Resideo Technologies, Inc. (REZI) September 2026 Conference Transcript

Thank you everybody for joining us. My name is Dan Stratemeyer. I run a sales trading research business in the equities division. I'm honored to introduce for the first time as a CEO, I believe, at a conference, Tom Cern and his team members here. So congratulations again. And Chris Lee, head of strategic finance. What is it? What's your exact title? Is that it? All right. So thank you both and the team for being here. And again, congratulations on the Reese transaction. So this is the outline. We're going to start a little bit of an update on potentially some developments since the investor day, how that may or may not change your near-term outlook, and as we look out into 27 a little bit. And then we'll take a step back and talk a little bit more about the journey since you joined the company, Tom, and what you've done to get the company in the position it's in today. So let's talk about the OEM security business that is reducing a little bit here, a contract. I consider this non-core. I'm not sure if that's your words or not, but just give a little bit of a background to what came of that relationship, why it was announced when it was, a little bit of the forward look on that, please.

Sure. So let's just get this a little closer. Hopefully that picks up. So the question is about OEM security and how that's changed. So OEM security, we have two OEM businesses. One is OEM security. The other is OEM combustion. They're very different though. The OEM security business is a business where we function as an ODM for one major customer. And that means we create a product, we invest our R&D, we do all the development, we bring it, we manufacture it. We basically then put their brand to compete against our products in the market. There was a trade publication that said, well, if you don't like that business, why do you like this other OEM? The other OEM business we have is Combustion. And that's a business where we create a component for a much higher level assembly to many of the companies that manufacture water heaters, furnaces, boilers, heat pumps. It's very, very different because this business is very low margin. It's not – it's margin dilutive. And it's been a business where we've exited many of the accounts, especially in the Europeans. But we had one remaining account. and at the end of 23 beginning of 24 we had announced that that customer was going to be exiting over the next two years but that customer has remained with us and what happened is we were in discussions about what the second half of the year were going to be and what our revenue deliveries were going to be and there was a substantial reduction that occurred now not at the time of the investors but subsequent to that right before our earnings call the week before the earnings call we could not get to reasonable commercial terms on what our deliveries would be and what our pricing would be and so as a result there was a reduction in the revenue to the tune of 40 to 50 million um in the second half of the year and you can think about that about a third in q3 and two-thirds in q4 now that business as i said was margin dilutive the gross margin impact on it is about 10 million dollars total okay and it would be proportional of course to the revenue but i think in the short term that'll also be the EBITDA impact on those two quarters but we scale our operating expenses and we we've talked before about being very disciplined about how we do our operating expenses and they scale with our revenue we will quickly and have already taken the actions to adjust our operating expenses so that there is not a long-term EBITDA margin impact on this. We have already taken the actions to restructure it. And unlike most OEM businesses, this customer consumes our operating expenses pretty aggressively. So we spend a lot of time on the R&D for them, a lot on sales, marketing, legal, everything. So it is easy for us to scale those with the reduction in the revenue and how much is left of that customer what would be the impact in 27 and when you think about your five-year targets i believe the contract's up in 28 it is in in your long-term targets although you didn't know exactly when it may have left do you assume it's all out in the in the long-term targets that you already gave at the investor day yeah it was incorporated because we understood where the contract was going to go eventually it probably won't go to zero zero there'll be some residuals always on these contracts support and replacement products that's fine but substantially it'll be gone by the time and so if it's 50 million

dollars in revenue in 26 10 million dollars of gross profits and I assume EBITDA in 26. What is the impact to 27?

Right. So there'll be reductions year over year. We're expecting further reductions to occur in 27. But the good thing about this is we're now have, we understand the relationship a little clearer. We're already, we're taking the actions that related to the reduction that we're seeing here in the back half. So that EBITDA doesn't carry point we'll be able to adjust our expenses for 27 so that impact will not have a material impact going forward because again the gross profit on the account was very aligned with what our operating expenses so and dan let me just jump in because um you asked the part of the question earlier that wasn't answered so just to give everyone a sense of the size related to this large OEM security customer.

