Resideo Technologies, Inc. Stock

Hello, everyone. Thank you for joining us, and welcome to the Resideo Third Quarter 2026 Earnings Conference Call. [Operator Instructions]

I will now hand the conference over to Chris Lee, Global Head of Strategic Finance. Please go ahead.

Good afternoon, everyone, and thank you for joining us for Resideo's Third Quarter 2026 Earnings Call. Joining me on today's call is Tom Surran, Resideo's Chief Executive Officer; and Shane Harrison, Resideo's Chief Financial Officer.

This afternoon's call contains forward-looking statements. Statements other than historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially. From those in the forward-looking statements as a result of a number of factors, including those described from time to time in Resideo's filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. We identified the principal risks and uncertainties that affect our performance in our annual report on Form 10-K and other SEC filings.

In addition, we will discuss non-GAAP and stand-alone supplemental financial measures on today's call. These financial measures, which can sometimes be identified by the use of adjusted or stand-alone in the description of the measure should be considered in addition to, not as a substitute for or in isolation from our GAAP results. Stand-alone measures are supplemental financial measures intended to provide historical results before the ADI spin-off on a more comparable basis to the company following the spin-off. Reconciliations of GAAP to non-GAAP and stand-alone financial measures are included in our earnings release as well as our financial data workbook which are accessible on the Investor Relations page of our website at investor.resideo.com.

Unless stated otherwise, all numbers and results discussed on today's call other than revenue and gross margin are on a non-GAAP or stand-alone basis. We completed the spin-off of ADI on August 3, and the financial statements presented in our third quarter 2026 earnings release, earnings call and Form 10-Q filing reflect the continuing operations of Resideo and the treatment of ADI as a discontinued operation for all periods presented. Recast income statements reconciling historical Resideo results to Resideo GAAP results from continuing operations for each quarter of 2025 and 2026 have been provided in our earnings release and our financial data workbook.

With that, I will turn the call over to Tom.

Thank you, Chris, and thanks to everyone for joining us today. In our first quarter following the spin-off of ADI Resideo delivered both top and bottom line third quarter results that were near the high end of our outlook. This is a testament to the team's continued resilience, strong execution and commitment to delivering what we promised at our recent Investor Day.

Total revenue was driven by both volume growth and pricing across most of our sales channels. Our gross margin was 40.4% as customers continue to see the value of our differentiated nondiscretionary products. We accomplished this in a challenging housing environment. Stand-alone adjusted EBITDA was $154 million, growing 5% year-over-year as our teams demonstrated cost discipline that helped drive operating leverage in the business.

Professional installers are adopting the differentiated products we design and manufacture, resulting in Resideo winning business. Leveraging our scale and experience enables us to navigate through the inflationary cost environment while also creating opportunities to invest in our future growth. Our execution is rooted in a mindset of continuous improvement in all that we do, and we believe that mindset will be the driving force for Resideo's continued success. Let's walk through the dynamics for revenue growth in the quarter.

In the third quarter, we reported total revenue of $727 million, growing 3% year-over-year, which includes an unfavorable impact of approximately 50 basis points from foreign currency exchange. Let me unpack the growth rate further. We achieved 6% or $41 million of growth across all sales channels, excluding OEM security. We consider these non-OEM security sales channels to be our core because they are the foundation that underlies our future growth and earnings potential. Let's walk through the key drivers for each of our core sales channels.

Performance in the retail channel was exceptional, with revenue growth of 15% year-over-year driven by both volume and pricing power. Volumes were robust for our first alert in Honeywell Home [ branded air ] and safety products as evidenced by point-of-sale data across many of our key accounts. Demand for our newer products was enthusiastic, including our new highly rated combo smoke and carbon monoxide detector, purpose built for easy installation while touting differentiated features and meeting the latest safety certification standards. Retail pricing strength reflected more efficient promotional spending, price increases and demand driven towards higher-margin products.

Performance in the OEM combustion channel was also strong, reporting 9% revenue growth year-over-year against very strong results last year. Growth continues to be driven primarily by steady demand for higher-priced products. From a geographic view, EMEA performance was a notable callout for the OEM combustion channel due to a seasonal build in advance of the upcoming heating season. Our distribution channel revenue was up 3% year-over-year, comprised of our 3 primary professional distribution channels, electrical, HVAC and security. Let me start with the electrical channel.

The electrical distribution channel achieved record volume growth, resulting in double-digit percentage revenue growth year-over-year. We believe our position in the electrical channel has improved with several competitive conversions. Demand for new and existing BRK and Honeywell Home branded air and safety products was robust despite the current soft housing market. We saw demand across all our electrical subsegments, including single-family and multifamily homes, manufactured housing and [ MRR ]. our content per new residential built home continues to be nearly $400. The HVAC distribution channel grew revenue by a mid-single-digit percentage year-over-year driven by both volume and price. The HVAC channel also achieved sequential revenue growth. Product demand was healthy from both our Americas and EMEA HVAC customers especially for our newer higher-value products such as dehumidifiers and connected thermostats, our HVAC channel inventory balance remained stable over the last several months, consistent with the broader residential HVAC environment.

Complementing the product demand in our HVAC channel was a solid uptick in our [ Pro IQ ] Service subscriptions. These services, which are not yet material to our financial results, includes software tools that professionals are using to improve the speed and quality of their installations, build homeowner loyalty and generate new business.

Today's announcement of the addition of our AI-powered intelligence layer within [ Pro IQ ] Services is designed to proactively predict HVAC problems, demonstrating the continued value we are providing to professionals through our differentiated hardware and software intelligence. Revenue from the general security distribution channel was flat year-over-year, in line with the continued soft market for security installations, which are typically highly correlated with the resale of existing homes.

In the fourth quarter, we will announce the launch of a series of new security products that are integrated with our next-generation [ Forti software ] platform. We look forward to building momentum with our professional community at our upcoming [ Connect 2026 User Conference ], which is oversubscribed due to record demand.

Moving to OEM security. This channel reported $33 million of third quarter revenue down $17 million year-over-year, performing in line with the reduced volume expectations we shared last quarter. As previously discussed, we consider OEM security to be noncore to resilient. We have shifted our strategic focus on security products, including investments in operating expenses away from OEM security towards our branded products for 2 key reasons.

First, when we act as an outside design manufacturer for OEM security customers, the products we design and make for them are used to compete against ourselves in the general market. Second, OEM security sales generate less margin than our branded products. We believe selling a branded product in the general security marketplace where we can provide innovation and drive value is healthier for Resideo over the long term.

I would like to reinforce how we are executing our strategy as a stand-alone company and highlight a few tangible examples of the progress we are making. Our strategy is built around a powerful self-reinforcing cycle, investing in innovation to drive revenue growth, expanding margins through differentiated product design, continuously improving operational efficiency and reinvesting the benefits back into our innovation engine. And importantly, we are already seeing this strategy come to life.

On innovation, our [ Elite Pro ] thermostats are a great example of how differentiated new products can drive growth with annualized revenue growth of approximately 50% since their introduction to the market. On margin expansion, our new combo smoke and carbon monoxide detector, which I spoke of earlier, is built on a redesigned common platform that improves product margins while delivering innovative features to our customers. And on operational excellence, we are taking deliberate actions to simplify our business and improve efficiency, including SKU rationalization and the planned exit of 3 underutilized manufacturing facilities, including the announcement in the third quarter of the closure of our manufacturing operations in Scotland. These actions are designed to reduce our cost structure and improve utilization across our manufacturing footprint.

Each of these initiatives reinforces the others. Innovation drives demand and create opportunities for higher margins. Operational improvements further expand profitability and generate resources to reinvest in our next generation of products. This is the flywheel we are building at Resideo, innovation driving growth, growth and operational excellence, expanding profitability, and those profits fueling the next wave of innovation. We believe this self-reinforcing cycle will be a powerful driver of sustainable growth, margin expansion and long-term shareholder value.

With that, let me turn the call over to Shane.

Thanks, Tom. I'd like to start by saying how thrilled I am to have joined the Resideo team. Over my first 2 months, I've had the opportunity to visit many of our sites, meet with our teams around the world and really dig into our products, operations and strategies. And what I've seen has only reinforced my excitement about the opportunity ahead. Resideo has iconic brands, accelerating product innovation and leading positions in many of the categories and geographies where we sell. The strong pipeline of product innovation is just beginning to deliver and the company is filled with incredibly talented and passionate people who are energized by the opportunity to operate as a stand-alone product-focused company. It's a powerful combination and one that I believe positions Resideo well for long-term growth, gross and EBITDA margin expansion and continued value creation. I'm excited to be part of this next chapter and to help the team realize the full potential of this business.

Now on to the Q3 financial details. Third quarter gross margins were 40.4%, slightly higher than the third quarter of 2025. Drivers of gross margin expansion were price increases, operational efficiencies and $6 million of tariff refunds, which were partially offset by unfavorable product sales mix and inflationary input costs.

On inflationary input costs we experienced an approximate $13 million year-over-year headwind to product input costs in the third quarter, which were partially offset by $3 million of benefits from the price increases we implemented this past June. Given notice periods for many of our customers, most price increases were not realized until the latter half of the third quarter. Stand-alone adjusted EBITDA was $154 million, representing growth of approximately 5% year-over-year driven primarily by higher gross profit dollars and controlled operating expense growth.

R&D continues to represent approximately 5% of total revenue as we invest behind new product launches and speed to market. Stand-alone adjusted net income was $80 million and stand-alone adjusted earnings per share was $0.52, which excludes $30 million of nonrecurring business separation expenses recognized during the third quarter of 2026.

Moving on to cash from operations. Total reported cash provided by continuing operations in the third quarter was $33 million versus the approximate $1.6 billion used for the termination of the indemnification agreement with Honeywell that occurred in the same period last year. Operating cash flow in the third quarter was negatively impacted by approximately $30 million of spin-related payments made during the quarter.

Turning to the balance sheet. Our near-term priority after completion of the spin is deleveraging. After receiving a one-sided $900 million dividend from the spin-off of ADI, we repaid $1.1 billion of gross debt in the third quarter. We also made a $20 million payment at the end of the third quarter to ADI as part of the post-separation adjustment mechanism to true up ADI's cash. We anticipate further deleveraging and reinvestment in the business as Resideo continues to turn the flywheel and increase EBITDA and cash from operations.

Before I provide our financial outlook for the fourth quarter and the full year 2026 I'd like to make some framing comments. First, we are flowing through our third quarter outperformance to our 2026 outlook while revising our outlook upward. Second, after excluding OEM security, we currently expect fourth quarter revenue to be between flat and low single-digit growth year-over-year due to 4 less sales days in the fourth quarter, expected foreign currency exchange pressure and SKU rationalization Third, included in our fourth quarter outlook is an approximate $30 million year-over-year reduction in OEM security revenue, resulting in revenue of approximately $25 million in the quarter, consistent with our previously communicated expectations. And fourth, on pricing and input cost inflation, we expect to realize the full benefit of the price increases implemented this past June during this fourth quarter.

However, continued inflationary pressures are expected to offset these benefits and result in a low single-digit million dollar cost headwind, which is reflected in our fourth quarter outlook and is consistent with our commentary in September. While we anticipate year-over-year gross margin growth in the fourth quarter, which we expect to be driven by the cost structure actions that Tom mentioned as well as continued volume growth from our core sales channels. We are also expecting a modest gross profit dollar reduction as a result of this inflationary environment and the expected lack of tariff refunds.

With that, for the fourth quarter of 2026, we expect net revenue to be in the range of $710 million to $730 million, stand-alone adjusted EBITDA to be in the range of $145 million to $155 million, which is up slightly year-over-year at the midpoint. Stand-alone adjusted earnings per share to be in the range of $0.42 to $0.48, and cash from operations to be at least $54 million.

For full year 2026, we expect net revenue to be in the range of $2.927 billion to $2.947 billion, stand-alone adjusted EBITDA to be in the range of $614 million to $624 million, which represents 21% of revenue. Stand-alone adjusted earnings per share to be in the range of $1.92 to $1.98 and cash from operations to be at least $165 million for the full year.

In closing, we remain focused on executing our strategy with discipline and consistency. While the macroeconomic environment remains dynamic, we believe our focus on these factors within our control positions Resideo to navigate these challenges. The strong performance in our core channels in the third quarter combined with our expected introduction of exciting new products in the fourth quarter underscores our confidence in the momentum that we are building as we enter 2027. As a stand-alone company, Resideo is now more focused on product innovation, growth acceleration and growing profitability, making it an exciting time for us and for our investors. We remain firmly committed to delivering on the long-term financial targets we outlined at our Investor Day.

Let's now open the call up for questions. Operator?

[Operator Instructions] Your first question is from the line of Erik Woodring of Morgan Stanley.

So Tom, I just want to start with you. Obviously, revenue excluding that OEM security business grew 6% year-over-year despite kind of the mixed housing -- housing market data points. Could you maybe just give us a little bit more color on growth volume versus pricing? And just higher level, just what you're seeing in real time when it comes to repair and remodeling, new construction demand, just some of those key macro drivers. Just if you could contextualize for those for us? That would be super helpful. And then a quick follow-up, please.

Sure. Thanks for joining us tonight, Erik. It's a great question. So you're saying the core business, 6% year-over-year growth, and you want a little more color commentary on what's going on in some of the business. It was a really solid quarter throughout the business. If you go through each of the segments, the distribution, the product areas, everything that is in our core business performed very well.

And so you say, what about volume versus price. If we extract out the OEM security and just look at our core business, our volume and price both increased. Slightly more price because we had some of the inflationary costs, but we had very nice volume improvement, which is indicative of how we are performing and what you've described is a fairly tough market related to the housing.

Now one of the reasons for that is what we provide, in many cases, is a nondiscretionary product, right? So this is the heating and cooling systems. This is the safety system, this is a security systems. These products are, again, nondiscretionary. And what we're seeing in the marketplace is us what we perceive is gaining share in those markets. Does that help?

Maybe just a follow-up to that is, obviously, there was news last month that Apple plans to get further into -- I guess, let's say, get into the smart home market, maybe rather than fighting against it. I guess for my perspective from the cheap seats, it looks like what they're trying to do is a little bit more DIY versus you're obviously focused on the professional. But just any thoughts on what this could mean for Resideo and some of the products that you sell that might or might not be competition in the market? Just high level, any thoughts that you have, please?

I would define it as creating an opportunity for us more than a competitive situation. And I don't know if you caught the press release we announced where we were going to be updating our software for some of the features that they brought to market. But you're right, they play in a different place in the home. So they are about the engagement and the interaction and some of the automations on audio video. That is not where we play. Where we focus is on the infrastructure systems of the house and making sure that the house is comfort and protectable.

So what we want to make sure though is that we're compatible with those systems, smart home ecosystems of Apple, Amazon, Google. And so that's why we announced what we did. The fact is that if Apple is successful this, they brought some new features, being having customers understand and engage more with their critical systems, that will be great for us.

The next question is from the line of Alexander Virgo of Evercore ISI.

I wondered if you could just unpick some of the differences in growth. The retail plus 15 distribution plus 3 stands out to me as quite significantly different. And I wondered if you could layer into that perhaps some of the sort of new product investment benefits that you're getting either now or when we might expect to see that really kick through into the growth? And then I've got a quick sort of follow-up, if I could.

Okay. So believe it or not, Alex, did you hear me okay? Yes. So they're pretty tight, your 2 questions that you just asked. It's a good question. So when I talked about retail up 15% and we had our distribution [ share ] of 3%, but that includes the security distribution. If you carve that out, electrical distribution up [ 15% ], HVAC distribution up 5%. So we had and then OEM combustion of 10%. So most of our channels, excluding security and certainly OEM security, we're doing -- performed very well during the quarter.

Now we talked a little bit about security. It's part of the home, and it's very correlated with existing home sales. So that's to be explained what's happening there. Although I will say, you asked about MPI. So why did retail do 15%? One of the things that's happened there is our new [ UL tent Edition ] product we're shipping into the third quarter and primarily was featured pretty heavily in the fourth quarter by some of our channel partners and our customers. And October was fire safety month. I don't know if you knew that one, but our product performed very well, the customers and our customers were very excited about what it brought to the customers. And I think that was a big part of what drove some retail, the retail numbers that you're seeing.

In terms of NPI, well, that was an NPI product. And we talked about [ DENALI ] was an NPI product. And one of the things that we're bringing forward now is the [ Forti ] platform. And that's really important because now all of our products, including security, air, safety, all of them are sitting on top of the [ Ford ] platform. That not only has the benefit of the information and the common data across everything in the awareness but it also helps us accelerate the development of new products. And by the way, I made a little prudence slip there. I said [ Denali ], which you know as a lead [indiscernible] a project that you mentioned that was [indiscernible].

But overall, we've been seeing the products that we've brought to market. All of the products that we've done have done very well for us and performed very well in the market. So I think we're already seeing it.

That's very helpful. I wondered as a follow-up, if you could just give us a sense of how much the tariff refund helped the margin, gross and EBITDA. I appreciate you gave us the $6 million. It feels like that's sort of a 50, 60 basis points number, but maybe I'm getting the calculation wrong.

Yes. I think you got to look at the net, but I'm going to let Shane answer that one.

Sorry, I missed...

So in the quarter, there was [ $6 billion ] of a tariff refund, but we also pay tariffs. And so the net tariff benefit in the quarter was $4 million. Does that help?

The next question is from the line of Aaron Kimson of Citizens.

Following up on Erik's question, in light of the Apple Home View announcement in mid-October, I was wondering if you can talk about the importance of the matter standard. And if matter becomes more important for both your hardware footprint and eventually [ Forti ] going forward?

Thanks, Erik, and thanks for joining us. I think this is your first call.

It is. Yes.

Congratulations. It's great to have. So Apple, we've talked a little bit about that. We've talked about our compatibility where they focus is, yes, it's distinct from what we do. But Apple has been a big advocate of matter and matter is fantastic. Most of our -- in fact, all of our new smart home products, support matter. And that's great because we want that compatibility with those smart helm ecosystems, and they all pretty much do support matter. Where matter is different, though, for us is it's great for that [indiscernible] it's just not very deep for really controlling infrastructure, just the amount of information related to how a HVAC system works or how your safety systems need to have life safety protocols. That's just not something that's in a matter protocol. So it's fantastic for interacting with the ecosystems and communicating information to the end user. But it's not something that we use deeply through our own system.

