constrained at this point. Which has been great. So in terms of going forward, we have made sure that we have a focus on what we need to execute for the plan. In terms of factories and capacities, we're basically revising our factory footprint. We have good utilization. We want to have great utilization levels, and that's requiring us to shrink some of our existing factories. We have three factories that we're closing at this point. We'll be in the process over the next 9 to 12 months closing those, and that'll improve the efficiency of the remaining factories. There's probably more work for us to do that to further improve the utilization of factories and improve our margins.

Got it. I just wanted to double-click on that point you made about memory pricing and circuit board constraints. You know, how do you think about, we've obviously been in an inflationary environment recently, so just how do you think about, you know, the price-cost dynamics in your business and pricing in general?

So, in terms of that, I mean, one of the issues is there's a pricing lag, right? So, as the inflationary cost came, even as we foresaw it, the ramp up. By the time we kind of calculate, we thought it was actually going to be a blip, the memory, because we use DDR4 and DDR3, older generation memory. The data center demands DDR5. We thought we weren't going to be impacted. We covered our supply, but the pricing of memory, even though you get an allocation, you don't get priced until right before delivery. So that got us a little bit, and we have a lag when we announce pricing because our customers are distributors and others, And there's typically 60 to 90 days on a lag. So as that price hits us, it takes us a while to ripple it through. One of the challenges I mentioned at the start of this discussion was Q3. We had about $13 million of inflationary costs, but we only had $3 million of price recovery. By Q4, that all offsets because we're past that 60 to 90-day window, and we catch it up. Now, we have forecasted cost inflation for 27. We'll be implementing a price increase here at the end of the year that'll take for the next several quarters, and we'll be monitoring. We haven't received pushback. We have a lot of strength with the professional channel and the distribution channel. We've had zero pushback on this. I think they understand the inflationary costs, and I think they appreciate the value of what we deliver in our products.

Maybe it's a good segue just into margins in general. How do you think about the longer-term framework and key milestones that you want to hit in the next one to two years?

Yeah, so we want to get our margins, you know, like last quarter was 40.4, but for the year, we're kind of in that neighborhood, let's just say 40. Our goal is to be 43 to 45 in three to five years. But if you look at where we are with the 40, there's in the past couple of years quite a bit of margin improvement. And there's a number of things that how we're going to do that. First, it's an easy one, products, right? Design products that create value, have higher value. You deliver more value, and the more efficiently you can deliver that value, the better off. So, one, design MPI to create value. Some of that's into new markets, some of that's into adjacencies. Some of it's just redesigning the products to deliver and improve. So, I think I mentioned UL 10th edition. One of the primary reasons we did that was margin improvement. And, you know, we're redesigning certain of our thermostats to use less DRAM and change how certain things work so that it's more cost-effective. So we're doing that. So product design, that's one. Second is factory utilization. We just talked about that. How do we, you know, we've already closed a couple of factories. We'll be closing the three that are in the queue. We'll be looking and improving that. We're using more robots. We basically have a lean process that we're continually going through, and over the past couple of years, you've just seen a ratcheting up of the margin, and so you see the trend line of where we're going. Now, it's not going to be perfectly linear. It's going to be a stair step because nothing is, but we want to make sure we're using our factories at very high levels. And the third one sometimes people don't think about is quality. You know, the pros count on us that when they roll that truck out, that they're not going to have to do another truck roll to fix in something, that when they install our product, it's going to work. That makes things efficient for them. We could talk about a whole bunch of stuff we do for the pros and how we think about them and our product design and what we've done. But one of the key things is a high-quality product in the field can only be accomplished by quality all the way back to design. So you design for that quality, and when that hits the manufacturing floor, it's first past yield means that whole line is more efficient. You're not dealing with a scrap. You're not chasing your tail around it. You're getting a defect rate in very low parts per million, and then you know it's going to be great in the field, and you're not having to do the service, the warranty costs, which also come into COGS. So all of those things together is what we're going to keep doing, focusing on all three of those to improve our margins to get to our goal of 43 to 45.