You know, the forecast at the beginning of 2026 was somewhere between 170 and 180 million. They performed in line with those expectations for the first half of 2026. As Tom mentioned, you know, we signaled a 40 to $50 million revenue drop in the second half of 26, which then puts, you know, the range exiting 2026 to be, you know, if you use 45 million at the midpoint, call it $130, $140 million. And then Tom talked about some incremental headwinds in the first half of 27. We think it's roughly a $15 million Q1 impact year over year, give or take, and a $10 million impact in Q2 year over year. And that's the extent of the visibility that we have today. And so exiting Q2, that's probably, you know, somewhere, you know, if you take the 25 off the, you know, the 130, you know, somewhere between 100 and 120 million is the range that we would, you know, you guys could use for modeling.

But I think the message you're sending is another $20 million of revenue down year over year, but minimal, if any, EBITDA impact. Yes, I think what your sign.

Okay, great.

And investors get a little concerned that there's that going on in this OEM business. Like I said, I consider this a little bit non-core versus the rest of your business. Is there any correlatory, if that's a word, is there any correlation between what's going on in that business and your regular way security business or any other of your businesses at all? This is a relationship that those people close to the story have been talking about for three or four years, right? So this really isn't a surprise to those that are focused on it. It's a little bit of a surprise that it happened right after the investor day and a little bit of the agita associated with that.

Timing was problematic. No question. It wasn't great. But the reality is this is an account that's not core. It's not strategic. It's never – we are not going to be an ODM. Our brands are worth too much. We put too much in the development of differentiated solutions to put someone else's brand on it. It's not a business we want to care for. It's not a brand that we want to do with any other customer.

Okay, let's move on from that. The Investor Day, I think you laid out five drivers of revenue. It adds up to, I think, something in the range of 4% to 6% or mid-single-digit CAGR between now and your 20, 30 targets. Can you remind us what those are and how those look going into 2027, especially in, you know, obviously a pretty difficult residential housing market?

Sure. So some of the big ones, I'll just make sure those are covered, probably the most important ones. One of the most is the MPI that we do and the creating of new products and basically additional value in the markets we exist and serve. as well as some adjacent markets that we'll enter. So we've got a roadmap that we've created that we want to execute on, and that is going to drive a big chunk of the revenue growth. So that's a big piece. But we also have things such as geographic expansion. That's another area. And if you look at our product, we're a global company, and we have different areas where we have strengths. And it's not something you can look at one market and say, well they're really strong there but why isn't it over there I'm talking let's just take safety in the u.s. the first alert brand is extremely well recognized and the product does very well for us it's executed well you can look to our numbers and the growth we've had in our safety business we have not competed in the European markets there's very little they typically rely very similar test standards there's a slight differences that the line voltages and some other things but the reality is that market is open to us we needed to have the platform we created the platform now we're preparing to enter the geographic expansion so geographic expansion I could go the other way on certain comfort products but coming back to us related to water some other things but it's we need to think more as a global company so that's a big piece you know we caught a lot of flack actually because we were conservative on pricing as well as market conditions. We are considering market conditions to be a major tailwind. We are looking at the market as it exists and saying, fine, that's the market we're playing. We're going to go win share. We're going to drive our growth of the business. Similarly, pricing. And just as we say that, of course, we have these shocks, the inflationary costs and what have you. But generally, we were assuming only a 1% price increase driving our revenue. Those are the big ones. Is there something else you think I should cover on?

I think, you know, just to talk about the new product introduction a bit more, you know, I think this has been part of our strategy for the last several years, and when we look forward around the opportunities that we can have from a growth and margin standpoint, Because, and I mentioned both purposely because, you know, our focus is around designing and manufacturing differentiated product relative to the competition. And when we're in the design of those products, they're margin accretive.