Got it. That's really helpful. And then I know you mentioned [ Pro IQ ] monetization is not material today, but can you help us think about the trajectory of monetization for the [ Pro IQ ] predict service. Will monetization be a recurring stream paid for by the buyer of the hardware? And is there a way to monetize it on the channel side by suggesting a pro to reach out to when something is looking like it's going to break.

Yes, that's exactly. So Aaron, let me just give a little background on [ Pro IQ ] Services. So we did announce [ Pro-IQ Predict ] today. But [ Pro-IQ ] services is actually a suite of services. And now we have 4 capabilities in that. The first one is install, and that basically gives the Pro the ability to do template and configuration in the field to being able to have a more efficient installation experience. The second one is engage. And this is about branding and contacts and booking for the Pro so they can have their brand not only on the product phase but also in the app that the customer uses.

Third is the analyze, and this gives the Pro the ability to have alerts and look at trends and history of the products. And then what we announced now is predict and this gives them the ability to diagnose potential problems, take preventative maintenance, but also if should something happen, they can understand what fails so they can make sure they bring the correct product part to make the repair to the customer, to make it a better experience for everyone. We're efficient for them and certainly for the customer a much simpler process.

But all of this it's really about creating stickiness with our customer and giving our customers value. So that value and stickiness is our primary thought process as we think about Pro IT services. Right now, it's not material monetization, but it's delivering really nicely on that idea of the stickiness and how Pros feel about the products we're bringing and the fact that we're bringing just a bit extra that they don't receive from other products.

The next question is from the line of Ian Zaffino of Oppenheimer.

I try to follow up on the tariff refunds. [indiscernible] a surprise? And is there any other tariff refunds factored in forward guidance? I mean, or were you expecting, I guess, this kind of net $4 million in the time quarter.

So it's Shane, nice to meet you. To answer your question, the short answer is we filed for these refunds pretty far at the time of the visibility of when you get the money. And if you're going to get the money, sometimes can be a little all over the place. So in this quarter, we did end up getting that $6 million, we ended up paying a couple [indiscernible]. So it was in that 4. So that's the answer there. But going forward for Q4, we have filed for more tariff refunds. But the visibility of seeing getting those in is very, very murky. So we -- in the guide that we just gave, we're assuming no tariff refunds or very little tariff refunds and probably a little bit coming out the door, but not anywhere like it used to be from the past.

Okay. And then when we think about NPI is there a way you can maybe help us understand how well they're doing right now in the market? I know you had some introduced awhile a ago, maybe how those are performing. And how do we think about their contribution, either maybe this quarter or next quarter versus the guide and versus kind of the other products that are not...

Okay. So how do we feel about NPI and how can you be aware of how they're performing. Hopefully, we'll keep you posted, and we will do a good job of letting you know in significant product new product releases have occurred. One of the things I just talked about [ Ford ]. Having that platform out there is really important. And that -- a lot of things were kind of bottled up a little bit behind it because we had to have the new platform in the market. And now we could start issuing out more and more products on top of that.

There are products -- the reality is I'm telling you about how certain ones did. But of the products we've released and the new products, we've been extremely pleased with how they've performed in the market. And sometimes, we introduce products clearly for increasing revenue. But we also introduced products, we've got to think about how they improve our margins. So that's a big driver of what they do. There's also reasons to sometimes for a strategic position on making sure that we don't have a competitive weakness. And also making sure that our products have the depth that really is unmatched by our competition. Because when you look at our products, it's not only the headline products, it's everything it attaches to, so the Pro can get the job done when they're at the house and do it.

So we want to make sure some of these smaller products we introduced you say, well, why do they do that? It's not going to move. It's that solution for the professional and that's what he had -- why he has trusted us is because we get that. So we're clearly going to introduce [ MPI ] to drive revenue growth. We're going to introduce products that improve our cost profile. We're going to introduce products that have strategic importance and basically make sure that Pro has a complete solution.

The next question is from the line of Tomo Sano of JPMorgan.

Hello, everyone. So you noted that unfavorable mix and input cost inflation partially offset margin gains. How do you expect those headwinds to change in the fourth quarter and beyond, please?

Tom, it's Shane. I'll take that one. So in Q3, you heard us say it was about a [ $13 million ] headwind on inflation costs in the quarter. And then we offset that with about $3 million of realized price increases. Well, that's sort of that [ 10 ], let's call it, as a headwind. As we move into Q4, the guidance we just gave, there is an assumption there that the inflation costs are still going to continue, probably even a little bit higher but we had a lot more price realization, the price increase realization from our June increases. So the net increase is going to be lower than what we saw in Q3. So less of a headwind the call it for Q4.

And a follow-up to Tom. Have you seen any changes in competitors' pricing or promotional activities? Like how is residuals differentiation helping you sustain pricing and product market share?

Sure. So right now, obviously, it's a season where there's some customers there are some competitors are doing promotional pricing. But our pricing, we typically don't do a heavy promotional pricing because our pricing is typically related and driven by the needs of the professional. And they're basically executing in accordance with the needs for jobs, then they have assignment that go to [indiscernible]. They're doing work and promotional just seems to be not something that's appropriate at that place.

In terms of our pricing, we believe we still deliver the best value out there in the marketplace. When you look at our products, in the value that they provide and the pricing that we're asking. We think we stand at the top of the chart on [indiscernible].

The next question is from the line of Jay Goldberg of Seaport.

Tom, I guess, first question for you. You've talked a lot about new products coming out next year. And I'm wondering -- I know you're going to talk about this more at your event next week super interesting. But I was wondering, to what degree have you sort of shown this to some group of Pro customers and what's the response you're getting from the new directions, the new products you're getting from the Pro's? And I have a follow-up.

So Jay, you're right. And again, thank you for joining us. And so I will say that, yes, we do get a little bit of a sneak preview of how the customers are going to respond because we have data programs in many cases. And some of the products that will be discussed at the upcoming Connect 2026 conference have been through beating. And we know what the feedback from the several hundred of the Pros that have tried some of these products, and it's been very positive.

So we have a pretty good idea how they'll be received at least some of the things that have actually gone through beta. I think in general, if you're going to be at Connect 2026, it will be great to be able to get the feedback from the Pros about how they feel the FTI that we've brought to market now with executing for them.

Okay. And then my follow-up will be for Shane. I guess I was just hoping, like this quarter, your revenue came in above where -- or pretty close to where I was expecting it, but your profit -- you were much more profitable. And I'm just wondering, as we're thinking building on our models for next year, how should we think about operating leverage? It seems to be moving in your favor.

Yes, that's the right way to think about it. As we laid out a model at Investor Day back in whatever that was, July I believe. The model there is -- I want to remind you of the model because it's something I'd love to talk about. So at the top line, we're expecting mid-single-digit growth annually over the 5-year period to 2030. No, that's not going to be linear. But this year, according to our guide, we're going to be right at that, right? [ $4.4 billion ] if you take out that OEM, the OEM security headwind.

You move down the stack from there. You look at gross margin. We're also expecting around the point of gross margin improvement every year throughout 2030. But for every point that we do gain on gross margin. We're going to throw another probably 50 points of that in the R&D kind of back to the flywheel concept that we talked about and as Tom talked about in the prepared remarks. But then build that operating leverage below that. It's controlled overhead and SG&A spending that will drive another point, call it, similar to what we're seeing in gross margin but at the EBITDA level. And if you do that math over that 5-year period, you're going to see what I love, which is a mid-single-digit up into the mid- to high single digit and then high single-digit EBITDA growth. And that's what we want to see, and that's what we're going to plan.

Now for 2027, we're right in the middle of budget season, so I don't even know what the numbers look like right now, but I can tell you that's what we're striving for, and it's the flywheel that Tom brought up is real, and we do believe that, that is going to be a very giant enabler of getting this operating leverage that we talked about.

Very helpful. And then just one last little [indiscernible]. If I understand it right, your revenue guidance for next year is basically in line with what you laid out at the Analyst Day a month ago, but you're hitting that even though you no longer have the security OEM business. So on a like-for-like basis, you're effectively raising guidance a little bit?

You're talking about '26, the '26 guide.

Sorry for '26, yes.

Yes, yes. So yes, what we did is we outperformed in Q3. We're going to pass that through. We're going to flow that right through, and we're going to -- we're keeping the implied Q4 actually raising it slightly at the midpoint. So yes, you're seeing a full year '26 increase. And frankly, what we're seeing with our forecasting in Q4 is very similar to what we're seeing 3 months ago, which is why we're kind of keeping that implied guide for Q4, where it's at and then yes, flowing through that Q3.

We have reached the end of the Q&A session. This concludes today's call. Thank you for attending. You may now disconnect.

Hello, everyone. Thank you for joining us, and welcome to the Resideo Second Quarter 2026 Earnings Conference Call. [Operator Instructions]

I will now hand the conference over to Chris Lee, Global Head of Strategic Finance. Please go ahead.

Thank you, and good afternoon, everyone. Thank you for joining us for Resideo's second quarter 2026 earnings call. Joining me on today's call is Tom Surran, Resideo's Chief Executive Officer. We would like to remind you that this afternoon's call contains forward-looking statements. Statements other than historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Resideo's filings with the Securities and Exchange Commission.

The company assumes no obligation to update any such forward-looking statements. We identify the principal risks and uncertainties that affect our performance in our annual report on Form 10-K and other SEC filings. In addition, we will discuss non-GAAP financial measures on today's call. These non-GAAP financial measures, which can sometimes be identified by the use of adjusted and the description of the measure should be considered in addition to, not as a substitute for or in isolation from our GAAP results. A reconciliation of GAAP to non-GAAP financial measures is included in the financial data workbook, which is accessible on the Investor Relations page of our website at investor.resideo.com. Unless stated otherwise, all numbers and results discussed on today's call other than revenue are on a non-GAAP basis. With that, I will turn the call over to Tom.

Thank you, Chris, and thanks to everyone for joining us today. Before I speak about the quarter, the entire team would like to thank Jay Geldmacher for his service as CEO over the last 6 years. During his tenure, Jay applied his operational and technical expertise to help Resideo to get where we are today, both strategically and operationally. Jay led us through 2 major acquisitions, the recent spin and provided a steady hand through a dynamic market condition. Jay's interactions with customers, partners and employees have created a tremendous company culture and strong enduring relationships and will benefit Resideo for a long time.

Also earlier today, we announced Shane Harrison as Resideo's next CFO. I had the opportunity to work with Shane during our time together at FLIR. So I know firsthand the kind of leaders we are bringing into Resideo. Shane is highly capable, dedicated and execution-oriented. He consistently took on challenging assignments, delivered exceptional results and was a major contributor to FLIR's success. He combines strong financial and strategic capabilities with sound judgment, a willingness to dig into details and a focus on getting things done. I also know him to be a person of high integrity and someone who works extremely well with others.

Shane will be joining us on September 1. As you are aware, we completed the ADI Global Distribution spin-off on August 3. As in prior releases, our discussion of the second quarter results, however, will be at times on a consolidated basis, as the Products & Solutions and ADI business segments, both operated under Resideo in the second fiscal quarter of 2026. As usual, we will also discuss the results of each segment on a segmented accounting basis. As has been the case in the past, these segmented results do not include a full allocation of corporate costs borne by the business as a whole.

Finally, there is also information in our earnings material that refers to Resideo's stand-alone results, which are presented as if the ADI spin-off was completed on January 1, 2026, and include adjustments to certain financial line items to reflect management's estimates of what our results would have been. We have provided a bridge from P&S segmented results to Resideo's stand-alone results in our earnings release. Starting with our third quarter financial statements. We will classify ADI as discontinued operations for that quarter and all prior periods. I will discuss Resideo's consolidated second quarter results before I hand the call over to Chris to speak about the balance sheet, cash flow and ADI.

Chris will then hand the call back to me to speak about the Products & Solutions segment results and Resideo's 2026 stand-alone outlook. In the second quarter, we were pleased with the continued execution demonstrated by the entire team as we exceeded the high end of the second quarter outlook ranges for all metrics, both the consolidated and business segment level. Total revenue grew 2% year-over-year to just under $2 billion, a new quarterly record. Total adjusted EBITDA grew 19% year-over-year to $249 million, another new quarterly record.

Adjusted EBITDA includes the favorable impact of $27 million of tariff refunds during the quarter, primarily received by ADI. Total adjusted earnings per share grew 26% year-over-year to $0.83. Overall, we are pleased with both the top and bottom line performance for Resideo in the second quarter. Now let me hand the call over to Chris to discuss the balance sheet, cash flow and ADI.

Thanks, Tom. Total reported cash provided by operating activities in the second quarter was $148 million versus the $200 million generated in the same period last year. The year-over-year decrease was driven primarily by approximately $45 million in payments for nonrecurring business separation activities and settlements including the termination of the Honeywell Tax Matters Agreement. There was also a $20 million use of cash for higher cash interest paid. The decrease was partially offset by higher net income and less cash taxes paid. Consistent with our Investor Day messaging, Resideo started deleveraging on August 3, paying down $900 million of outstanding principal under the Term Loan B credit facility.

We expect to make an additional repayment of approximately $200 million on the Term Loan B credit facility in the third quarter following completion of the post-closing cash adjustment under the separation agreement with ADI. With respect to the ADI segment, we have provided its second quarter segment results in our press release. ADI has announced that it will be hosting its second quarter earnings call tomorrow morning, and we'll speak about its results and outlook in more detail on its earnings call. ADIG will present its results derived from Resideo's accounting records and presented on a carve-out accounting basis.

On behalf of the entire Resideo management team, we would like to congratulate Rob and the ADI team on the completion of the spin and their new life as a stand-alone public company. They will remain an important partner to Resideo. Let me hand the call back over to Tom to discuss the Products & Solutions segment results and Resideo's 2026 outlook on a stand-alone basis.

Thanks, Chris. The Products & Solutions segment continued its strong operational execution despite soft housing trends and inflationary input costs. The team achieved another quarter of year-over-year revenue growth and the 13th consecutive quarter of year-over-year gross margin expansion. Products & Solutions reported revenue growth of 4% year-over-year, including an approximate 35 basis point favorable impact from currency. Revenue grew across substantially all of our sales channels and product families, driven primarily by volume from customer demand. Let me walk through our performance by primary sales channel.

First, in the retail channel, we experienced another quarter of strong year-over-year revenue growth driven primarily by increased volumes for higher-value products. Adoption of our combination smoke and CO detectors, and our new thermostats continues to be strong and ahead of our expectations. Our point of sales volumes at our key accounts continues to be strong and is supported by healthy levels of channel inventory. In the OEM combustion channel also reported as energy category posted its seventh consecutive quarter of year -- for our year-over-year revenue growth against a tough comparison. Growth was driven primarily by continued demand for higher-priced products, primarily in EMEA.

In the HVAC distribution channel, revenue returned to year-over-year growth. Revenue growth was driven primarily by volume led by another quarter of strong customer adoption of the Honeywell Home Elite Pro, our new premium smart thermostat. Demand continues to exceed our expectations and has resulted in our increased presence in the high-end connected segment of the market. In addition, our new dehumidification and water filtration products increase our category penetration and continue the positive momentum generated from the execution of our strategy. Conditions in the residential HVAC market remained stable versus last quarter.

Our channel inventory remained healthy and increased modestly from the prior quarter. The electrical distribution channel had another quarter of year-over-year revenue growth driven primarily by volume. We saw continued demand for our BRK branded nonconnected safety products primarily in the maintenance, repair and operations market, but also the manufactured housing market. Our content per new residential built home remained stable quarter-over-quarter amidst a continued soft market for new home builds. Revenue from the security distribution channel was flat year-over-year given the continued soft market for security installs related to the resale of existing homes. OEM security sales were down slightly year-over-year due to reduced volumes with a large OEM security customer.

This was in line with our expectations for the quarter and with our strategy to focus on higher-margin branded business. Moving on to profitability. Our gross margin percentage was 43.6%, up 70 basis points year-over-year and up 100 basis points sequentially. Gross margin expansion was driven by volume increases, favorable manufacturing and supply chain variances and tariff refunds, partially offset by product sales mix. We also incurred inflationary input costs, which we do not believe are permanent but are only partially offset by the price actions we announced last quarter. P&S segmented adjusted EBITDA grew 6% year-over-year due primarily to higher gross profit dollars.

As discussed at our recent Investor Day, R&D continues to be approximately 5% of total segmented revenue as we invest behind new product launches and speed to market. Operating expenses increased due primarily to higher legal settlement costs. Before I provide our full year 2026 and third quarter financial outlook for stand-alone Resideo, let me walk you through some of our current market perspectives and assumptions. First, we believe Resideo can continue with steady execution through a residential macroeconomic environment that is persistently soft. We also anticipate continued demand for our products and year-over-year revenue growth across all channels other than OEM security during the second half of 2026.

We anticipate some continued weakness in the OEM security channel. Our current outlook reflects lower volumes from a large OEM security customer which we expect will result in $40 million to $50 million less revenue in the second half of 2026 versus the same period in the prior year. Input costs such as memory, metals, printed circuit boards, semiconductors and shipping continue to increase at a pace greater than originally expected due to dynamic global conditions. While we proactively instituted price increases during the second quarter, our outlook incorporates a slight headwind to gross margin due to higher input costs anticipated in the second half of the year compared to the most recent quarter.

We do not anticipate material cost increases related to tariffs after conducting our assessment on the recent trade actions announced by the U.S. administration on July 24. We also do not anticipate receiving any material tariff refunds for the remainder of 2026. Due to our corporate accounting calendar, there is one extra day in the third quarter of 2026 and 4 fewer days in the fourth quarter of 2026, both versus the same period last year. Now as to our outlook. We are initiating our outlook for Resideo on a stand-alone basis. Starting in the third quarter of 2026, Resideo will no longer consolidate its former ADI Global Distribution segment and results for that segment for all periods prior to the ADI spin-off date will be reflected as discontinued operations.

Our outlook is presented as if we had operated as a stand-alone company for the first half of '26, coupled with our stand-alone outlook for the remainder of the year. This outlook includes sales to ADI as an external customer and approximately $80 million of full year corporate costs allocated to stand-alone Resideo. The full year of sales to ADI are anticipated to be approximately $175 million. In our earnings press release, earnings presentation and financial data workbook all of which can be found on our website, we have included a revenue and EBITDA bridge from reported segment results to a stand-alone basis.