Right, and these are all structural things that we're doing. So the price increase that we keep talking about is really just to get our heads back to water level, right? These are efforts and initiatives that are going to drive that one, call it one point a year that we have in our model. And it's pretty much, you know, we're doing it with, despite the market, the market can do whatever it wants to do. We're doing this structurally for the company for our margins to ultimately get that EBITDA margin up, like I was talking about.

You know, on the topic of factory efficiency, how do you think about, like, automation and, like, allocation of engineering dollars? There's a general question we've been asking our companies is, you know, what are your views on AI implementation, and, you know, how has that changed over the past year or so?

Two very different questions. I'm going to... I'll go to the first one. Normally, I would say the primary purpose of our R&D investment is to create new products that deliver new value to the customer. That's the primary. That said, we do do about 20% to 30% for value engineering at all times. Basically, same level of value of what the customer sees. How can we do that more efficiently? So that's one piece. In terms of factory automization, we actually have a team that's fully focused on that. We create our own robots for our factory. We're manufacturing 150 million parts per year. So we're vertically integrated because we don't want to transfer that scale we have out to third parties because that scale is of such size that it allows us to be even more efficient in our products. And part of that is we've been increasing the level of robotics and automation we have, and yes, we do AI inspection and visual inspection and what have you. But, I mean, AI actually is something that we're going to be leveraging throughout the company more to improve the efficiency of all of our operations, as well as the integration into some of our products.

Okay, that makes sense. Maybe just zooming out a bit here. I mean, you recently announced the divestiture of ADI from your business. I mean, just kind of, I think that was in August. So maybe just, you know, touch on, you know, what does the composition of the company look, you know, post that? You guys can be a lot more focused now. So maybe just a couple of thoughts surrounding that.

Sure. So ADI was the distribution business focused on low voltage products in the home and business. It had started out as just a security distribution business. ADI is a Demco distribution Inc. That started because our security products were Demco, but over time, less of their volume was coming out of our products, and it was just the security offerings, and they were starting to distribute much more for third parties, and less of our volume was going into them. And so there became this separation over years and years, where they're less than 5% of our distribution at this point. So we were pretty two distinct businesses. We operated in distinct behavior. There was very little cross-collaboration. They're still a very important customer. They're a great distributor, but they are separate and distinct. And so what the spinoff did, it allows us to focus on our business at a corporate level. It allows investors to understand our message of what exactly we do on our products business and allows the same thing to happen for them. They can focus on their business, their use of capital, and their focus on the distribution business.

And the other thing that we got out of that was we spun them off. We got a dividend back from the $900 million. And we used that $900 plus another $200 of our existing cash to pay down our debt. So we're down from $3.5 down to a little over three times levered now, which was important. It's not as far as we want to go. Our focus from capital allocation for the near term is going to be continued delevering, whether that's EBITDA growth or using the cash for paying down some of the debt. And I bring that up just because being as levered as we are, it's not, you know, Three and change isn't awful, but it does constrain us a bit. From my standpoint, I don't think it gives us enough flexibility that I'd like to see as far as using cash to do other things, right? Direct returns to shareholders, indirect returns to shareholders, specifically also M&A. We'll do tuck-ins here and there, even under the delevering mantra, but to do anything of any scale and size, we want to get that leverage down. So that's the focus for the next couple of years.

Okay. Maybe we can touch on that again in a second, but first, maybe on your point, just now, how would you characterize the split of sales as more direct, or is it still through the majority through distribution, and does that split impact, you know, your visibility in the out years until, like, 27?

So we really have two means of selling the product. Our products, we sell through distribution and professional distribution. And that is the HVAC channel, the electrical channel, the MRO channel. And then we have retail. And if you look at our products, the products related to our comfort business, 85% are going through the professional distribution, 15% go through retail products. And of the products that go through retail, we think over 50% are being purchased by pros through stores like Lowe's or Home Depot. And the safety products, it's about 60% going through the retail channel, 40% going through the professional distribution. In that case, it's the electrical distributors, the Sonopars, the CEDs, and what have you. And so that's how our products are distributed. Makes sense.