You know, we're improving upon, you know, the designs of the past so that it's, you know, beneficial on a go-forward basis so that when the adoption does take hold, it's a net benefit to the P&L. would you mind diving in a little bit further into each one of your segments obviously you're the leader in air safety and security you know energy and water could you give us a little more granularity on the drivers and what you're seeing in a demand side for each one of those businesses right now sure so there's a commonality to all of them but since we're focused on residential

there's two pieces to the residential side there is the repair and remodel side to it and then there's the new residential construction now they have different dynamics to them but we're about 80 repair remodel is our revenue base and there's a resiliency to that which is important to understand now we've done very well in our new residential construction and the amount of our sales per home and the growth of that and our relationships with all of the top really 40 builders but especially even the top 25 and how we've executed but let's go back to repair remodel in all those businesses in the markets that we serve if you deal with the comfort systems that's water and that's air the growth there is there's one there's a replacement cycle that occurs and typically the comfort systems in a house last somewhere between 12 and 15 years now people can push it off for a year or two but you really can't push it off you know once the say the igniter starts failing or capacitor starts failing you could patch it for a little bit but eventually that system is going to go so most people do a full system and the fact is our solutions have had real strength in the marketplace this is because of the domain expertise we have we invented the thermostat we've been doing it for 140 years sorry about that we've been doing it for 140 years and what's really important is we provide a trusted solution to that pro so when he goes in there and every house is a little different he knows that our products are going to provide him a solution that he can count on when he drives away that's going to deliver the value to the homeowner and he's not going to get the call back and it's going to be a reliable system and we go even beyond that obviously of how we create value for both the pro and the homeowner we could go for it I could spend this whole time slot talking about that and our ability to grow in that is not only kind of reasserting ourselves as the leaders and we have product roadmaps specifically related to that, but even expansion into the adjacencies, areas that we had kind of lightened up on in the past couple of years prior to the spinoff from Honeywell, where areas such as ventilation, filtration, humidification, dehumidification, these are all markets that really apply directly to us, that connect directly to our control and sensing, that we have domain expertise that we can reassert ourselves in those are easy in safety again we've done extremely well in residential new construction and the relationships we have with all the builders and installing the first alert brand in their homes but also the mro business which is new that's been a big driver of growth and for those listening safety is smoke alarms safety of smoke alarms and gas alarms um and yeah there's a few other things but those are the primary and so then in existing homes uh they typically have a 10-year cycle and most people are going to replace and so our game there the biggest place is we can expand into certain capabilities that go with more in supporting us to smb but the big one is the geographic expansion that i was talking about earlier and that is entering the european markets which are uh of similar size to the u.s or estimated after the regulation changes probably be two billion dollar market where we don't participate at all so that's a huge group security is one of those markets and i'm not talking about oem i'm talking about our general market our brands going into market this is an area that we have we've identified a lot of opportunity. We had focused pretty much on one segment of it as part of a solution called intrusion. The reality is a fully integrated security system has much more to that. It has video integrated, access control integrated, has presence of some form. All of those things is what we want to bring to market. And probably even more important is the fact that we're building the ecosystem to connect all these products.

And the Fortick platform as it comes out, our common data model the red link plus communications protocols all of that so all of our devices inside a home are able to have context of what the other systems are doing to optimize their own jobs all of that delivers greater value all of that drives growth I'm gonna come back in a few of those points later because I think they're important but I was stick on the outline I mentioned earlier alright let's turn to um margins a little bit um you've done a remarkable job since you've been at the company um and we're going to ask you a little bit more about that i think it's 13 straight quarters of gross margin expansion you say it's not going to be every single quarter but every quarter you you tend to still do it um as we look out to the next 12 months and i'm going to keep this a little bit shorter term uh your investor day i think at 400 base points of margin expansion over five years. A lot of puts and takes today, right? Cost, price. You're doing other structural things with Amit over here. Walk us through how investors should think about the next year or two and the margin ramp continuing, not continuing, price costs, all that stuff, if you can help us out a little bit on that.