During this short transition period, the stand-alone outlook we are providing is for revenue and adjusted EBITDA only. We intend to provide our outlook for adjusted earnings per share and cash from operations upon completion of certain activity including the post-closing cash adjustment under the separation agreement with ADI that is to be calculated in the coming weeks. We intend to once again provide outlook on these metrics starting with our third quarter earnings call. With that, our stand-alone outlook for 2026 is as follows: revenue in the range of $2.9 billion to $2.95 billion; adjusted EBITDA in the range of $605 million to $625 million.

And our stand-alone outlook for the third quarter of 2026 is as follows: revenue in the range of $705 million to $730 million. And adjusted EBITDA in the range of $145 million to $155 million. Looking forward, I'd like to reiterate some of our key themes from our recent Investor Day. The new Resideo was focused on its mission as a pure-play building technologies company. We believe we have tremendous market momentum from the recent introduction of new differentiated products that strengthen our customer value proposition and in turn, will fuel the near- and medium-term financial targets we laid out today and at our Investor Day.

Those targets reflect a business with higher gross and operating margins than the historical Resideo, coupled with continued strong cash flow generation. We're very excited about the launch of new products in the second half of 2026, including our new smoke and CO detector platform and our new video surveillance and intrusion security products, to name a few. And as we discussed at length during our Investor Day, we have several levers we are pulling that are intended to strategically optimize our operations throughout the remainder of this year and beyond. With our track record of execution, our stellar team and our focused go-forward strategy, I am extremely confident in our profitable growth path ahead. Now let's open the call for questions. Operator?

[Operator Instructions] The first question comes from the line of Erik Woodring with Morgan Stanley.

And congrats again on the spin. Tom, I just want to make sure we're doing kind of a like-for-like comparison here. So if I go back to last quarter, the guide for Resideo Holdco 2026 revenue growth was 5% year-over-year at the midpoint. There were remarks that P&S and ADI revenue would grow at roughly the same rates, again, call it, around 5% year-over-year. I think if I take your new stand-alone P&S revenue guidance of $2.925 billion at the midpoint and compare it to stand-alone revs in 2025, we're now getting to P&S revenue growth of 2% year-over-year in 2026.

So first, can you just comment, is that math correct? And then if so, why are we guiding down relative to 90 days ago after just beating the second quarter, kind of what is changing about the second half? And then a quick follow-up, please.

Okay. So the math is a little bit off. So I'd have to go through exactly how you did your calculations. But no, the assumption what we said was that the things with the 2 segments would have similar growth for the year. We did not specify that it was P&S coming up in its revenue growth versus ADI coming down. But the projection that we have for P&S, A, the growth is higher than the number of 2% that you've stated. So overall for the year, it's almost 3%. Now in terms of how -- if you want to talk about exactly your math, we can go through that. But generally, that's in line with what our expectations have been.

Now in the second half of the year, we do have the issues that we described about OEM security, which were something that came about in the mid part of the year. It's a business we've talked about before. It's one that's determined by a third party and so we have to respond to that.

Erik, it's Chris. One other thing I'd like to add is if you look at the first half performance for Products & Solutions at the segment level, we outperformed our expectations given growth across most channels. And we still anticipate growth in the second half of the year across many of our channels with the exception of the OEM security channel like Tom just mentioned.

Okay. All right. We can do the math offline, but I appreciate all that color, guys. And then just a quick follow-up, Tom or Chris. Just can you maybe help us better understand how to think about the linearity of gross margins over kind of the next 6 months or 2 quarters? Just -- there's a number of moving pieces when we think about seasonality, input cost inflation, pricing, mix, end market softness, NPI, just any way that you can help us understand how to think about that kind of trajectory would be super helpful.

Yes. So I think in terms of -- because of the input costs that we've talked about, the biggest challenge for us is Q3. So we said -- always said it was never going to be linear, and it's going to be step functions. And I think Q3, we're going to see probably that most of these temporary input costs going up before all of the pricing catches up to it. So it's probably going to hit us most in Q3. But we're not talking net here. I mean most of this is going to be recovered by pricing, but there will be some. I'm not sure that we will get gross profit for a 14th consecutive quarter, it's well within the possibility, but it's not something we're focused on right now just because of those activities.

And one other thing to mention, Erik, remember last quarter when we talked about the price increase that we were implementing in Q2, we did implement that price increase, but we also said it would have a lag impact because of certain customer provisions that we have with certain customers in terms of a notice period. So while we have increased pricing and as Tom said, the price increase is helping to offset some of the inflationary costs. It's not a dollar for dollar offset.

Okay. Awesome. I really appreciate the color.

The next question comes from the line of Dan Stratemeier with Jefferies.

Congratulations again, Tom, congratulations on your first call as CEO. Let me follow up on Erik's question and ask it a little bit differently, but maybe tie it back in. Tom, can you help us understand the cadence and sort of the number -- actually not the exact number, but looking at your NPIs that are going to be coming out over the next 18 months, it's obviously being a big part of your growth, your gross margin expansion. How would you compare what you have upcoming over the next 12, 18 months to what you rolled out over the last 18 months and maybe like the magnitude of what's coming versus what already came out.

And then to Erik's question, I think someone also asked us at the Investor Day, when you had your buildup to your 5-year CAGRs in your projections at the Investor Day, you only had 1% to 1.5% pricing. Seemingly, there's a lot of inflationary pressures. And it seems like 1% and 1.5% seems low or out of place, especially with the mix of new products coming in. Can you just help us understand the pricing philosophy and how you came to that 1% to 1.5% number? And then I have a follow-up.

Sure. Sure, Dan. Thank you. So let's deal with the NPIs. So we've got -- we're pretty excited about the second half of the year. But for instance, on our smoke and CO detector platform that we're introducing. That product will first go into the American market, replacing the eighth edition UL products that are out there. It has a better cost profile to it. It will have a better margin profile to it. We think it performs well. We think it will continue to drive revenue growth. But it's really about creating that global platform that allows us to build even further out.

Second, we're introducing the Fortic platform to the marketplace and bringing that all the way across all of our products. That's going to be very important. It's a major effort. It doesn't necessarily in and of itself drive revenue immediately, but long term, it's a very key part of our strategy. Some of the security products that will be built out or brought to the market, I think that they will help drive the revenue. But I think the best thing to think about overall is excluding OEM security products, we are expecting revenue growth across all of the other product areas. So that's the first piece.

And the cadence of the NPI, we are seeing momentum. So generally, yes, we are continuing to see more products coming out with shorter development cycles and we are continuing to have a very healthy pipeline for thereafter. In terms of your second question, the pricing. So you're right. If we experience the conditions that we do have experienced recently, memory costs going up 4x, metal costs going up 35%. And now these shortages of things like low thermal expansion fiberglass driving printed circuit boards and all of these shocks from the data centers, 100%. That would be -- these are significant costs. They're able to be currently absorbed by pricing offsets and certain other efforts to try to reduce the cost of our products, but they do have an impact.

That said, we do not believe that these will be long-term cost increases. Some of it will stick. But I think long term, we will see these basically roll back up. We're seeing more memory coming online from some of the suppliers related to especially the generations and the geometries that we consume. We kind of have a good visibility of what will be happening. These prices are going to start unwinding as the competition comes to the market, capacity comes available. So I don't think that we're going to see a long-term shortage on thermal expansion fiber. I don't think we're going to see a long-term contraction in the memory supply market. Metals and fuel, those are shocks from what's going on in the world. So those things, yes, they impact the short term, but over a 5-year term, they shouldn't be considered a trend.

All right. Great. You threw one line in there at the end that caught my attention, which was strategically optimize our operations throughout the remainder of the year. What does that mean? What's the magnitude of it? Can you help us understand the drivers of that, if you don't mind, please.

Yes, we have to be a little -- in terms of discussing some of these things, there's certain sensitivities. But we've spoken about always reviewing our manufacturing footprint and our cost how can we optimize those things to reduce our product costs and we can pass that up both on to the customers as well as improve of our margins. And that's something we're actively doing. We're looking at all of our operations worldwide to take those actions that we think will benefit the company long term.

And is this like above and beyond what you've already always been doing?

Yes. Yes. Again, Dan, just in terms of this, this is a long-term plan. So when we talk about this, we're talking about things that we want to do over the next 5 years and thereafter actually. But certainly, in the next 5 years, we have specific actions that we want to take that will make a material impact to the company, and we are executing. I mean we talked about the closing of the Tianjin facility, we talked about the closing of Latrobe. We're reviewing our manufacturing footprint. We're optimizing our product manufacturing and the execution in all of our factories.

Yes. And then just to pile on. I mean, this also is thematic to the replatforming that we've talked about moving from tens or hundreds down to one to a handful by product line. And I think these are all levers that are really under our control. And so I think that's important to understand and ties back into what Tom said this is part of the long-term plan.

Yes. Those actions improve the efficiency of our operations, but they in and of themselves are only to do that. So we talked about platform. But there's other actions related to the efficiency of our operations.

The next question comes from the line of Ian Zaffino with Oppenheimer & Co.

Just wanted to drill down a little bit on the Air and HVAC. Maybe help us understand kind of what the environment is and that you saw in the second quarter? And then how do we think about the rest of the year? I know we had a couple of some softness last year. So what sort of the magnitude of maybe the comp benefit we should get? What is the timing of that? And then also just kind of what happened in the second quarter.

Sure. So second quarter for us, we were relatively flat year-over-year. We believe the general market was down. So we believe that our volumes since our sales, revenue dollars represented increased volume, but flat revenue. We believe that we did well in the marketplace and our position in the marketplace. When we look forward, what happened last year related to a transition, related to the gases and refrigerants used in the marketplace and the inventory that had been built up in the channel and some shocks related to that. We don't see anything like that happening this year. In terms of I think what we're going to see is kind of a more normalized marketplace.

I don't expect large growth right now in HVAC because there's still fundamental drivers for that. But I think really it's on us to create great value products that are able to increase the volumes and our share in the market.

And look, as we talked about in Tom's prepared remarks, I mean, the adoption of our new products, be it the thermostat, be it the dehumidification product, be it the water filtration product continues to be positive, and we're going to continue that NPI focus, as Tom mentioned, and when you combine that with pretty healthy channel inventory, I think we're well positioned.

Okay. And then can you maybe just talk about -- just a follow-up to that question, then I just have another question for that, but what are we thinking about as far as comps going into the back half of the year? And your confidence in that? And then also, can you maybe just give us a broader discussion on price versus volume? And I know you said that a lot of the gains in the quarter were volume -- and there's references to price benefits on the gross margin side. So just trying to understand, like, what's actually going on.

Okay. So you broke up a bit there, Ian. I didn't catch all of it, but you were talking about the comps?

Yes, the comps in...

Second half.

Correct.

Our expected second half versus last year, prior year. Yes. Okay. We expect growth in the second half of the year in our HVAC market in summary. And in terms of price and volume, looking at that you made a comment, I just want to correct the perception that you thought that the improvement in gross profitability was because of pricing. I would not say that was a correct assumption. If you look at actually what happened in the prior quarter, price was not a contributor to margin at all.

Okay. And then just on the HVAC again. Is this a benefit in the third quarter and the fourth quarter -- the fourth quarter? Maybe can you quantify it for us?

Ian, I think we provided a guidance in totality. We don't get down to the product level or channel level type of guidance look, I think Q3 of last year, those numbers are out there. You can set your estimates on what you think the growth is going to be -- but I think what Tom just said is the market is still a little bit muted.

The next question comes from the line of Tomo Sano with JPMorgan.

Tom, Chris, congrats on the spin. Could you talk about P&S gross margin again, if we look at the 70 basis points year-over-year, could you break down a little bit more color, contributions on volume manufacturing, supply chain execution, productivity, mix and pricing and so on. And to me, if you could add some color, what would you believe you did better than expected.

We haven't really gone into that level of detail in discussing our margins, I did disclose and just talked about the fact that pricing was not the contributor. The volume in itself is a major contributor. If you really look at kind of what happened in the profitability of the business, it was the execution and the efficiency of the operation. So it's really the conversion cost and the conversion efficiency that drove the gross profit improvement. And in the period, there were these inflationary costs that kind of were offset generally by a little bit of tariff refund. Most of the pricing inflationary costs will actually start hitting us in Q3, Q4.

In Q2, though, net-net was somewhat everything offset each other. All these kind of onetime events kind of offset all of it. So we saw a pretty -- at the net of it, a pretty natural level of gross profitability. And so what really drove the improvement with the efficiency of the operations.

And then follow-up is Pro Channel Health. Tell me if you could talk about Pro Channel Health. How should we look at the second quarter performance and the second half expectations. If you could give us more color on active product retention, install time reductions? And any color appreciated.

Sure. The second half -- so the Pro, I think you're -- the Pro buys through all of the channels that we have and we really -- all of our revenue is driven by the Pro. We do have some retail products. We believe that the primary customer, even at retail is a professional. So I think you're talking about the distribution channels probably more so than the retail channel. We expect in the second half of the year for there to be growth in the distribution channel overall. So I think we expect continued performance in retail as well. I think the one channel, which we mentioned before that we expect the headwinds is that OEM security channel.

The next question comes from the line of Jay Goldberg with D2D Advisory.

I just want to follow up on a few comments that you just -- on the last question and also you made in the prior remarks, I was hoping you could give us more color on what you're seeing in the end market. I guess that OEM security is not good, but it sounds like some of the other end markets are looking much more positive. And I was hoping you could talk about those.

Sure. Thanks, Jay. And nice to also have you on the call. Okay. So we think the market is kind of being a continuation of what we've seen to date. We're not expecting kind of the rising tide for the market to drive our performance. We're going to execute to drive our performance. And so whether it's the housing market, we're certainly not seeing much change in the sales of existing homes. We're not seeing any improvement in the new home construction levels. When we look generally into the market of what people are expecting and either HVAC or security market, it's fairly muted.

And I think that's probably the best characterization we can put on it right now. Our goal is to out-execute the market, and that's what we're trying to do. And that's what we expect to do in the second half, again, with the exception of the OEM security. And again, just to be clear, the lean into the OEM security, the commentary is about a large customer. So let's not paint the entirety of the opportunity in that channel negatively. It's 1 customer who's large that we're talking about.

The next question comes from the line of Dan Stratemeier with Jefferies.

Just a question on the OEM customer. Is this like a one-off? What's the overall relationship like, I guess, with that customer going forward?

Yes. Dan, this is -- so it's Tom responding. So the relationship with the customer, I think, is healthy. I think they just have a different direction they're going. They're pursuing vertical integration. I think the products that we offer to them are still well accepted in the marketplace. I think that they like the product. I think they're just trying to do something different with their own business model. In terms of -- you asked a little bit about the outlook, it sounds like you were trying to understand the trend. This clearly is going to have an impact Q3 somewhat Q4 more so.

And then as we go into kind of Q1 of next year, it will kind of be a little more like the Q3 level and then by Q2, we would expect it to kind of plateau. But long term, this is not a strategic business for us. This is a lower-margin business, it's not branded Resideo or First Alert or Honeywell Home sold by a third party and it competes in a market where we create our own products. It could compete in the general market with our own branded offering. So -- we expect this to kind of have a little bit of a stair step. We are under contractual obligations to execute with us, and we are going to do our best to provide great products to this customer and the relationship is healthy in terms of how we get along and everything is very positive on that.

There's no problems at all related to that. It's just a strategic decision they've made and how they want to execute their business.

And just one other point to -- Dan, just one other point to clarify. This activity that Tom just mentioned is already baked into our medium-term financial targets that we presented at Investor Day.

That's helpful. So this is sort of separate then from your refresh that, I believe, is gaining momentum in your security line of branded products. We should think about this as completely separate than that, correct? And I apologize for...

Totally separate. Yes, yes, you got it. Totally separate. No, no, it was great. Thank you, Dan.

We have reached the end of the Q&A session. This concludes today's call. Thank you for attending. You may now disconnect.

Ladies and gentlemen, please welcome to the stage, Chris Lee.

All right. Thanks for the warm welcome. Really exciting times, good afternoon. It's really great to see some familiar and new faces in the crowd. Look, we're standing here at the New York Stock Exchange for an incredibly profound moment for Resideo. .

When I think about the last year or so and the amount of people involved, the hours of effort and collaboration, this moment feels amazing for all of us. Thanks for sharing this moment with the entire Resideo team. I'm Chris Lee. I'm the Global Head of Strategic Finance at Resideo and your host today.

On behalf of the company, I'd like to welcome you to Resideo's Investor Day. We're so glad that you could join us in person or via the live stream. And we have a great event planned and are excited to share more about our business with you. Okay. I got to take a breath. Before I cover our agenda, I got to draw your attention to the forward-looking statements.

I feel like Vana White. We will be making in today's presentations. All right. So stick with me for these statements other than historical facts made during this presentation may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties.

Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those time to time in Resideo's filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements.

We identify the principal risks and uncertainties that affect our performance in our annual report on Form 10-K and other SEC filings. In addition, we will discuss non-GAAP financial measures in today's presentation. These non-GAAP financial measures which can sometimes be identified by the use of adjusted in the description of the measure should be considered in addition to, not as a substitute for or in isolation from our GAAP results.

A reconciliation of GAAP to non-GAAP financial measures are included as an appendix to this presentation which is accessible on the Investor Relations page of our website at investor.resideo.com. Okay. That was a mouthful.

All right. So in July 2025, we took a strategic and transformative action to spin-off ADI from Resideo. We believe this business separation sharpens both companies' focus provides greater financial flexibility and tailored capital allocation priorities that are directed toward their respective growth initiatives while reducing complexity.

We believe this transaction unlocks significant value for our investors and enables both companies to offer distinct and compelling investment profiles. As part of the ADI spin-off, Resideo's Board of Directors remains largely intact. As announced this past May, the following changes to Resideo's Board become effective upon completion of the spin-off.

[ Cynthia Hostetler ] and Nate Sleeper will resign from Resideo's Board to become members of ADI's Board. We thank them for their contributions. Jay Gelmacher will resign from the Resideo Board in conjunction with his retirement. We thank Jay for his leadership over the last 6 years as Resideo's CEO.

Andrew Campelli and Tom Curran will be appointed to the Resideo Board and we welcome the experience and expertise they bring. During today's event, we'll look to share more about our value creation strategy as a pure-play building technologies company. As you can see on the screen, members of our executive team will discuss how we work together to create and deliver value.