Okay. And then maybe touching on your point on capital allocation, just generally, you know, is there any types of technology that you still think that the portfolio needs, you know, if you were thinking about an acquisition, what types of areas would be looking into, be more hardware or software?

I think he was asking you.

Well, I'll start. Again, our focus is delevering. We have been an acquisitive company in the past. We intend to be that or continue to be that. So we got our ears to the ground. We're listening, keeping tabs on what's in the market, understanding what's out there. But like I said, it's mostly going to be bolt-on and tuck-ins in the near term. Nothing that I want to specifically talk about right now, but obviously when we have something come up, we'll make an announcement. But I don't know if there's anything else you want to leave there. But, yeah.

There's nothing in our roadmap right now that we need something in order to achieve our objectives. Oh God.

Okay, and then, oh, I have a question. Can I ask a question on the ADI separation? Do you have any systems, ERP issues that you had to separate?

So, we are, all of our factories, all of our operations are on SAP, and they were on a different system. They just had done a switch. They have some operations in Europe that are smaller that actually we had to host, and we are currently hosting some SAP for them. So there's a TSA for them for a small piece, a very small piece of their business to use our TSA systems, or SAP. No, because all of it was on SAP. It's still continued. We're current. It's all good.

Yeah, this business that's left after the spin has pretty much always been run as a separate company, and it's, you know, other than some of these TSA-related things that will roll off over the next 6 to 12 months, it's very much the same business.

They're independent, yep.

Okay, we have a couple minutes left, maybe just, maybe you could talk about your visibility in your order book, backlogs, you know, what type of trends are you seeing with customer conversations that you're having, you know, how far out are people booking into, things like that, Adrian?

Yeah, so one of the parts of our business is that... In terms of how our products are sold and the nature of the business, we sell them to the residential market. But a lot of our systems are basically, because they're the critical systems, they're repair and remodel market by the professional channels and the distribution. It's pretty much real time. We don't have a huge order book. So we know what the cadence and kind of the daily fulfillment and replacement rates are, and so we get the orders on a daily basis, and we're watching the tallies, and we're understanding it. It's nice because we have a very broad distribution base, and so there's not one customer who can swamp the boat or also throw everything off. There's just a lot of... DISTRIBUTION HOUSES, YOU KNOW, WE HAVE SOME LARGE CUSTOMERS, BUT IT'S A BROAD BASE. AND THE FACT THAT REPAIR AND REMODELING MARKET. It's a little bit different than, say, just residential new construction. We've done very well with residential new construction, especially with our safety products. Our content per home has gone up to $400 per house. We have relationships with 25 out of the top 25 builders, including some exclusivities. But we also, a big piece of it is the repair and remodel side and the replacement cycle for, say, HVAC systems. And it's just much larger, right? There's, there's... Every year, far less than a million homes being built, 600 to 800,000, and there's 114 million existing homes, and if you look at a 10-year replacement cycle, you're talking like 7 million new units going into that every year, so it's much larger, and the great thing about that is this is the critical infrastructure of the home, and so this is not stuff that people, it's not elective, that if your HVAC system goes out, you're going to fix it. And that does us well that we get buffered a little bit from the vacillations of the residential market.

Okay. I think we are at time, but if I could sneak in one more, you know, you still have grown considerably well in a pretty constrained housing market, still pretty challenging. Would you say that's just like a result of your relationships with your customers, or is it just the strength of your products? Maybe just a few thoughts around that?

So in the past couple of years, three years, we are going through a process, revitalizing the product line, very focused on delivering more and more value to our customers, making it clear that we are going to be their best solution every time they go into the field. And, you know, I could go through a whole bunch of examples, but it's going to take longer than 10 seconds. Okay. Fair enough. It's what we've been doing.

Fair enough. All right. Sounds good. Thank you so much, guys. Thank you all.