Yes, thanks. This is a really important part of our story. And we have a roadmap that we are executing, have executed, and will continue to execute. And it goes past the 2030 date. And there's three major pieces to the gross margin. And it has been 13 quarters. We are going to continue to expand our margin. One is the factory efficiency. And so we have a manufacturing footprint. We're vertically integrated. But historically, we've lost some of the, diffused some of the advantages we have from our scale. So we make 15 million thermostats per year, 24 million smoke detectors. We're vertically in agreement. But we had that over numerous platforms spread across. And you don't get scale advantage. And so part of the story is we're taking all that product development we're talking about and getting those onto platforms, reducing the number of platforms we have to support to leverage our scale to create greater efficiency. We're working on the footprint of our factories in terms of how many factories we operate, what the loading is and the efficiency of those we're working on the efficiency of each of those factories to improve it so that's one third the other third is the improvement of the products as we bring greater value to the products higher level of integrations higher level of values we will be compensated for that so there's the values related to the mpi and the third is about pricing and channel and the allocation of those margins and that's the third piece of it but the The first two, and especially right now, the big one that we have partially executed is the factory efficiency and the supply chain. But we see the roadmap of exactly what we want to do for the next five years on all three of these. So it's laid out. It's a matter of execution, not a determination of what to do or a speculation of that this would work. It's now just execute what we know we can.

And you've done, obviously.

Part of it.

We've got a lot more we can. um talk about more specifically here um component costs commodity costs every day it doesn't get easier seems like talk about your ability to push price um you know a lot of these component costs have gone up a lot sure how are you how should investors think about that the puts and cakes as we go into 27. sure so i'll talk a little bit about the inflationary cost and i'll talk a little bit about our pricing power um so let's talk we announced at our earnings call we kind of reminded people that we were going to have a headwind in q3 personal inflationary costs

and we said you know there are most people are aware of this the ram costs memory costs have gone up substantially metals costs um the petroleum costs impacts our residents pcb costs a lot of this related to the data center drive and we said that the net impact of it because we had taken pricing action but there's a lag to our pricing and it's typically on account 60 to 90 days notification and what have you on our actions and that for Q3 the gap between the cost increase versus our pricing increase was going to be about ten million dollars whereas in Q4 that would Close okay, so it'd be less than $2 million. So we had a one-quarter headwind because we have taken the pricing actions And now that as we go forward, we'll be able to also continue so it is a headwind and We'll talk about you know, we'll be able to go through how we execute two three and That's one piece of it Going forward though We will be able to do the pricing because the pricing power If you think for two reasons one our leadership in the marketplace the strength of our brand the trust We built to the pros the consistency of the value delivery all very important The other piece to consider in most cases is we're providing the controlling sensing parts of complex higher-level systems An HVAC system is $15,000 to $20,000. The thermostat is $150,000 to $200,000. On the higher end. On the high end. We went to the high end. That's what you should be buying. But so that is, you know, a small piece of the overall system. It's not going to move the system. It's not going to create customer resistance to that level of pricing. But we have to consider, of course, that we're – we appreciate that the pro doesn't want to feel that they're being abused here and that we're aware that we're delivering the value and we're increasing our value and that they – we're keeping them apprised of, hey, these are – we're not doing this just to try to screw someone. This is cost. We're responding. We're trying to make sure we deliver value. And they're very appreciative of that. They get it. They understand it. So I don't think there's an issue there. um and similar in other markets safety security we're again a smaller player it's not a huge issue i think we have the pricing power to be able to adjust our prices to reflect these inflationary costs okay i'm going to wrap up this segment here with a question that i hope you'll answer um not asking you for 2027 guidance but the investor day and you guys both know i really don't like investor day you know targets because you have to answer questions from people like me and investors.

But I think what I heard from you is despite the difficult residential market, despite some of the cost headwinds you're dealing with, given all the idiosyncratic things your company has going on, whether it's NPIs or regional expansion, investors should expect the company to grow next year and margins should be higher. Essentially what I hear you saying.

Yes.