I'm really excited to introduce you to members of our executive team as this may be the first time you're meeting some of them. My colleagues are accomplished executives who give us conviction about the execution we described in today's presentation. A couple of housekeeping matters. A replay of today's presentation will be available later today on the Investor Relations page of our website at investor.resideo.com.

We plan to have a Q&A session at the end of the presentation. [Operator Instructions] We hope you walk away today with a better understanding of Resideo and share our conviction about the opportunities for Resideo to be the leader in residential sensing and controls. I personally look forward to catching up with many of you after the event. Before I hand it off to Tom Curran, the CEO of Resideo, let's play a video.

[Presentation]

Good morning, and thank you for joining us. I'm Tom Surran, and I joined Resideo 2.5 years ago as the President of the Product and Solutions division. I'm honored and excited to be named as the CEO of the company after the completion of the spin of the ADI distribution business. There are 3 reasons why I was drawn to Resideo.

First, it's a control and sensing company. And I've spent 30 years of my career in control and sensing. Prior to joining Resideo, I was the Chief Operating Officer for FLIR systems. That background allowed me to recognize the strength of Resideo's technical foundation and the importance of the problems we saw for homeowners and professionals every day.

Second, one of the opportunities I saw Resideo was the chance to reinvigorate product development, creating innovative, differentiated solutions and bringing new technologies to market has been a central theme to my career and it remains one of the areas that excites me most about our future.

Finally, I have a personal passion for building science. I know that sounds weird, but it began when I worked in construction as a teenager which started as a way to earn money became a lifelong interest. I was fortunate to be able to learn the craftsman around me and develop skills in many of the building trades.

I was drawn by the ability to create something enduring and useful. In fact, it's what I love about it. That passion has never left me. building and renovating his home is still how I spend most of my weekends. In fact, over the past 30 years, I have built or substantially rebuilt every home I have owned and despite all those construction projects, I'm still married to the same wonderful wife for 32 years.

That construction experience has given me a deep appreciation for how dramatically homes have changed and become more complex. Today's homes are smarter, more efficient and more sustainable than those built just a few decades ago. The signs behind residential buildings and continues to evolve, and we believe we're still in early stages of that evolution. That's what makes this such an exciting time to lead Resideo.

We operate in a terrific market with powerful long-term drivers. We're becoming a pure-play building technology company focused on residential control intensive solutions. We're stewards of a rich legacy, but we're firmly in command of our future.

We believe in quality. We believe in differentiation, and we believe the companies that create meaningful value for homeowners, contractors and channel partners will be the companies that win. Those beliefs are why I love this company. Today, we want to share why you should be excited about Resideo's story as well.

Before I start talking about the company, I want to speak a little bit about the people who are leading it. One of the things I've learned throughout my career is strategies matter, products matter. Markets matter. But ultimately, if companies succeed because of the people.

We've built a cohesive leadership team united by a shared mission and a shared commitment to our customers, employees and shareholders. While each of us brings different experiences, perspectives and expertise, we operate with a common purpose and a common set of values. We describe our leadership approach as a team of teams.

But what does that mean? First, we're aligned around a shared purpose. Every function and every leader understands how their work contributes to our mission of delivering comfort and protection to homeowners. Second, we prioritize collaboration over silos.

The best ideas and the best outcomes rarely come from a single individual or even department, they come from teams working together to solve problems and seize opportunities. Third, we communicate with transparency. We believe people perform at their best when they understand the challenges we face, the opportunities ahead of us and the reasons behind our decisions.

Fourth, we empower our organization. We want decisions made by the people closest to the customer or the problem. Clear accountability, combined with empowerment, creates speed, ownership and better outcomes.

And finally, we are building the processes, systems and operating disciplines for continuous improvement. We're never satisfied with the status quo. We believe that small improvements consistently applied over time, create meaningful competitive advantages. This leadership philosophy is more than management approach.

It's how we operate the company. It's how we develop products, how we serve our customers and execute our strategy. Most importantly, it is how we will continue to build a stronger Resideo for the years ahead, a home. It's more than 4 walls of the roof. It is a system of systems designed for one purpose, to provide its occupants with comfort and protection.

That purpose has not changed for thousands of years. What has changed is our ability to deliver it. Advances in building sites, sensing and control technologies and connectivity have transformed what a home can do. At Resideo, our role is simple. We provide the sensing and control solutions that help optimize comfort and protection throughout the home.

Whether it's maintaining the right temperature and securing the home or ensuring critical systems are operating properly, our products work together to help homeowners enjoy a greater piece of mind. It's a responsibility we take very seriously. We have been serving homeowners and the professionals who support them for generations.

And everything we do comes back to that simple mission, helping make homes more comfortable and protected. The markets we serve, they're large, they're attractive and they're supported by powerful long-term secular trends, including electrification, efficiency and connectivity.

Collectively, we estimate our core served markets to represent more than $40 billion of opportunity. And unlike many of our competitors, which tend to focus on a single category or a narrow set of applications, Resideo sits at the intersection of comfort and protection, serving the critical systems of the home.

We have one of the broadest portfolios of sensing, control and connected solutions in the industry, giving us a unique ability to solve problems across multiple domains and create integrated solutions. Importantly, we do not view our current leadership position as the end state.

In many ways, they provide the foundation for our next phase of growth. There are several adjacent categories that represent a natural extension of our existing capabilities and customer relationships. Areas such as ventilation access control, Hydraulics control as well as presence monitoring and video solutions.

They're all highly complementary to our portfolio and represent attractive investment opportunities. Take ventilation, for example. Building codes and energy standards are increasingly driving homes to become significantly more air type.

In the past homes naturally exchange air because they were leaky. Today, creating a healthy and comfortable indoor environment requires active management of air exchange and air quality. As a result, ventilation is becoming an increasingly critical system within the home.

Yes. It's a category where we have limited participation today. For Resideo, this represents an attractive opportunity because ventilation is inherently connected to our existing HVAC in sensing capabilities. That's why that is just one example of the adjacencies that we feel we can address.

We believe there are a number of adjacent product categories, which offer significant growth opportunities. Within the residential housing market, we participate both in the repair and remodel market as well as the new construction market. A common question we received from investors is how much of your opportunity is tied to repair and remodel versus new construction?

And the answer is simple. It's approximately 80% repair and remodel, 20% new construction. And the math behind that is relatively simple. Let's just take the U.S.A., okay? There are 114 million existing single-family residential homes. Each year, we're currently building about 700,000 new single-family residential homes.

If you take, let's say, even something as long as a 20-year replacement cycle for an HVAC system, the size of the replacement market dominates the size of the new construction market. We all recognize the current economic environment for the housing is not ideal.

However, despite this, Resideo has continued to execute well. And more importantly, we believe that many of the long-term drivers for recovery in the housing market remain intact. On the repair and remodel side, we see several favorable trends. The housing stock continues to age. Homeowners are accumulating significant equity in their homes and homeowners are increasingly investing in upgrades driven by efficiency, comfort and safety.

At the same time, we are excited about the long-term outlook for new construction. The current housing supply shortage is not sustainable in the long run. Housing starts remain below equilibrium levels as they have for a number of years now.

And yet demographic trends continue to support household formation and housing demand. As the market normalizes, we expect new construction activity to become an additional tailwind for growth. We believe Resideo is exceptionally well positioned within the new construction market.

We have relationships with every 1 of the top 25 builders, and we're well regarded across the industry. Our products are frequently specified into homes during the design and development phase, which creates a strong foundation for future growth.

We see opportunities to increase both our penetration in the homes, the number of homes as well as the amount of content per home. In fact, over the past several years, we have consistently increased our content per home, demonstrating the value Resideo brings to the Pro and builder and homeowner alike.

A moment ago, I used a common refrain in building science that houses assist systems. House is not simply a collection of individual products. It's an interconnected set of critical systems. They must work together to deliver the comfort and protection and savings. These systems include heating, cooling, electrical, plumbing, security and life safety.

And while we sell individual products, our products are typically much more than stand-alone devices. In most cases, they are the sensing and control points that determine how these larger, more complex systems perform. That leads to 2 important implications. First, homes are not uniform. Every home is different. Every installation is different. Every job site presents new challenges.

It's common for repair or installation to require several different products to get the job done, and those products need to interact seamlessly for any problem of professional encounters on the job site, we have a solution that will let them get the job done correctly.

Second, Sensing and Control products are often the most critical components within a system. Consider a thermostat, it may cost a few hundred dollars, yet it determines the performance of a $20,000 HVAC system. And the same principle applies throughout the small sensing and control devices frequently determine the efficiency, reliability and safety of much larger, more complex and expensive systems.

This is one of the reasons why professionals -- our professional customers love Resideo. We're not simply providing products we're providing solutions, trustworthy solutions across the full range of critical home systems. But our vision extends beyond individual systems. Today, we're building the FORTIQ platform for the Resideo ecosystem.

At the foundation is FORTIQ. Our next-generation platform designed to provide a robust and scalable foundation capable of supporting a broad portfolio of devices with exceptional availability and uptime. On top of FORTIQ is our common data model. This enables devices and systems to share information through a common language.

Above that, it's Red Link Plus, our communication protocol that securely connects devices and systems throughout the home. And this is important. Together, these systems create something much more powerful than a collection of connected products. What they create is coordination between systems that create contextual awareness, and that's very important.

Because ultimately, in order to have intelligent homes, you need to have context. When people hear the word legacy, they sometimes think about the past, we think about the future, that Resideo innovation and legacy are inseparable. The reason we have a rich heritage is that for more than a century, we have created new categories, solved important problems and brought innovative solutions to market.

We did not become leaders by following others. In many of the areas we compete today, we were the original innovators. We invented the thermostat. We pioneered residential security. We developed the residential smoke detector. That history matters because it has created something extraordinarily valuable, unmatched domain expertise.

Over decades, we've accumulated a deep understanding of how critical systems interact, how professionals sell problems and how homeowners experience comfort and protection. As I've spent time across the company, one of the things that continues to impress me is the depth of knowledge that exists within our organization. Our teams understand these segments at a level that few companies can match. They understand not only the products that we have been successful in bringing to market, but the many ideas, technologies and solutions, we explored it along the way.

That accumulated knowledge becomes a powerful competitive advantage. It helps us identify opportunities sooner. It helps us solve customer problems more effectively and it gives us confidence we can continue to create solutions as markets evolve. With the stewards of a rich heritage ES, our history gives us credibility, our expertise gives us confidence and our innovation will determine our future.

What of the strengths of Resideo is the power of our brands. The reality is you see our brands every day. Brands like Honeywell Home and First Alert are among the most recognized name in the residential market. For generations, homeowners have relied on these brands to provide them comfort and protection. But recognition is only part of the story.

What makes the brands really valuable is trust. With our homeowners choosing a thermostat, a smoke detector or a security solution, they want a product they can depend on. And when a professional installer recommends a product to a customer, their own reputation and their own businesses on the line. That's why trust matters.

In addition to our flagship consumer brands, we have a number of highly regarded professional brands, including BRK, Brockman and Adevco. These brands have earned the trust of professionals through decades of performance and reliability. Professionals know our brand. They trust our brands. And in many cases, they prefer brand.

That trust creates customer loyalty. It strengthens our competitive position and provides a powerful platform for future growth. I've just been talking about the Pro bit. And as I refer to them, the reason is they're one of our most important competitive advantages. And our relationship with the Pro, it's one we spend a great deal of time developing.

Because when homeowners think about comfort and protection, they think about the products. But the pro is the person that delivers the value that those products can offer. Whether it's a security system, a life safety system or an HVAC system, instillation, quality and system performance matter and the increasing complexity of these applications mean they increasingly require the expertise of a professional rather than a DIY approach. And that's where Resideo excels.

Over decades, we have built the brands and installation experience of choice for critical comfort, safety and security applications. Professionals trust our products because they know they perform well. They're easy to install, and they help them deliver superior results for their customers.

But the relationship goes far beyond the products, we've invested for years in professional training and technical support and the tools that help our customers, the professional build and grow their business. These capabilities have been developed over decades and they're difficult to replicate by our competitors.

We've created software platforms that are embedded into the daily operations of the professional, solutions such as AlarmNet customer applications or ResideoPro are integrated into professional workflows, and we believe the forthcoming Forti platform will drive greater engagement between the Pro and Resideo.

Every year, those relationships become stronger. With more than 15 million installations annually, every installation creates another customer interaction, another data point and another opportunity to deepen our relationship with the professional community. Contractors rely on us to solve problems across a full range of installation -- residential installations.

From straightforward applications to highly specialized and technically demanding applications, they know they can come to Resideo for answers. Simply put, the professionals do not just buy residual products. They often build their business around them. One of the defining characteristics of Residio is our scale.

Scale by itself does not to create value. What creates value is the ability to leverage scale to deliver better products, greater efficiency and financial performance. At Resideo, we design and manufacture substantially all of our own products. Every year, we produce more than 75 million units that help homeowners improve comfort and protection.

Historically, however, that scale was spread across numerous product lines in each product category. And while we benefited from the breadth of our portfolio, we did not always capture the full advantage that scale can offer. Today, that's changing. We are managing Resideo as a unified operating company rather than a collection of individual product lines. We are leveraging our purchasing power, manufacturing footprint and engineering resources across the enterprise.

As a result, we are becoming more efficient more responsive and better position to create value for our customers. Importantly, we believe we're still in the early stages of that change, and there remains significant opportunities to further optimize our operations simplify our processes and increase the returns generated from our scale.

As we move forward as a stand-alone company, unlocking the full power of our scale will remain 1 of our highest priorities, and we believe 1 of the most important drivers of long-term shareholder value. We view operating scale as more than an advantage. It's a strategic asset. One of the strategic choices we've made as a company is to remain meaningfully vertically integrated.

In today's environment, many companies have adopted asset-light models and outsourced significant portions of their manufacturing operations. We've chosen a different path with an emphasis on making the vast majority of our products in-house. And we believe there are 4 important reasons why our vertical integration creates meaningful advantages for our customers and shareholders.

First, our manufacturing operations are an extension of our domain expertise. For more than 140 years, we've been developing products that provide comfort and protection. That knowledge is not limited to our engineering teams. It is embedded throughout our manufacturing processes, our production systems and our quality discipline.

Second, vertical integration gives us greater control over quality. The products we manufacture are often responsible, as I mentioned, for the critical functions within the home. Whether it's a smoke alarm, a thermostat or combustion control, reliability matters. By maintaining control over manufacturing, we are managing quality throughout the production process and ensure our products consistently meet the standards our customers expect.

Third, manufacturing plays an important role in accelerated differentiated solutions and accelerating the development of these new products. because our engineering and manufacturing teams work closely together, we can iterate faster. We can move products through development more efficiently, and we can bring those innovations to market more quickly. Manufacturing is not separate from our product development process. It's a critical enabler of it.

Fourth, scale creates meaningful economic advantages with more than 75 million units produced annually. Our manufacturing footprint provides purchasing leverage, operational efficiencies and cost advantages that strengthen our competitive position.

As I transition today to talk about our strategy, I want to make something that's pretty important. The strategy we'll be talking about today is not new. It's what we've been doing for the past 2.5 years. And while we have specific strategies related to each of our product categories, the 4 pillars I'll be talking about today represent the common framework through which we guide our decisions across the entire company.

The first pillar is accelerating differentiated solutions for differentiated products. And the key word is differentiated. We're not interested in creating generic products. We are focused on developing solutions that solve meaningful problems create value for our customers and ultimately delight the homeowner. We believe innovation should be purposeful, and we believe differentiated products create both competitive advantage and superior financial returns.

The second pillar is focusing on the professional. You've heard me talking about it. As we've discussed throughout this presentation, the professional is central to our business model. And when we talk about focusing on the professional, we're talking about viewing every decision through their lens.

How do we save them time? How do we help them solve the broadest possible range of customer problems? How do we help them create happy, loyal homeowners. Because when the professional succeed, we succeed, the third pillar is expanding geographically.

And while we have leadership positions in many of the segments we serve today, we have not pursued all geographic geographies equally. For example, our smoke detectors sell primarily in the United States where certain categories of our water products sell predominantly in Europe.

The reason for that nonuniformity has little to do with the markets or the product requirements. It has to do with prior management decisions. As a result, though, there are significant opportunities for us to increase our participation in existing markets around the world.

As a company, we need to think more globally. We need to leverage our investments that we make across multiple regions and apply best practices across markets and thereby expand our participation in these international opportunities.

The fourth pillar is leveraging our scale. Scale allows us to invest more in innovation, provide greater value to customers and operate more efficiently. It is one of the most important competitive advantages we have, and we intend to leverage it aggressively. These 4 pillars work to get differentiated products strengthen our value proposition.

A deep understanding of the Pro drives adoption, geographic expansion broadens our opportunity set and scale enables us to execute more effectively and create greater value. As a stand-alone company, we believe these strategies position us to accelerate growth, improve profitability and create long-term shareholder value.

Up to this point, I have focused on what we are doing and why we believe Resideo is uniquely positioned to win. But ultimately, strategy only matters if it produces results. We believe the actions that we've been discussing today allow us to target mid-single-digit revenue growth even without a significant improvement in the economic environment.

At the same time, we believe these initiatives will drive meaningful margin improvement. As we continue to improve our product mix, increase our operating efficiency and execute with greater focus as a stand-alone company, we have set a goal of increasing adjusted EBITDA margins to the 23% to 25% range.

Importantly, this is not dependent on a perfect macroeconomic environment. While we would certainly benefit from a stronger housing activity and improved market conditions, our strategy is designed to create value and a variety of economic backdrops.

In summary, we believe the entry to creating long-term shareholder value is to deliver better long-term profitable growth through economic cycles, maintain durable competitive advantages and continuously increase the value we deliver to our customers. Our conviction in this is supported for the following 3 reasons.

First, we occupy a unique position within the home. Our products touch many of the critical residential systems, including air, energy, water, safety, security. A few companies, if any, have as broad a footprint across the home.

That footprint provides us with the opportunities for enhanced systems integration, which in turn provides better system coordination as well as that contextual awareness that's so important. And that creates the opportunity to drive whole home optimization.

Second, we believe our position is highly durable. The products we provide are essential to the operation of the home. Much of our demand is driven by repair, replacement, maintenance and upgrades, creating a resilient foundation that extends across economic environment.

And third, we have built an exceptionally strong competitive position. Our brands our customer relationships, our expertise sensing control, they create advantages that are difficult to replicate. When you combine our footprint in the home, our durable market position and our competitive position with the focus that will come from being a stand-alone company, we believe Resideo is uniquely positioned to win.