Great.

I'm sorry if that was too abbreviated, but I don't want to get into it.

I'm not asking you to, but I think that's important given some of the changes since the investor day to reiterate that you will grow top line and bottom line next year. One of the things I find so remarkable about your company, especially with the valuation of where it is today, is you have literally best in class or close to best in class, both gross margins and EBITDA margins. Okay. And that certainly wasn't the case when you walked in the door four years ago. It's four, right? Three, even more impressive. I don't really care about what got the company to the point where it was when you walked in, but thankfully you did. You mentioned it a little bit. On a high-level basis, what have you done in three years to change really the margin trajectory, the top-line trajectory of this company? And why, on a high-level basis, are you able to have the margins that you have?

I think three years ago, when I came in, probably there were three things that needed to be done immediately. One, the strategy for the business had to be determined and set, which was done almost immediately and said, look, this is how we're going to win. And we've talked a little bit about in the best today, there's the generic or not generic, but the larger cross the company, cross the product line strategy. And that is, one, create differentiated solutions. Make products that are special. That's really a big, huge focus. Then next is the focus on the professional. That's what we do. we focus on the pro okay and that sounds trivial but if we spent more time on it I could say why that's how long you've been focusing on the on the pro as a customer well so I mean as a company the question were we a DIY company were we focused on the end user or we focus on the pro and the decision was we are 100% focused on the pro that was a layup you're supposed to say 140 years or something you've been focused on the pro well the reality is there was a question when I got there and we've been serving the pro for 140 years the focus has been intensified in the past three um the next is the geographic expansion we talked a little bit about and uh the last is the leveraging of our scale okay so those are four but inside each of our products we have more so that's the strategy and i could go each of our product lines have strategy that we're executing we're in the process of executing second was the organization getting the right people into the right roles and restructuring the business there were silos there were people acting we had multiple sales organizations that were acting in conflict we had multiple product development organizations we had it just there wasn't a shared purpose once you've established the strategy and once you've established the organization you can now create the shared purpose and then it becomes the execution and you say here's what we need to do and this is what exactly we want to do over this next five year time frame and even a little bit beyond and there's some fundamental stuff to it big strategy platform pieces to it there are specific targets of products that we want to do but you talk about okay why why margin so i gave a very big picture so i'll bring it back to your question about margin okay so we talked about that products is a very important part to making that margin the execution the footprint of our facilities, the efficiency of our facilities, the utilizations, the platforming, all of those make a huge difference. And we're only part of the way. I would say we're somewhere between the third and fourth inning of what our plan is. And so there's a lot more for us to execute.

And I think where were margins when you walked in and where are they now?

Oh, I think there were 30.

Yeah, I think, you know, three years ago is probably mid to high 30s, 35, 37. Gross margins. Gross margins. And then, you know, certainly as we've executed against the strategy that Tom just talked about, that's, you know, underpinned the 13 consecutive quarters of year-over-year margin expansion.

Both on the gross margin EBITDA margin line. And I would also note that's in an environment where all your competitors are giving back margin post-COVID. in a really difficult market. So that's what I think is so impressive. Where are your market shares? You're not going to give me the percentages, but globally thermostats, globally in safety, and then security, I think it's maybe lagged a little bit.

Talk about your market share positioning and where you are in those two markets, and also what you're doing to revitalize the security business sure so in the comfort business and so comfort is our air and our water businesses because those are just two different mechanisms to deliver energy in a home right in europe primarily it's water delivery of energy in america we use air it's for the comfort in america we are and i i've got our lawyer back there he's flaring at me i don't want to go i go into specifics here send those specifics we have a very strong position i think i think you're number one in air i'm saying it's not you but the research we do is you look at 15 million thermostats and then you look at anyone else's what the volume is we've said this before probably an order magnitude larger than the next number so very strong in comfort u.s even stronger in the european market you have to go to each market because there's different dynamics that occur and the delivery we have some real strengths there's some markets we can improve it and so there's opportunities for us and part of that is making sure that we make the investments in some of our water products for that we have on as we under invested in the u.s historically or north america historically we had under invested in europe as well and in fact the next couple of products we're going to be bringing to market revitalize our European product portfolio in safety in the US you really have two major players it's it's us and Kitta and Europe we don't participate but that is going to change we'll be entering that marketplace in security we have historically been a very strong brand and if you go back to the Ademco name the first alert name they were really established brands that we had because of the lack of investment had