What you've heard from me today is the framework. Now I'm going to turn it over to the team, members of our team, who'll talk you through the individual components of the plan, explain the actions that are already underway and show you how we intend to translate these strategic priorities into growth, margin expansion and long-term shareholder value.

At first, I'm going to introduce you to Scott [indiscernible] he's Resideo's engineering leader, and he's going to talk to you about our differentiated offering. You should know Scott to avid marathoner. In fact, he's actually completed the 7 continent Marathon challenge.

And one of the great things about Scott, as he demonstrates that tenacity of a marathon every day it is job in Resideo. Scott?

[Presentation]

Turning the dial on the [indiscernible] Thermostat. That's a core memory for so many people, isn't it? It's simple. It's iconic. It's Resideo. Good afternoon. I'm Scott Zira. I lead the engineering team. I joined Resideo about 6 years ago. And from developing communication systems for first responders to powering AI scale data centers, I've built a career obsessing over technology that simply works.

That same principle, reliability, simplicity, trust what powers everything you just saw and it's what's driving our next generation of products. Your home, one of the most important places in the world it's deceptively simple until it's not, right? Homes are actually one of the most difficult technology environments on the planet.

It's a system of fragmented systems. Every home is different. Every installation is different. It's the place where hardware, software, buildings and humans all interact. And we don't see an end to this complexity. If anything, it's growing.

We face ever more stringent regulation demands, demands for greater efficiency -- at the same time, we're all using our homes differently, spending more time at home, greater variability in how we use our homes. And you know what, we love it. over decades, we've developed deep expertise in how homes actually operate, not in some lab but across over 150 million homes and small businesses, over 150 million unique environments, over 150 million edge cases, that experience has shaped our technology, our road map and it forms the foundation for the differentiation that you'll see today. Our product philosophy is simple.

Great products create value. Connectivity amplifies at value and then intelligence compounds that value. At each level, we're developing a closer and more enduring relationship with our homeowners and our professionals. We start with the foundation of award-winning, industry-leading, best-in-breed products.

These solve hard, important challenges. We then connect these devices, it started with RedLink, our own wireless protocol purpose-built for home comfort systems. And that matters. The home is not an easy networking environment. It's walls, it's floors, it's interference. The Red Link protocol beloved for its long-range robust coverage and very long battery life.

And most importantly, it just works out of the box. And that's critical for our Pro channel. They want to install, get systems up and running quickly and move on to the next job. We've continued to enhance this technology and are expanding it across our full portfolio with Red Link. This brings the same level of performance, speed of installation and connectivity to every product we deploy.

And that's difficult to replicate with off-the-shelf protocols. This becomes our foundational advantage as we scale our platform across more devices and more homes. Now great products, they'll get you in the house, but great platforms keep you there. Once you have a reliable way to connect the home, the next step is turning that connectivity into intelligence.

And that's what FORTIQ enables. FORTIQ is our cloud platform for connecting devices, services partners across the home. We've built it to scale to tens of millions of devices and to deliver the reliability needed for life-critical applications. I'd like to say FORTIQ is the layer that's woven into fabric of our homeowners' lives and into our professionals businesses.

As we dive a to our products, let me start with a core belief that drives our product strategy. delivering comfort is not about a single device. It's orchestrating the entire home. I mean what even is comfort, right? Probably they go, it's temperature. And that's important but it's constantly balancing temperature, humidity and air quality efficiently. So our approach is threefold.

First, that's control. That's thermostats. That's hydronics it's zoning. This is the intelligence layer for sensing and decision-making happen. Second, conditioning, that's humidification, dehumidification, actively controlling moisture in the environment. And third, air quality, ensuring air is clean and fresh.

Our differentiation is not just having products in each of these categories. It's how we integrate them. Our systems work together, sharing data and coordinating decisions to optimize the whole home. At the center of this is the thermostat. Winning and comfort starts by winning the thermostat. I'm sure to some people at some box on the wall, maybe something for you to argue over. But to us, it's much more than that.

It represents 12 months of development, over 1 million lines of code. 500 qualification test. It sits at the center of the most expensive system in your home, and that's why it's also the center of our strategy. Over the past 2 years, we've reinforced our leadership across that portfolio, strengthening both entry level as well as the premium segments.

Released in '25, 2025, our premium Elite Pro model has quickly established itself as one of the leading smart thermostats on the market. We're building upon our strength in thermostats to expand into the broader system, extending into conditioning where we recently released one of the most efficient and easiest to install dehumidifiers on the market. And soon to follow will be a refresh of our humidification portfolio.

In air quality, as Tom mentioned, we're pursuing growth opportunities in both filtration as well as ventilation Finally, as we update our thermostat portfolio, we're greatly reducing the complexity from over 40 families to 5 global platforms. These platforms mean faster innovation cycles and greater scale efficiencies. We have a video that plays in our Aurora, Illinois office.

And in it, a fighter says, we meet people on the worst day of their lives. I'd like to think that my job is to ensure that day never happens. And that's really how we think about protection, not as a set of products. It is a system designed to prevent, detect and respond before small issues become major events.

In security, we provide the full system that's panels, sensors, video, importantly, monitoring creates a continuous connection to the home and is a meaningful source of recurring revenue for us, while delivering ongoing protection to the homeowner. We extend that into safety with smoke carbon monoxide in gas detection, providing against life critical risks.

And finally, leak detection, helping prevent one of the most common and costly sources of damage in the home. The key point is these are not stand-alone products. They're designed to work together as an integrated system, allowing us to move from reacting the problems to helping prevent them.

We see a significant opportunity in security and safety, but our approach is different from traditional point solutions. Our strategy is to develop a fully integrated whole home solution. This starts with next-generation intrusion and monitoring, but it extends well beyond that. We're building a broader ecosystem that includes video, access control and leak detection, all working together in a coordinated system.

We've recently introduced video solutions for both homes and small businesses and have next-generation all-in-one and hybrid panels in development, and we're integrating all of this into -- for tick. Delivering a more complete solution for homeowners and a simpler, more powerful offering for our professionals.

Now a security system can involve installing dozens of sensors. The low latency of FORTIQ allows sensors to be added in seconds. And just like in comfort, we're leveraging global platforms to speed product development and reduce costs. As an example, we've recently released our tenth Edition smoke and carbon monoxide detectors, where we transformed 12 product families into 1 global platform, cutting development time by nearly 50% and from over 2 years to just over 1 year.

So FORTIQ is the intelligence layer. Our apps are where that intelligence shows up every day. This is where we turn connectivity and system understanding into an ongoing expert experience. On the Pro side, our application simplify installation, they'll provide advanced diagnostic. And they create a direct connection to the homeowner for the Pro.

For homeowners, our apps deliver a seamless experience across comfort and protection, providing insights, energy savings and increasingly proactive protection. It creates continuous engagement -- it's how we stay connected to the home, not just over time, but not just at install, but over time. So now imagine you're a contractor and you're building out a new subdivision.

You've got dozens of technicians that are installing hundreds of thermostats. Each thermostat may require over 100 configuration settings and each one of them needs to be done quickly and consistently through our Bluetooth-enabled configuration tool, we've reduced what may have taken 15 minutes to mirror seconds. You literally walk up to the thermostat, pull your phone out, click on the app, you're done.

One of the biggest constraints in this industry is access to labor in the pro channel. We create solutions that are purpose built for the Pros. From Red Link Plus that reduces install time to on device and app branding that helps them strengthen their relationships with their customers. We also provide diagnostic system insights and a direct connection to their installed base.

We become integrated into how they run their businesses. It becomes part of how they install, how they service, how they engage with their customers. And you know what, once you're embedded in those workflows, it's very difficult to be replaced. We tied this all into a concept we call labor, loyalty and leads that Scott Harkins will talk about in detail in his section, but it all starts with quality.

As an engineer, I cannot begin to tell you how it feels to hear a customer say, my family is alive today because of your product. That's not marketing. That's a standard we aim to meet every single day -- we take that responsibility very seriously and is a commitment that's recognized by our customers.

Amazon needed someone to design a thermostat. They turned to Resideo. Google needed someone to design a smoke detector. They turn to Resideo. Over 100,000 professionals across the world, trust residual for their businesses their customers, their families, delivering 24 million smoke detectors a year, that's hard, processing 50 billion cloud transactions per month is hard.

It requires deep engineering expertise and disciplined manufacturing. And that's why quality for us is not just operational excellence. It's a core part of our differentiation. I think most people have this common belief that quality and speed their trade-offs, we disagree. We've made deliberate investments in talent and platforms and how we operate.

We've added over 130 engineers bringing the team to just over 1,000. We've increased R&D by over 130 basis points to roughly 5% of revenue. We've invested over $100 million in platform and core technologies. These investments have translated into execution into velocity. The impact is clear. We're delivering products 30% faster than prior generations, and we've tripled NPI revenue since 2023 to over $900 million.

For all this talk about smart homes, most homes today are actually pretty dumb. What we're building is the shift from pure connectivity to a home that actually understands context, behavior, intent. And what you see on this slide is that evolution. We start with the connected home, devices that can sense and respond. We then move to a coordinated and contextual home where those systems work together.

Making better decisions about real world conditions. And ultimately, we move to a cognitive home where the system understands reasons and act. We're adopting AI today to turn device and system data into actionable insights from identifying activity in video streams, for example, to proactively detecting water leaks automatically shutting off the water supply before significant damage occurs.

To be clear, AI is an enabler, but the real value comes from how our understanding of the home actually operates. Our models, our data, our algorithms. That's what ultimately creates new value and differentiation. Let me walk you through a quick example. So I'm sure we've all experienced this. Your HVAC system fails, your furnace, your air conditioner.

It's always at the worst possible time, like 9:00 p.m. on a weekend. The industry is largely reactive. That's expensive for you, that's expensive for our Pros. What if there was some sort of check engine light for the home something that could tell you a problem is happening before it actually fails.

That's exactly what we're doing with Pro IQ predict. We're leveraging building science, machine learning and deep HVAC equipment experience to predict and notify when a piece of equipment is about to fail. The benefit is clear for homeowners. Fewer surprises, fewer emergency repairs, a more reliable home. For PROS, it fundamentally shifts the model from reactive to proactive.

They can schedule service in advance, arrive with the right parts and complete the job faster and more efficiently. When you step back, what we're building, it's more than a set of products or even a platform. It's a connected ecosystem that makes the home smarter over time, a truly cognitive home by integrating the best-of-breed devices, connecting them through Red Link and unifying everything on a single platform, we're able to turn how the home operates into real intelligence.

And since where we are delivering each layer of that system, that's something very difficult to replicate. We're creating a home that knows anticipates reacts. Building on over 100 years of innovation, our engineers around the world are solving hard problems, and they are doing it at speed. We don't just build products.

We understand how homes actually work. That understanding becomes our data, our insight and ultimately, our advantage. We take this foundation and compound value over time, starting with great products, extending through connectivity and building towards intelligence. And that leads to where we're going. We're building a home that understands, anticipates an X.

And ultimately, this connected ecosystem, connectivity platform, intelligence, it doesn't just add value. It creates a durable compounding advantage that's very difficult to replicate. So I'm going to close by sharing a little secret, product people, we can tend to be an obsessive bunch. Wherever we go, we like to see our products in the wild, who smoke detectors on the sealing whose door sensor is there.

I'll be at dinner with my wife. She's talking to me, and I'm looking past through who's thermostats on the wall there. But here's the thing. After doing this for so many years, in many homes, I've realized you're never far from a Resideo product. And once you see it, you start to notice it everywhere.

So when you go home tonight, look around, look at your walls, look at your ceilings, if you've got to look at your basement. Look for Honeywell Home. Look for first alert, look for Resideo. These chances are we're already there. And if you find one, there's a good chance our next speaker, Senior Vice President of Sales and Marketing, Scott Harkins has something to do with getting it there. With more than 30 years at the company, Scott has spent his career earning the trust of our professionals. And many of those relationships have grown into lasting friendships. Scott will take the stage after a short break.

Ladies and gentlemen, please make your way back into the room at 1:15. Thank you.

[Break]

[Presentation]

Ladies and gentlemen, please welcome to the stage Scott Harkins.

Welcome back. My name is Scott Harkins and I lead Resideo's global sales and marketing organization. I'm a 30-year veteran of this company, having joined in 1995 as part of Ademco and through its evolution to Honeywell and then the residual spin-off in 2018. You can say I have had front row seats to our transformation. And that long tenure gives me a unique perspective on both our past and on our future, and it makes me somewhat of a company Astoria.

Over that time, I've led sales and marketing organizations. I've managed the $700 million P&L and have helped build our connected home software organization. And across all of those roles in all of those years, I can say with conviction, I have never been more excited about our future than I am right now.

And over the next few minutes, I hope to share that excitement with you. At Resideo, our mission has always been to serve the Pro. They are the professionals that serve the HVAC, security and electrical needs of homeowners and small business owners. They install, repair and monitor the systems and provide comfort and protection.

Today, almost everything in your life is connected and monitored your cars, your phones, your watches, everything, except most people's largest investment they ever make the home. The home is managed by catastrophe. Water heaters fell by leaking. HVAC systems fell on the hottest and coldest days of the year, and security systems are of purchased after a critical event.

The reality is home systems fail at the worst possible times and that's when our Pros show up. That's when the Pro becomes the hero of the home. It's the Pro who ultimately delivers that sense of comfort and protection, that feeling, that peace of mind that turns a house into a home.

And when the Pro is engaged, that's when Resideo wins. And we take our mission very seriously. We understand our role. We must help them win more business, be more cost efficient and ensure that our products are available when they're needed. Our connection of this community is unmatched with more than 100,000 pros globally in millions of homes weekly, selling and installing residual solutions.

For decades, we've been their trusted partner. Supporting them with reliable pro for solutions and investing $10 million a year in training and education. It's their expertise and our solutions that gives them confidence that they can overcome any challenge.

And over time, this has built a deep trust. In today's world, it's unusual for someone to spend their entire career with one company. And will people ask me why I have the answer is simple. It's our customers. They inspire me with their focus on their employees and their customers and within their communities.

Today, you'll hear about technology and channels and innovation and supply chains. And all of that is obviously important, but it's our customer relationships, our partnerships and our friendships that are a major differentiator in the market. I believe that these relationships are sacred.

And I'm grateful that some of our customers have joined us here today are friends it's by serving these pros that we will win. In our markets, the Pro is the channel and winning the pro means winning the market and delivering long-term growth. Our brand is trusted by Pros worldwide who choose what gets installed, and that trust drives our performance.

As Tom said earlier, we've been innovating for a very long time. We've launched our first thermostat in 1885, our first security solution in 1929 and our first smoke detector in 1964. These brands Honeywell Home First Alert and BRK represent quality, reliability and performance attributes that matter to the Pro when failure is not an option. And they resonate not only with PROS, but also with homeowners, helping Pros win the home and reinforcing their credibility with consumers.

This brand equity was built over decades by working alongside our customers, understanding their challenges and delivering solutions that solve real-world everyday problems. And we continue to strengthen our brand equity today through innovation. A great example is innovation that we brought to a simple thermostat wall play.

Our UWP wall fleet makes every thermostat installation exactly the same. This innovation takes time out of every install, it reduces installation errors and it makes future upgrades fast and friction-free. Professional contractors have responded by installing over 30 million units.

Think about that 30 million units. That is an overwhelming response from the HVAC community. That is how we build our brand, not just through awareness, but through performance that drives productivity and profitability for the Pro.

Every week, I receive articles on fires and burglaries and carbon monoxide poisonings that happen around the world and have real impact on people's families, and they're completely avoidable. I am proud to be associated with these brands and the pros that install them, all in an effort to help people and protect homes.

In our markets, trust isn't built through marketing it's built through performance in the field. And after 30 years, I can tell you, this level of trust and brand equity is incredibly difficult to duplicate. It's the kind of trust that money can't buy.

Our channel strategy gives us unmatched access to those pros and it ensures we capture demand wherever and whenever it occurs. We serve the Pro through 5 channels: security, HVAC, electrical, retail and OEM. This makes us unique in our markets and allows us to participate in virtually every system in the home.

And each of these channels is served by a network of distributors that was built over decades. And today, that network spans more than 30,000 locations. In fact, in the U.S., over 90% of our contractors are within 15 miles of one of our distribution partners. And therefore, within 15 miles of one of our products, 15 miles, that proximity matters to our customers, the job can't wait.

If the product isn't available, the sale could be lost. We complement that network with products in more than 7,500 retail locations, serving consumers and Pros who choose that channel and a strong OEM channel that supplies leading manufacturers that rely on Resideo's technology to create value for their own solutions.

Together, this multichannel approach ensures that regardless of how the Pro chooses to buy, we are present and positioned to win. The scale of this distribution network also unlocks a platform, a platform to launch new products at speed and at scale. This means we can bring new innovations across entire regions maximizing our Pro engagement and launch in just days.

In fact, last year, working with our HVAC distributors in the U.S., we launched a new indoor air quality product, a humidifier and the results speak for themselves. We have delivered exponential growth with clear gains in the indoor air quality category. And in Europe, where our water solutions are the backbone of our portfolio, we worked with our distribution partners to launch the industry's first lead-free water filter.

And once again, the results were amazing. It delivered immediate incremental growth. That's the power of our distribution network. That scale, coupled with a level of proximity and channel breadth is a deep and durable moat and it is structurally difficult to replace. And a key reason why no competitor has.

Over the past 5 years, we've delivered consistent baseline of growth across a wide range of market conditions. That consistency is not accidental. It's the result of a deliberate and repeatable growth strategy built on 3 strategic pillars: everyday growth drivers, strategic expansion and macro trends.

These pillars create a balanced growth model, combining growth, expansion and tailwinds. We are a proven growth engine and a clear path to accelerate and I'll go a little bit deeper into each of these categories. Our first pillar is compelling everyday growth drivers. This is the core engine that drives our business every single day.

It's the growth we generate driven by execution and not dependent on macro trends. This everyday effort has 3 primary levers: first, expanding wallet share. Our portfolio spans multiple categories and it creates natural upsell and cross-sell opportunities. So by introducing more of our solutions to our customers, we can increase the share of each PRO interaction.

Second, competitive conversions. We operate in competitive markets, and we've developed a disciplined approach to competitive conversions. Our new product innovations lead those efforts to deliver and win new customers and drive incremental growth above our baseline.

And finally, demand generation we have built a world-class demand generation capability focused on influencing end markets, not just the Pro. We target segments like residential new construction, property management and insurance markets. where decisions are made upstream.

These customers specify our solutions, which are then installed by our pros creating pull-through demand across our channels. A great example of this, our efforts in residential new construction. In just 4 years, we have executed dozens of agreements with builders, including all 25 top U.S. builders.

Those agreements cover more than 60% of all new homes built. And over that same period, we've doubled. We have doubled our content per home to roughly $400 and the highest content per home is $800. We're not just participating in demand we're helping create it.

This is a powerful growth engine. And even in a down market, we're growing our position, setting up for an acceleration when the cycle returns. Importantly, these 3 growth drivers are repeatable and within our control. This is the growth that happens every day, job by job, customer by customer, and it will remain the foundation of our long-term growth strategy.

Our second pillar is strategic expansion, this is how we build on our core and drive incremental growth above our baseline. We do this by extending our capabilities into adjacencies where we have a clear right to win. Two simple examples. First, we're already a leader in the U.S. market with our first lean BRK brands, but we have yet to enter the European market.

That is a $2.9 billion segment with requirements very similar to the U.S., making it a highly attractive adjacency. And just 3 weeks ago, we launched a new family of smoke detectors in the U.S. It's a new technology with a sleek design. It meets the latest standards and regulations, and it provides an enhanced consumer experience.

As Scott [ Ziffer ] said, they were intentionally designed to be a global platform. And because they are a global platform, these products will be the beachhead for our expansion into the EMEA Life Safety segment, where even small gains will deliver meaningful growth.

The second example is, again, demand generation where we intend to expand our efforts into the small and medium business segment in 2027. That timing is intentional. It aligns with the ongoing rollout of our FORTIQ software platform and with an all-new security hardware platform.

We'll focus on multi-location small business owners, where one customer win, represents a high volume deployment of Resideo products and meaningful lead generation for our customers. In both examples, we're building on strengths we already have. We're not just entering new segments. We're extending our proven capabilities.

We have existing customers, existing channels to market and a very real right to play and win. And as I said, strategic expansion will drive incremental growth above our baseline while strengthening our ecosystem and creating long-term demand for our Pro customers. Our final pillar or macro trends. These are the powerful forces that increase demand for our solutions and ultimately amplify our growth.

There are 3 primary trends that impact our industries. First is housing. I've already talked about it. We have dozens agreements in place, nearly $400 in content per home, and we are well positioned with builders and the pros who serve them.

When the housing market recovers, we are ready to capture and capitalize on that demand across our markets. Second, our equipment replacement cycles. This is one of the most important drivers in our industries. HVAC systems typically have a life span of 12 to 15 years. And our life safety products, smoke detectors and CO detectors, typically follow a 10-year replacement cycle.

What's important is where we are in those cycles today. HVAC installs began to recover again in 2014 after the housing crisis and have consistently grown 9 million to 14 million new installs annually ever since. And those older units are just entering their natural replacement cycle.

The 10-year battery smoke detectors that really started to gain traction for us in 2014 as well and today, we continue to sell millions of units annually, fueling a long-term replacement tailwind. We have entered a sustained replacement cycle in both the HVAC and Life Safety segment.

Not a short-term spike, but a peak and plateau cycle that will last well into the 2030s. The final macro is building science. Both Scott and Tom talked about how buildings are being built more tightly and more energy efficiently. And that drives the need for integrated controls and monitoring and safety solutions.

This will create a higher content per home for our solutions with IAQ, zoning, safety and security solutions. Importantly, our baseline growth does not depend on any of those trends. But as they materialize, they become a powerful accelerant to drive incremental growth on top of a fantastic baseline and then software.

Our software is a value multiplier. Our software ties it all together. It's a layer on top of our hardware that unleashes and maximizes value for our Pros. I have been involved with the smart homes since the 1990s. And over that time, I've seen many companies make the same mistake.

They think that the power of the smart home is in the consumer app. And of course, the consumer experience is critical. In fact, our app is rated at 4.8 stars on the Apple store, one of the highest in the space. But the real value, the true value of the smart home is what the software does for the Pro and by extension to consumer.

I have had thousands, probably tens of thousands of conversations with customers. And I asked them the same question every single time. What are the biggest challenges you face? And their answers are amazingly consistent. Labor, leads and loyalty.

Labor, our pros are facing significant labor shortage. 25% of all technicians are nearing retirement, and there will be 2 million open positions by 2030. Leads, online customer acquisition costs have never been higher, and they keep rising. This makes it harder, especially for smaller companies to compete for new customers.

And loyalty, long-term customer relationships are increasingly difficult to maintain in a world where a customer can be lost to an online search, crippling the lifetime value of that client. Our software platform, FORTIQ, and specifically the ProIQ services are designed to directly address these challenges.

Our technician app improves labor productivity. It reduces installation errors, minimizes truck rolls and helps upskill new technicians, allowing Pros to do more with fewer resources. We embed the PROS brand directly into our consumer app, where every interaction becomes a brand impression between that homeowner and that pro.

It reinforces their relationship. Creating a persistent connection that consistently associates comfort and protection with that PROS brand in ways that a billboard or truck wrap never can. And with predictive analytics that Scott [ EZ ] spoke about, ProIQ enables a transformational shift from reactive services to proactive engagement.

Identifying issues before they become catastrophes and creating leads within a Pro's existing customer base. That means fewer emergency calls, more efficient service calls and better outcomes for the Pro and more importantly, for the homeowner.

Instead of a onetime transaction, software enables an ongoing 24/7 relationship between the Pro and the homeowner. It is a fundamentally better model and it has powerful implications. It drives higher retention rates, increased lifetime value and expanded opportunities to deliver recurring revenue.

The smart home won't be one in the app. It will be one with the Pro. And in doing so, it will unlock a new level of growth for Resideo. In closing, we have built long-term trusted relationships with over 100,000 Pros globally our focus on the pro is our competitive advantage. It's the foundation of our competitive moat.

Our products are accessible through 30,000 outlets, giving us unmatched reach into markets. And our brands are trusted by pros and consumers. Our first approach drives innovation that delivers value where it matters. And our sales strategies consistently deliver growth without the benefit of macro tailwinds and it will accelerate when they return.

Resideo is a long-term growth story. It's built on the Pro, it's scaled globally and is positioned to compound value for both our customers and our investors. In recent years, I've become a fan of the story of [indiscernible] from Greek mythology. He was condemned to push a rock up a hill only to have it roll back down over and over and over again.

At first glance, it seems like a fetal existence. But what resonated with me is the idea that he found meaning in the effort in showing up every day and doing the work. And in many ways, that's what we do. Every day, every month, every quarter, we start focused on driving growth, serving our customers and executing our strategy.

But here's the difference. I don't push that rock alone. The real strength of Resideo is our people. The teams that show up every day to serve our customers to innovate and to execute across every part of the business. People like our engineers that are building an innovation machine that keeps raising the bar.

And many others who aren't here today because they're out doing the work, they're pushing the rock and delivering for our customers in real time. In my 30 years with this company, this is the strongest team I've had the privilege to work with. They're smart, driven, competitive and deeply committed to winning. And that's ultimately what gives me the greatest confidence in our future.

Our next speaker is someone who isn't afraid to put his shoulder into the back of the rock and push. He ensures that our products are built available and delivered with the quality and reliability that our customers expect. After a brief video, please welcome from the city of Boston, Massachusetts; our Senior Vice President of Integrated Supply Chain, Patrick Murray. Thank you.

[Presentation]

Good afternoon. Scott Harkins just highlighted the tremendous work of our sales team, and I couldn't agree more. I'd like to thank Scott's team makes the first sale while every following sale is made by the operations team by delivering high-quality products on time every time.

I'm Pat Murray, and I lead the integrated supply chain and IT teams at Resideo. For the first 25 years in my career, supply chains were boring. The one really cared how products were built and delivered. To quote my wife, today, supply chains are sexy.

Since COVID, supply chains have been in the global spotlight from tariffs and geopolitical tensions to disruptions in critical trade routes and constraints and component supply. Volatility is the new normal. Fortunately, we have an exceptional team who consistently navigates these challenges and delivers results.

I joined Resideo in late 2018, bringing over 30 years of experience in operations. I've been fortunate to work at world-class companies such as Bose Corporation, Danaher, Motorola Solutions and Zebra Technologies. These experiences have enabled me to develop deep expertise across multiple disciplines, including advanced manufacturing, lean principles, product distribution and IT systems.

As a hands-on operations executive, I have a proven track record of leading large-scale transformations across complex international organizations. And I thrive on the daily challenges. I specialize in driving supply chain innovation, building high-performing teams who deliver measurable results, including quality and service level improvements and unlocking hundreds of millions of dollars in savings.

As a former college athlete, I bring a competitive fire and a team first mentality focused on coaching and mentoring great people and winning together. What I love most about my job is saving the professional and personal growth of the people with whom I work. My personal leadership philosophy is rooted in not just motivating people, but inspiring them. When I joined Resideo, our operations and systems were fragmented, making them difficult and complex to manage.

Today, we operate as one integrated team, delivering industry-leading quality, lead time and customer service. A clear example of this is our ERP systems. In 2019, Resideo operated across 7 separate ERP systems. Today, our business runs on a single ERP platform, providing 1 data source of truth across the globe.

Our ability to consistently deliver exceptional service is built on 3 core principles. Vertical integration, regional manufacturing and the use of technology as a competitive advantage. This includes both factory automation and digital systems. Our manufacturing strategy has strengthened product quality, improved supply chain resiliency and increased our speed of execution.

In fact, everything we have done has been centered on 1 thing: speed, speed and manufacturing, speed in the flow of information and speed in decision-making. These strengths enable us to deliver the industry-leading performance that the video today. This focus has created greater value for our customers while driving stronger financial performance for shareholders. Resideo has significant operational scale.

In our 11 factories, we have a workforce of approximately 8,000 strong, producing over 75 million units per year. Our factories are strategically located as part of the regional manufacturing philosophy. Regional manufacturing provides a competitive advantage through faster customer response, lower landed costs and greater resilience to geopolitical instability, including ever-changing trade policies, and supply disruptions.

Continuous evolution remains a key focus. We are not stuck in the past. Since 2018, we have increased factory utilization and improved network efficiency by consolidating operations and reducing our manufacturing footprint by 4 facilities. We have also recently announced 2 additional site consolidations.

We will continue to unlock further productivity and cost advantages across our manufacturing network. Deliver speed and quality, we need flexibility. This means being able to change quickly to stay ahead of shifting market conditions, and this is inherent in not only our factories but also our strategic suppliers.

Over the years, we have streamlined our supply base and in doing so, have improved executive relationships and purchasing leverage. Recent supply chain disruptions have underscored the value of these relationships which provide greater flexibility, priority access and more resilience than a manufacturing model solely reliant on third-party contract manufacturers.

Our executive level relationships with suppliers, including memory and semiconductor companies helps to ensure supply continuity and provide greater visibility into market conditions. This allows us to respond quickly to supply challenges and changing demand. The additional leverage improves cost management and strengthens our negotiating position.

In short, in times of supply constraints, relationships matter. We drive operational flexibility in other ways as well. Our localized supply chains to reduce inventory in transit, enabling faster response to supply disruptions -- we have worked closely with our engineering friends to create product platforms, which enable improved factory efficiency.

As an example, in 2018, we started with over 110 different product platforms, our goal today is to have 1 or 2 product platforms for product family. Our vertical integration allows manufacturing to the ability to deliver speed, quality and operational flexibility at scale. Vertical integration strengthens our supply chain performance by reducing handoffs, eliminate waiting cues and minimizing transportation between suppliers.

By avoiding unnecessary air, trucking and ocean freight, we lower cost, shortened lead times and improved resilience. Gartner recently recognized Resideo as having a mature supply chain that is well ahead of our peer group with top quartile grades in manufacturing expertise, logistics, material planning and sourcing and procurement.

That's external validation of the transformation we have been building for years. At heart, of an engineer. That's why our journey has always been grounded in utilizing technology. We invested heavily in advanced digital technologies, automation and Industry 5.0 principles to build an agile, efficient and sustainable manufacturing network supported by world-class systems and processes.

We have a robust continuous improvement program, driving improvements in productivity, quality and operational performance. And most importantly, every one of our investments and process improvements has been designed with the customer in mind. We deliver superior customer results by creating long-term value for shareholders.

Customer satisfaction begins with product quality and outstanding service. Professionals and distributors build their business around reliable, quality products, that need to be right the first time into every time. We have built our manufacturing operation to deliver this exact customer experience.

Our investment in technology, digital capabilities and AI have helped us achieve some of the highest service levels in the industry. Our ability to anticipate customer needs and adapt to market changes has earned us the trust of our customers and channel partners, driving long-term loyalty and sustained growth.

At Resideo, quality is not just a catch phrase. With our promise to deliver comfort and protection, it can quite literally be a matter of life and death. And that's an awesome responsibility that we take very seriously from product development through delivery.

We've delivered consistent year-over-year quality improvements through our enhanced supply or quality management program by controlling almost every aspect of production, utilizing tools such as statistical process control and automated in-line inspection systems we consistently achieve high levels of quality and operational excellence.

Our deep integration with our engineering teams has allowed us to optimize product designs. This includes a sign for manufacture building and decide for automation principles from the earliest stages of development to further drive quality and operational efficiencies. This collaboration accelerates product development cycles by providing immediate feedback on design decision and helps to allow rapid product development.

As a result, our new products consistently achieve production deals that matter in many cases, exceed those of our most mature products. A Resideo, we use a metric called cost of poor quality. COP Q is a powerful metric because it quantifies the financial impact of quality problems. Not just warranty costs, but rather measure the totality of waste and inefficiency.

These improvements that I've mentioned have resulted in a 65% improvement in cost of book quality in the last 3 years. Let me say that again. These improvements have resulted in a 65% improvement in the cost of poor quality in the last 3 years that is truly a remarkable achievement. The combination of faster development, higher production yields and improved product quality ultimately translates into lower warranty costs, but more importantly, a better customer experience.

As an avid Boston Red Sox fan, I've spent a lot of time in my beloved [indiscernible] Park. To use a baseball analogy, we are only in the middle innings. The game continues to be to unlock structural operational advantages and we are playing to win. We have a significant competitive advantage to the speed at which we move and leverage data.

While virtually all manufacturing companies use similar assembly equipment, in injection molding machines. Not every company can move data at the speed of Resideo. Today, process and systems are connected to a unified digital ecosystem. We have built world-class capabilities that create a seamless digital connection from customers to suppliers, to factories.

This end-to-end connectivity provides real-time inventory visibility enable us to deliver exceptional customer service while simultaneously reducing overall inventory levels. Our integrated business planning process provides more accurate forecasting, rapid scenario analysis and synchronized decision-making across the organization.

Simply put, we are a data-driven company. We generate, analyze and act on data every day. To continuously optimize our operations, improve responsiveness and drive superior supply chain performance one area of superior supply chain performance is our inventory management. The use of technology, combined with a disciplined lean culture, has contributed to a steady and deliberate improvement in management and inventory turns.

Benchmarked against other top-rated industrial supply chains, our inventory turns are at the same level as the Gate top 25 supply chains in 2025. Our inventory management is a proven capability which we have purposely and methodically improved. We have taken over $76 million out of our working inventory in the last 3 years, and we will continue on this path.

We have also reduced excess and obsolete cost through the end-to-end digital ecosystem that I mentioned. It enables a rapid flow of data across our supply chain to improve forecast accuracy, inventory optimization and decision-making speed throughout the organization, speed and quality need automation.

Our focus on technology-driven improvements include significant investments in automation, we have deployed more than 300 purpose-built [indiscernible] in the last 5 years, and we have plans to deploy another 300 cobots in the next 5 years. When I say we control end-to-end manufacturing, I mean it.

Unlike most companies, we employ our own in-house custom automation team. These 39 automation engineers design, assemble and deploy our own proprietary systems. We can develop cobots in half the time and at half the cost for us going to an outsourcing third-party automation company.

Developing our own cobots is again all about speed, speed of deployment. These cobots will continue to yield savings for years and years to come. The benefits are already being realized, Labor cost reductions, more consistent production times, yield improvement, reduced scrap, reduced rework and an ability to scale production without any incremental cost increases.

As I mentioned, we are only in the middle innings. We have an active pipeline of projects to enhance our manufacturing capabilities and to drive further cost reductions. The automation investments today will continue to expand future margins on a structural basis.

Speed, quality and efficiency gains are nothing, if not executed responsibly. With our safety and sustainability programs, we have accomplished much, but we're not done. A safe working environment pre employ loyalty and prime the workforce and Resideo's safety record exceeds all industry benchmarks.

Our safety program is perhaps the thing I am most proud of. There is nothing more important than providing a safe work environment for our employees. Furthermore, inherent in our mission to deliver comfort and protection is to do so sustainably in a way that helps our people and the planet.

Globally, we have installed over 17,000 solar panels with a savings of over 3,600 metric tons of CO2. Our high-efficiency HVAC initiative in Mexico has resulted in a reduction of 2 million gallons of water. These examples are a few of many that demonstrate our commitment to our long-term sustainability and a commitment to our children's future.

The result of our efforts include the stats you see on the slide, but also complement our overall manufacturing strategy by showing supply chains, result in fewer transportation miles and lower emissions. We have high standards, and we're striving to be better because we believe it is the right thing to do.

The operations teams are well positioned to help accelerate our growth. Our manufacturing footprint is a strategic asset being actively improved. Our supply chain is a competitive advantage that drives speed, quality and the customer experience, and this shows up in margin and value creation.

As a vertically integrated manufacturer, our end-to-end control gives a systemic advantage, we will continue to optimize. We are building an operation function that gets better every year. Our efficiency gains are a structural capability, not just a cost-cutting exercise. It's been a long time since it was a competitive athlete, but it's something I've never forgotten.

Ruthlessly focused on the fundamentals work to improve every single day and to lean on my teammates to win big. And this is a team that works together and wins together. And let me hand it over to Tom.

Okay. All right. So, the first thing I want to talk about is why I'm up here. So I will be covering the financial section today because we are currently in the final stages of a comprehensive search for our new Chief Financial Officer. We've evaluated a number of very outstanding candidates who have gone through a rigorous process and as I mentioned, we are at the final stages of that.