given up to other third players we have a vision and a roadmap to bring ourselves back to a strength position and start capturing sharing that's what we're going to be executing i would ask you how long but i'm not going to um let me ask a financial question and you're no longer the cfo of the company which i'm sure you're happy about we have shane harrison hey shane congrats welcome um free cash flow conversion of your company is pretty high yes um because you took out the honeywell indemnity you're probably a little bit higher um on leverage that you want to be there's a two times target did you say at the investor day you be down to that around 18 months is is that what you said or am i putting words in your mouth at investor day we said our goal is uh net leverage of about two turns in 24 months okay close enough okay um that's all i have does does anyone have a question here in the room a new just yell it out thank you thank you um quick follow-up on the oem security business um so it sounds like 70

million between now and q2 of 2027 and the ebitda impact of call it roughly 10 to 15 million dollars uh no it's about 10 million about 10 million impact and that's really more of the second half of 26 impact yeah yeah so that comes out to about 13 percent EBITDA margin for roughly for that business so if you're saying that business goes away the 140 goes away is the right way to think about the EBITDA impact on the 140 also the 14 percent no because we would adjust our operating expenses would be much lower yes and so let's i think you've answered a little bit different

question so you you took the h2 reduction 40 to 50 plus then you added the h1 reductions that were talked about to get to the 70 and the gross profitability is approximately 20 on the account okay um and i this is a very special situation where we're going to talk about margin because and in the q4 or h2 piece that is where the margin reduction and you look at the 20 between the 40 and the 50 million and you could say okay that number is not going to have the operating expense reduction offset but we've already put them for place the actions to compensate for that it's just the timing for it because there's a lag when you make the actions and basically because this was done right at the earnings because we weren't able to see it we have visibility what's actually happening for h1 we're able to take those actions now to address our operating expense levels so when you look at this you have to look at the operating expense the EBITDA reduction is the net of the gross margin reduction offset by the operating expense reduction when our operating expenses are running 20% the gross profit is approximately 20% those offset so the EBITDA margin going forward after Q4 is basically negligible.

So I guess fair to assume that theoretically the 140 that's left, run rated, that contracts up in 2028, the EBITDA impact on that would be negligible.

Negligible because as long as we have visibility and there's not a lag offset unless they shock us again, we're able to offset. And we're very disciplined about our operating expenses. So over time in our business model, we invest the 5% in the R&D and we're very disciplined. Our operating expense generally would have some operating leverage, but we scale directly proportional to our revenue. Anything that is reduced, we will reduce or increase.

Tom, last question. Anything you want to leave everybody with here? Floor is yours. One minute.

Floor is mine. I think it's important to understand the story and what our position is and what that brands, the brands that we have that we've built over the past 140 years, how important they are to the pro, how important our position is in the residential control and sensing market for the critical systems of the house. This is an area where we've spent and developed domain expertise. And I think the focus we've had in the past three years in the execution of the team that we're in early innings of what we want to execute to serve that market and i think the market's appreciative of what we're delivering and i would argue you're also more of a consumer products repair and remodel company than you are a building products new home sales company we we like to call ourselves building technologies because i appreciate there's a distinction between something that you know building materials housing roofing windows what have you. Whereas we have a lot. But I think what's different about our solution is that we're very focused on the professional who's going to install that product versus a consumer where they're going to deploy it themselves. And that's why we call ourselves building technologies is because that relationship with Crowe and them to make that value.

Well, great. Congratulations again, Tom, and thank you guys for being here today.

Thank you. Thank you.