And we feel highly confident that we'll be able to choose a Chief Financial Officer who will guide us to that next phase through that next phase of growth. Okay? All right. So let's go. Great. We're a little off on this, but that's fine.

So one of the main things that's on this chart is, I want to discuss basically the change in the business model. As compared to as reported where we had the $7.5 billion of revenue, this is the -- what Resideo would look like as a stand-alone business based on fiscal year 2025 results, post the ADI business. Obviously, the revenue is smaller than it was $2.9 billion. That includes what you saw as segment reported revenue as well as about $175 million of revenue that was intercompany sales, us selling to ADI previously.

So that's where that number comes from. And I should mention, by the way, I think Chris mentioned that all of the presentations here will be available. And in that, there is a reconciliation section that we're not going to be covering on the screen but you will have access to it. So let's go back though to that, the $2.7 billion includes -- added $175 million of intercompany sales to the $2.9 billion.

Now the next line, of course, is the gross profit. There is a fundamental difference between the 2 businesses we currently have. There is the distribution business versus the product business. And the product business has higher gross profitability. And in this case, can you please go back whoever has a slide. I want to go through all these points.

So the profitability of the product business currently generating 39.5%. And we're going to talk about how we will be improving that in the future. And we'll be talking about how we'll be improving several of these metrics and performances. The next piece is our stand-alone adjusted EBITDA.

And when you compare that to the as reported $833 million, as a stand-alone entity, we'll be generating 70% of that same amount of adjusted EBITDA, and that operating margin will be 20.3%. And again, we'll be talking about how we'll be improving that.

So the next line is stand-alone adjusted EBITDA less adjusted CapEx. Everyone is looking at me like, what that's a proxy for free cash flow, okay? So given because of the GAAP rules, we're going to be speaking in using this statistic, but I think cash flow, okay?

So as a stand-alone business, we will be generating -- or had bid standalone at the end of 2025. We would have generated $519 million of cash flow, okay? So when you look at that relative to the adjusted EBITDA amount of $581 million, you can quickly do the math.

There's $62 million of CapEx. We'll be talking about that in a second. But most importantly, is the fact that 89.3% or approximately 90% cash generation from our business. We are a strong cash flow generating business. All right. Now we can go to the next slide. All right. So this slide is important because I want to explain to you some of the reported numbers.

And today, we've been talking about comfort and protection. In fact, we wanted to make sure people understand I've heard comments about it's a complex business. It's really we wanted to simplify it down. What is the core of what we're doing. It's come from protection. And I know we've reported these segments before, so how do these relate to comfort and protection.

Very simply, air and water, 41%, that's comfort, okay? So when you hear us talking about comfort, air and water, that's cohort. Security and safety, 33%, that's protection. Okay? So there's your comfort, your protection. And then we have the OEM businesses, which we have 2 parts to. We have combustion.

So we have talked about that. Sometimes you'll hear us slip into the word global climate solutions or energy, that is our OEM combustion business. And then the next one is our OEM security business. This is the sale of products that we design, manufacture and we sell to third parties for the brand and sell under their name. So combined, our OEM business is about 26%.

In the middle is our channel. The distribution channel that you see here, this is the supply house. This is part of every contractors daily routine. They go to the supply house the pick up the materials they need. You'll hear more about it when ADI talks.

They're in this business. They support the pro every day with the needs that they want for that job site, and that's obviously our largest channel, 60%. The next one is retail. And what retail was primarily represented by is the big box home improvement stores.

And to give you the reason why is if we want to support the Pro, let's take Home Depot, for example, 50% of their sales go to the professional. So we need to be where the professional is got to pick up their products. And if it's going to be a casual drive by a Home Depot and [indiscernible] so be it. We're going to be there for them. And so that's why we're a tail.

And then we have, again, the OEM business as being broken out. And that last column stack geography. This speaks to the opportunity you've been hearing us talk about the opportunity we have for taking the solutions that we have in, say, the North American market and expanding it into the international market. There's no reason for us to be lopsided like this.

We want to drive this, so you see pretty much balanced between these -- but this is where it stands today. Now okay. One of the things here is First, this is going to be a summary slide. So I'll be talking about each of these points in a minute.

The first one, though, is the revenue. So we have the target of a 4% to 5% compounded growth rate by 2030. And you say, okay, well, show me what has happened in the last 3 years, and you see a 1.5% growth rate. Behind that, something else, when I got to the company about 2.5 years ago, and we started trying to reinvigorate our product development there's something we call cavitation or eyeball cavitation.

That means you're spinning the wheel a little bit or spend in the prop and you're not quite getting that forward trajectory, and you have the development cycle of the products. So '23 to '24, the actual growth rate was 0. '24 to '25, gross rate was 3%.

That progress gives us conviction, and we know how many products we've got coming out this year Scott mentioned some of we have more that we didn't cover today. That's why we have conviction about getting to that 4% to 5% growth rate.

The adjusted gross margin, again, in a few -- in the next slides, we're going to talk about how we will be achieving that 400 basis points of gross margin and the 400 basis points of adjusted EBITDA. So let's go to those, please.

All right. So when we look at revenue and the 4% to 5% compounded growth, the first piece is the 1% is the market growth. Above that is the pricing. And there's 2 pieces to the pricing. There is -- and this is above the market growth. So this is the piece where we're delivering more value.

And as we've talked about, that's something that we're continuously thinking about how do we create more value for the Pro as well as for the homeowner. And by doing that, we expect to be compensated for the value we create.

In addition, there is also trying to get the customer and creating so much value at the premium that they move up into the higher products, the greater capability products, the more sophisticated products, we believe that, that mix will be part of it. And then you heard Scott do a really good job talking about new products and how we're going to be growing.

And he said it first is wallet share, right? So that's the first one, grow with existing customers. And then the next one, competitive conversions. This means our products win against the competition. We feel good about that. And then the last is the strategic expansion opportunities.

We've been talking about that. The markets that we think we have a right to play in and win. And with our domain expertise, we have confidence of that. You add those together, you get the 4% to 5%. That's the path we're on. Let's go to the next slide. So we're going to be talking about gross margin improvement.

How are we going to achieve that gross margin improvement? I think one of the important things, just as I mentioned about the revenue growth, how have we been doing in the last 2.5 years. The past 12 consecutive quarters, we have improved gross profitability every quarter.

We're on a path to continue to improve the efficiency that we deliver the value we create. So you're going to hear that every day. I know that probably the folks in the company are just all the time, drone it in. We have to continually focus on our efficiency.

We're continuously looking at this. We want to create more value, and we want to deliver it more efficiently. That's what this shows. But let's go to the chart that says the stack of exactly how we're going to get to it. There we go. First is the product mix.

We are continually reviewing the products that we offer, making sure that we're offering the right products if a product is not receiving the value, there's something wrong in the product. We may have to change that product to review it. There will be product areas we won't participate.

There are some of the segments that we currently participate today that if we are not able to improve, we will be exiting. That's a continuous process. It's not a onetime thing. The next is the pricing and the value delivery this is channel efficiency.

And I'm going to say that part of that is being compensated correctly for the value we create. And finally, it's the ability to efficiently create that value, just as we have been speaking about, that is a major part of what you heard Pat talk about. Those actions that we're taking, this is what it's about, creating the value, delivering inefficiently. That drives margin.

That drives profitability. So that's how we're going to get the 4% to 43% to 45%. Let's go to the next slide, please. So adjusted EBITDA, the biggest driver for that, so we talked about increasing that 4%, approximately 4% from 20% to 23% to 25%. That's our commitment for 2030.

How are we going to do it? All right? The first thing is, of course, the gross margin. You're saying, well, there's your 4%. Behind that, though, we will be investing in additional R&D. We want to get into a virtuous cycle. So increasing the value we deliver, generating more profit but we're going to be investing part of that back into more R&D to accelerate that virtuous cycle, okay?

So for every 2 points of margin expansion, we'll be adding 1 point to R&D investment. Now offsetting that is the operating leverage that we have in our models and our plans for increasing SG&A operating leverage. So they kind of net out. So it looks like it's just the gross profit going to the bottom line. But behind that is the idea, we will be investing in more R&D to the extent we achieve that improved gross margin, okay?

And then we have the operating leverage that kind of works at -- so that's how we're going to achieve the adjusted EBITDA margins. Let's go to the next slide. Okay. So we talked a little bit about the free cash flow. We invest about 2% each year in capital expenditures, and we have for several years.

And there's going to be a little fluctuation, right, because some of these investments are large. You've heard about what we do in the production system and how we make investments to improve our efficiency. And about 40% of our capital expenditure relates to NPI.

That's the tooling, the equipment and those parts that we need to bring new products to market. So that's a substantial portion of it. Beyond that is the things that you've heard us talking about investing to make the company more efficient. So we're investing in ourselves to improve the efficiency of the business.

But after that, even after that capital expenditure, the cash flow generation. It's been running about 89%. Our commitment is to raise that in our target to 92% by 2030. So we want to do even better. And as much cash flow as we generate today, we know we can do better.

So this is again our continuous improvement, but we are a very strong cash flow generating business. Okay. Let's go to the next slide, please. Okay. One of the importance here is the -- just the financial condition of the business as a stand-alone post-spin, we're going to have quite a bit of liquidity.

We have a $500 million revolver that has no draw on it. We're going to have $150 million of cash. We have near investment-grade rating, but we are going to have a chunk of debt. 3.3. We talked about the cash flow generation. Our first priority is to reduce our net leverage from 3.3 to 2.0 within 24 months.

That's our top priority on the use of our cash. I think that's really kind of this slide. It's the most important thing. Let's go forward. So when we talk about our cash flow that we do generate a substantial amount, what's our priorities. Number one, we're going to deleverage, okay? Number two, the organic reinvestment.

Now that's a business where we -- if we have opportunities, and those are almost always the best investment opportunities, we will look at them because you could do the calculations and you say, wait, your cash flow generation is so strong, you'd be able to take this down in just basically 15 months.

But there will be -- if there should be opportunities to reinvest in the business, we will be looking at those and evaluating those. After that, we will be looking at this selectively at M&A primarily at businesses and almost specifically at the businesses that are the adjacencies where there is the opportunity to accelerate our participation in those markets.

It will be a disciplined approach, and it comes after those other things, okay? And finally, we will be evaluating the best means of deploying and returning capital to shareholders in the future. Okay. Let's go forward. So Resideo is well positioned to drive the long-term value creation.

We have the growth that we've talked about of 4% to 5%, driven by our new products, driven by our innovation and driven by the investment we're making. We have the profitability of the business, 20% today, driving to 23% to 25%. We know how to do it. It's creating more value and deliver it efficiently.

We have the free cash flow of the business. We saw the numbers 90% going to 92%, a substantial cash flow generating business. And then the capital allocation, our commitment to reduce the amount of debt leverage from 3.3 down to 2.. -- that's our focus here.

Let's go forward. So I want to go back and call back to the summary of the key slides here. When we talked about the 3 things we wanted you to think about, as you heard it, one of the things -- the key point is the unique footprint in the home.

No one else has that footprint, and that especially when you think about the context and how to go forward and what it means to connect the home.

So there's a lot of pieces to the puzzle about connecting -- and we could speak a lot more about this. But having that footprint is absolutely critical. That enables us to understand everything that could be going on in the home, and we want to expand that. So we create that cognitive home.

The highly durable demand, the fact that we're providing solutions to the critical systems of the home. This is how the home functions and the fact that for 80% of it, it's the repair, remodel, maintenance upgrades. That's highly durable demand. And lastly, our strong competitive position. You've heard about our brands, our domain expertise, our customer relationships.

Those are difficult to replicate. So at the start of today, I said I was hoping that you would -- we wanted to share actually why we thought you should be excited about the Resideo story. And hopefully, today, we've been able to do that to get you excited about our Resideo story.

We're going to take a 5-minute break to provide a stage drew an opportunity to bring up some chairs and set us up. And when we return, we'll be opening up the audience, both those participating here as well as those virtually to ask us Q&A questions to be fielded by the members of the team. Thank you very much for participating today.

Ladies and gentlemen, please make your way back into the room at 2:25. Thank you.

[Break]

Okay. Thanks, everybody, for joining back again. We're going to start the Q&A session. the management teams on stage. And I'm going to start off with a couple of questions received online. We do have mic runners in the room, so people that are in the room, please feel free to raise your hand, ask a question. And when you ask your question, it would be appreciated if you could introduce yourself to the team.

Okay. So let me start off with a question directed to Tom. And Tom, maybe you walk the audience through your philosophy as the CEO of Resideo, what's your -- what are your top 3 priorities as a CEO?

Okay. Thanks for that. So you made a comment about being as a stand-alone company. And being a stand-alone company is not going to fundamentally change 2 of my 3. What we've been doing for the past couple of years, focusing on our customer and creating products and value and services that are innovative and create incremental value, that's number one. You probably picked up on that and like, well, yes, that was obvious. I've heard this all day. So yes, let's go on.

Number two, also doesn't change, which is the efficiency that we're going to be focused on continuously improving the efficiency of the business. okay? And that's not only supply chain, but that's in all of the operations and all the functions.

Now the third one, the third priority is the use of our cash flow to deleverage the business down to 2x. So that's number three. So one, products and customers; two, the efficiency that we execute with; and three, deleveraging the business.

Great. Why don't we open up to the room. Erik, why don't you start? Can we get a mic up to Erik, please? He's in the second row in the front, please?

Thank you, Chris. Thank you, team. Erik Woodring from Morgan Stanley. So Tom, just very clear presentation. I know this is a long time coming. So just congrats on getting that behind you. And really nice to get some details we haven't seen before. I'd love to ask, can you be a bit more specific or detailed on why this asset in the PMS business effectively is better position stand-alone than without ADI. I understand the opportunity to simplify and focus the story, but just as a business unit, what are the clearest benefits you get now as a stand-alone residual effectively?

What -- yes, I hear you. And I think that we spoke about how over the past 3 years, we've had a very independent life from ADI, very distinct businesses, and I know we were together part of Resideo. But the execution that we've been doing over the past 3 years is exactly what we will continue to be focused on doing. So I don't think it's going to change that. But hopefully, 1 of the things that does create is the opportunity to understand our business better. And I feel like we even kind of scratched the surface today. I would have loved to have gone even deeper, especially on some of the products and what some of these things mean that we had to basically condense down to a sentence or a few comments. And so when people understand this is what we do, we're comfort and protection. We're in the sensing and controls of the critical systems of the home and then how are we taking that forward having our investors, our shareholders and basically even customers understand with clarity what that is, I think that's really important.

Do you have another?

Yes.

Yes, go for a quick follow-up.

Just maybe a combination of Scott and Tom. Just the connectivity opportunity seems kind of incremental and again, new details. Scott, can you maybe just help us understand exactly what's so different and unique? And then just recurring revenue, like what -- how do you monetize that? Is there an opportunity there as we think down the line?

So this is 1 of the things where we talked about understanding a little deeper. So I'm going to hand off to Scott in a second. So he'll go even further. So when we talk about connected we have products and so many times, that's the shorthand for WiFi devices that are connected. And we talk about Red Link Plus. What we're doing is every one of our devices, almost every one of our devices, that sensing will have Red Link Plus in it. So it doesn't have the overhead of something a WiFi connected device or the power usage. But that means all of our systems will be able to be aware of every other system and sensor in the entire home. That goes beyond just having a WiFi connection. That means if any of these systems say, security wants to understand anything that is going down the home to improve its contextual awareness, it is able to do so. I can subscribe to it, and we could have a bigger, longer technical description about that. So the idea now that you have all of the awareness across the entire home and that contextual awareness, that's powerful. So now I've kind of gone beyond what connected leads to us beyond just WiFi connected to products or smart products.

Yes. Maybe I can add to the recurring revenue question that you had there. And today, that's really a foundation of security, intrusion monitoring. And to an extent, video clip storage. But we think that's truly a foundation where we can build additional services on top of that. So once you're monitoring for protection from an intrusion standpoint, that could be leak detection, that could be more advanced video analytics even Pro IQ Predict that we talked about. So monitoring many protection grow beyond kind of that security mindset and into the HVAC world. I tell the team over the weekend that I was doing a run and looking at HVAC ads and adherence on HVAC, commercials on the radio. And there's millions of dollars of spend that go into that for our professionals. And I'm in the industry -- and I'll tell you, I can't remember one of those names that were mentioned because it's not important to me at that time. Some of the pro services we're talking about that we showed in the video, where we have in-app branding and on-device branding, that brings tremendous value to Pros. Right when the customer interacts with that device or needs it. If your app says, hey, some things going wrong with your HVAC system, would you like to dial Tom Surran HVAC company? That's tremendously valuable versus just kind of the low impact advertising that the industry has today.

We'll go to Ian and then Keith.

Okay. It's Ian Zaffino from Oppenheimer. I know you spent a lot of time talking about NPI. So I'm going to ask you something more about NPI. Maybe help us understand where the current portfolio is right now as far as how long has it been since you've had new products and maybe some categories you might want to highlight a you have kind of new low-end thermostat that you've launched? I know there's a new security panel you launched. But kind of like where are we as far as the portfolio? And as you look to refresh the portfolio, is it more about refreshing something that's been very old and how much a war of it is looking at kind of where future markets are going?

Okay. Thank you for that, Ian. So you're right. When I got to the company 3 years ago, there had been an underinvestment in new products. And so part of the task at hand is to revitalize the existing product categories and then part of it is obviously to create new product categories and new value propositions. Where do we stand? And so you brought up the question or the statement about the thermostats, we got there we said, okay, in the thermostat market. What's important for us is to control the corners. We don't want to be eaten away by companies entering the market, competing on low price point. And we don't want to have people that have superior technology to us that are coming down, trickling that technology. In order to control that cornerstone of our business, we need to control those corners. So then you saw the focus pro come out at the entry point. We brought out the Elite Pro at the premium price point. And Elite Pro, our goal, and I think we have done it, but we still can do even more, is create the best thermoset that exists in the market. That's what the Elite Pro is. And so I'll probably get in trouble with the lawyers. But the fact of the matter is we still have to do the mid-tier, that's being worked. We have products that we want to create that create certain advantages for us that will be new categories in Europe in certain the ability to handle basically zoning a little better. And for Hydronic integration as well as various hybrid systems, we want to create that. If you look at, say, the products and security, One of the important things is when we talk about Fortic, it's across everything, right? So the platform that we talked about just a second ago, all the products communicating, all of them connecting, having awareness of everything having that ready and having Red Link, which we had an older link, but redlines on next generation. It's a huge step in terms of its capability. Getting all of that infrastructure ready, that foundation that ecosystem ready. Now for security, we're about to the summer release a whole new set of products that basically build on that. The security products go on to the Ford platform. We start incorporating Red Link Plus, and we started doing that already in some of the products. So having and built on that platform and then introducing security on top of that, when we brought out the new H3 panel, which I think you're referring to, it was replacing a product that was created in 1995, okay? So now we basically have a new all-in-one panel that we'll be bringing to market. We have a new hybrid panel that we're going to be bringing all built on Fortic. So we're revitalizing that. Safety, you've -- Scott made a reference to Three weeks ago, we introduced -- it's not in the stores yet. Well, it's really close. They should be stocking the sells pretty quickly here. But that is a new 10th-edition smoke detector, which is the global platform. You happen to have a picture right behind you there of that safety product, which we're very excited about.

Scott, do you want to add anything about that?

Yes. I just -- maybe I'll just be very, very direct. In the 2.5 years, Tom?

Yes.

So I think that was like a December, January time line.

This December, yes.

and by October, we launched a brand-new family of entry-level thermostats, Focus Pro. It's been accepted exceptionally well in the market. We followed that up within, I think, under 12 months, pretty close with the premium product. We've launched a brand new and it's out in the hallway here. innovative dehumidifier that's very cool and getting really frankly, tremendous traction out in the marketplace. We have humidifiers coming. We have flipped like the core piece of our business in the HVAC community, pretty aggressively. We've turned over the safety portfolio, I think, twice now, right? We had a regulatory change that happened. And now we've changed it again into our new -- our brand-new platform that I mentioned earlier. And then something that gets overlooked because it's not a product, is this Fortic platform, right? So Fortic has been launched in the market. I think we'll probably have 2 million connected customers on it or somewhere in that neighborhood. And -- but it's not a thing that we sell. So we overlook it, but like it's foundational to releasing a whole bunch of other [indiscernible] leader here, for a bunch of other NPI that's coming at speed. And then I think the place where a lot of our focus is right now security. And while we did launch a Vista H3, Fortic will be launched into the security space here very soon. Probably the security space will be the bulk of my NPI focus for the next couple of quarters. So we're really excited about that.

If I could just focus on price and volume. I know you gave some forward-looking guidance on that. Again, with the new product introductions, I mean, I would have thought that you would see maybe some upside to the pricing there. And maybe if we just go back a little bit, I would have thought historically or at least over the past several years, you've seen significantly better pricing than kind of what's in the forward guidance? And maybe that's just a function of volume being depressed. And maybe to kind of add to that question is how much are volumes depressed in the business? And then why wouldn't pricing be higher than kind of your forward guidance?

Okay. I'm going to let -- I feel like I shouldn't have you answer this because we have a different metric of the measure. But I think the important thing is you will see improvement in volume. That's our expectation. Our share capture would represent volume capture. And I think that's what we're committing to in our numbers. Pricing is important. We've had a lot of pricing activities because we've had to adjust for inflationary costs that come with tariffs and various component costs that have gone up. So we've been adjusting to that. But long term, volume will be a driver of our revenue.

Keith [indiscernible], Truist. Kind of building on the last question on pricing, as you have in the bridge is 1% to 1.25%. Given some of the innovation you have brought and are bringing based on the presentation, just a little surprised that number is not higher. Is there anything specific long term where you're hitting resistance in pricing? Any details you can give on that would be great.

I think that was for Scott. I think you asked for Scott?

Whoever has the answer.

Pricing resistance. Are we seeing pricing resist?

No, we've consistently, whether it's cost driven or just our annual price increases. We've consistently been able to get price in the market. Our new products have all come to market at a premium, including these brand-new small protectors that we've just talked about. So we've traditionally cash for a long time. I've been in a little while, been able to capture price in the market. And again, sometimes that's driven by cost challenges like they've happened in the past few years with COVID and supply challenges. If you look at Lead Pro, which we talked about it was in the video, there's a few different models within that family. We're always debating internally which 1 would be most successful in the marketplace. And the X12, which has what the external name is. The internal name X12 has the video integration that was in the video, and that's performed very well in the marketplace, one of the first thermostat that has the multi-vendor doorbell integration.

Why don't we bring it to Aaron in the front and then Dan in the third row.

Great. Aaron [indiscernible] from Citizens. When we think about the pace of development for Fortic, how much more are you getting out of a dollar of software development CapEx today with the improvements of the Frontier Labs? And are lower barriers to software development, ultimately a big driver of NPI time going from about 2 years to about 1 year like you were talking about, Scott?

Yes. I missed further question. I want to make sure [indiscernible]. So let's talk about AI's impact to software development first. Yes, it's -- I would say -- we're still in the early testing stages. I think a lot of companies are. I would not say that the gains you saw here were as a result of AI. It's really a couple more fundamental areas portfolio, making sure we're focusing on the most important programs, not getting distracted by shiny objects. It's people not just adding people, that's easy, but a deep change to the culture and how we execute. So what is [indiscernible] cultures kind of vague. We come from a very conservative heritage of Honeywell. And people want to make sure it was done right, but there's a difference you right and done SaaS. So for example, let's do testing of a product. We have a very serial process. Let's do Test 1, Test 2, Test 3. I'm asking the team why would you do that? Let's do all of them at the same time. All there's a chance they'll fail and we'll have to retest this and that costs money. And we said, well, what's the chance of those tests failing. Very little. Okay. Well, let's start stacking that in parallel. And Tom has driven a very strong culture of we're not penalizing anybody for being late. We want to drive more greater acceleration to market.

Now you also had a kind of a software dimension to that question. A lot of what we've released from a device perspective is more hardware engineering or firm more engineering. And we do use some of the AI in the firmware development to help accelerate. But again, I think that test development that's QA resources and just the beginning stages of using it from a development standpoint.

Okay. That's really helpful. And then as a follow-up, how do you think about the manufacturing footprint as it relates to geographic adding to existing sites? Or will there be net new sites? And do you still want to stick with the folks of producing products and you're where you're going to ultimately distribute them if you're looking at Australia and New Zealand and more in Europe?

So I think Australia and New Zealand are going to be at the scale that would necessarily be able to drive or support a facility. However, I'm going to let Pat really follow up on this question, talk about how we're looking at our footprint and evaluating it.

So the -- so my plan is that Scott's going to sell so much more product that we're going to add continuously add factories, right? I think as we look at the manufacturing footprint, it's evolved quite a bit since 2019. I talked about that, right? Our expectation is we'll continue to evolve based on where our customers are, how the additional products we sell. Tom talked about moving into other geographic locations, specifically talking about Europe. I would expect that we would continue to build more capability, whether it's in Europe or somewhere else based on where the customers are going to be. So it's not quite fungible in the footprint. It is a fixed assets, but we do have the capabilities to move capacity around. And we do have a very wide geographic footprint of the factories. So I'm very confident wherever the customers are that we'll be able to get to them very quickly and build the products very efficiently.

Let's give it to Dan.

Dan [indiscernible] from Jefferies. First of all, congratulations and all you guys have done, Jay, included over the last 5 or so years and getting to this point just really awesome job. Tom, I guess you're the acting CFO. So my first question will be for you and Chris always tells us not to just model margin improvement, linearity if that's the word. 400 basis points, I guess, is what you are projecting by 2030, not created math, but that's, I guess, 75 basis points a year, whatever the heck it is. Should we just think about it that way, 75 basis points a year of margin expansion between now and then. It doesn't seem like there was 1 major thing you're doing that's going to change the margins in 1 specific year. But just for modeling purposes, is that how investors should be thinking about?

Yes. So first, yes, I will be the Principal Financial Officer and some of the other announcement. But behind that, people should know we have an outstanding Chief Accounting Officer. Jeff Kutz, he's in the audience here. It's just every day killer job. So I'm sitting on top of that. Plus we have a segment Chief Financial Officer, Jim Mason, I can still -- I can see her right there, who also does a superb job. So we have an incredibly strong financial organization, okay? Now to the specifics of, okay, so what about margin? Is it linear? No. I would take a bit more stair-step. We're continually so the actions that we take, the improvements we will make yester's always going to be some small ones that add up. And then there are going to be stair steps, right? When we talk about looking at facilities in footprints and manufacturing the new approaches, it may be a major product step it's not going to be linear, but it will be a progression because your net of your question is, should we think 75 basis points per year over this period, that's a reasonable approximate. Sorry, that was a long answer to a simple answer in the end, but I think it was important.

It was great. I guess the next 1 Pat for you. I'm surprised it's taken to get to me to answer to ask this question. All anybody wants to talk about is memory. Maybe Jay should answer this question, giving this on the board of Seagate. What have you done to clearly, I guess, to this point, has not been a major concern if Mike was here you probably walk through what your exposure is. So maybe that would be helpful to not like your company exposure, how many products actually have memory, the pricing there. What are you doing to mitigate it? And then the real concern for investors is or anybody, I guess, for you guys, 1 of your big suppliers just wake up and says, we're not making these chips anymore. We're doing something else that we can sell for a much, much higher price, how would you handle that? What would be the trade downs, like just talk about memory.

So multi-facet question there, but let me start with, we have never missed a shipment due to memory shortage, right? So sitting here today, we have never missed a shipment. In the presentation, I talked about our executive relationships, which is critical with our suppliers we noticed and recognized material -- the memory shortage exactly 12 months ago, right? So while other companies, I think we're waiting a little bit. We started pipelining materials memory. We started buying memory exactly 12 months ago. So really last July, right? So we were ahead of it, and we've been ahead of it this entire time. We do have multiple suppliers for virtually every piece of memory that we buy. There are new memory suppliers coming on online in the next 3 to 6 months, and we'll also be qualifying with, right? So I'm very comfortable with where we are today. We are seeing, as Tom mentioned, surprise increases on memory. But from a supply perspective, we're in a pretty good shape compared to the rest of the industry.

Tom as a CFO. I guess these -- the concern is you bought a lot a year ago at a lot lower price and now 200%, 300% increase, whatever people like to say, I think your response will be, well, you're not buying the stuff up 300%, but you've been able to pass along that price obviously and keep your margins growing as I believe what the answer has been, right?

Yes. There's not a big clip face. So just to explain exactly how the memory works you receive allocations. So you're not able to lock the price in before 30 days or so. So when we have, let's say, a 9- or 12-month allocation, they're just saying you're going to be able to buy it. You're going to be able to buy it at the price at that point in time. So we've already been experiencing the increase in the memory costs over this period. So we don't -- we're not facing a big cliff.

Great. And Scott, so you're not left out. Clearly, your Pro relationships is an unbelievable differentiator of your company. You have a big goal to make it, I guess, 50-50, I guess, revenue or whatever you said, internationally. Can you replicate the Pro relationships that you have here that have been built over 50, 70 years that quickly internationally if that's such a big differentiator of what you do?

Well, in -- yes, really good question. And we have -- it's been many decades we've been here. I came out of the security side of our industry, which right demo was founded across the river in Brooklyn. But we have a substantial position in Europe today in the U.K., in Germany, in Benelux and all those markets with similar exceptionally long relationships in the pro channels, both at the distribution level, it's a much different market where every country is essentially its own technology deployment, but we have distribution relationships. We have pro relationships, very, very similar to how it is here. I'd say the only difference there is really in the light safety segment, where we don't have a position in the electrical contractor world like we do here, but we do have positions in the electrical distribution world. So when we take our life safety products from here to there, we'll have a channel into the marketplace. And the contractors there, the Pros that are a little bit structured differently than here. So they more often play in multiple segments. So we also have some customer relationships there. But yes, we've been in Europe for -- I guess I don't know when we entered Europe, but for a very long time for as long as I've been with the company, we've been in Europe. Our security business has been there. Our HVAC business has been there. It's really just a light safety piece that we have to go and build those in as relationships with.

And just to pile on to clarify, I think, Dan, your question, I think what we said in our presentation is we have an opportunity. I don't know if we ever sized it to be to paraphrase what you said a 50-50 type of mix in the geography. So I just want to make sure that's clarified for the record, okay?

Can we pass the mic to Tomohiko please?

Tomohiko from JPMorgan. I'd like to ask you about incremental margins. Given the potential upside in volumes, you talk about it on, how should we think about the flow-through to incremental margins as your volumes increase? And especially, Patrick could talk about the continue to invest in automation and operational excellence. What other benefits do you expect when the volumes have upside?

Sure. Thanks, Tomo. All right. So I'm taking the question is, the incremental volume, will that contribute to scale? Scale typically, rule of thumb for the learning curve is that for are doubling of volume, you have a 10% cost advantage, right? That's the rule of thumb. So I don't think the volume level is really going to move the numbers of our margins, what's going to move or improve our margins is the execution of how everything we do. It's a continuous improvement play more so than having some step function in volume. We don't need step function to improve our margins. We just need to execute.

Yes. And I think to just pile on there to Tom's point, look, there's a blended benefit in all the things that we talked about today that will lead to greater profitability. And remember that the profitability profile that we depicted at our presentation is 1.5 to 2x the growth rate of the projected revenue. So keep that in mind that there's a multitude of things that we're doing that will enhance the margin.

If I may ask another question on M&A. You highlighted ventilations and access control as a potential areas of interest. Could you elaborate on your M&A playbook. What kinds of opportunities you're seeing and how M&A fits into your overall value creations or culture perspectives?

I'm going to take that, and I'll hand off to Amit. As we've looked and he's -- Amit [indiscernible], our strategy and business operations. So ventilation, I spoke to it being a critical area. And so when you talk about - just to give you statistics, if or just how tight homes are becoming. I need to be no limit on how leaky they could be, right? And so now you're starting to see building codes that require the amount of leakiness limited to something like 5 AC's, its 5 air chase per hour or 50 Pascals. And that's really hard to hit. But when you tighten something up to that extent, you have to be thinking about the entire home because if you just put in some kind of ERV energy recovery ventilation, now you're conflicting with the zoning that you're doing because you're bringing in air here from the outside, exchanging it and redelivering here. And that can conflict with what you want to do with your zone. So you have to make the investments in the entire system, the awareness in order to optimize the home you have to think, how is this integrating to how I'm delivering the heat? How is this integrating into how I'm handling the zoning houses, integrating to what the delta T is for the outdoor air versus the indoor air and really that's where we do things very well, the system integration, the complexity of it and understanding that. It's an area we probably should have invested in years ago. I think there are solutions on the market at the very high end. I think the solutions that exist today in the marketplace personally. I think they're partial. I think that the manifolding the integration to zoning. I think the -- even the ducting and how it's working asset.

Right business, right, culture fit, right ROI, right? It doesn't show up in our numbers right now. We see it as an accelerator. So we are building that pipeline. And Tom's mentioned, first and foremost, delevering, putting the company in a good financial position. That's our priority. So that being said, when we look at M&A, Tom's mentioned ventilation, access control, I would add enhancements our security portfolio, continued investments in AI analytics. We see a lot of targets there as well. So as we're starting to develop that pipeline, if you kind of zoom out, we've got these hub products in the home with the thermostat and security panel. We can use those in the attachment to all systems in the home to add on and bolt on to a system. So a lot of the decision point for us is what do we want to actually pull in and find synergies with in our portfolio versus partnering. And so that's the lens we'll take.

So we have about 15 minutes left for Q&A. We'll certainly take more questions in the room. Let me get 1 question that's come in online. And maybe this is another Tom and Amit question. But Tom, how have you reshaped your organizational structure and team to better operate now that you are a stand-alone business? Are there any cost savings associated?

Okay. So the team that was running products and solutions, which partially here, there are some other individuals in the background. We have Pat [indiscernible]. We have Ryan Carlsberg in the back. Who else we have? Those are 2 people that are critical to the team. So we don't have all of the team up here. But in terms of the execution, and there's 2 pieces of that question, this team, the extended team that I'm referring to has demonstrated the ability to execute. In terms of cost savings as we integrate more corporate functions into it, we are going to look at efficiency through all of our business operations. So it's not good one. I mean I think that's what when we talk about efficiency, we are going to be looking at continuously improving all of our operations.

What I'll say is we just -- for the past year, we can focus on the spin, right? And executing the spin is the #1, first and foremost, what we've been doing. Get to day one, keep the business momentum, keep the continuity. We haven't done major structural shifts to how we work in favor of making sure that we execute the spin properly. So post day 1, that's all opportunity that we can look at, right? We can start looking at processes and systems, things like that. By virtue of our history, we have the Honeywell operating system that turned into the Resideo operating system, which is largely manufacturing focus. And 1 of the key initiatives for us going forward is how do we expand that into the full business. So we will see a lot of efficiency gains from that, and that should go down the bottom line.

Great. Chris.

Chris Meeker from Franklin Equity. I want to go back to a question with regard to some of the pro network. And I would just be curious how has the relationship with the Pro network? How is it different today than, say, 5 years ago or 2018, 2019 first spin?

Okay, I'm going to rule myself out and answering that 1 because I wasn't here. So this was going to go straight to Scott.

So I'm -- I'm not sure I heard you completely.

I'm just trying to understand how the relationship with the Pro network is different today than, say, 2019? Where has it gotten better? Or where has it gotten worse?

Yes. So there are a lot of -- that's a really good question. So the industry that we play in are changing. If you look at our HVAC community, it is heavily driven by PE firms now acquiring, in some cases, hundreds of smaller local players. I think the largest amount like 220, 230 acquisitions in the last few years. It's happening on our security business as well and even in the electrical channel. So what's changed there in terms of relationships is these local relationships with the local HVAC contractor, as an example, get you set into that TE relationship. So now we can win in the HVAC world at a level that allows us to win across what we might in the past be 70 different sales calls, 70 different ownership models different value ideas that the contractor might have where we now get the focus at that TE level, right? The people that are driving the business and when I think about some of my presentation today, I think about labor leads and loyalty in the PE firms, that is the kind of thing that truly matters. How am I going to drive growth? Often as a thermostat provider, you might not be in the boardroom of a large HVAC contractor. But when you're driving labor leads and loyalty improvements for them, when you become an actual growth driver, creating brand impressions, creating better customer relationships, driving growth through Predict. It changes the relationship pretty dramatically. It goes from transactional to more strategic I would add to that. I've been here for 7 years, and I think the software development around the Pro is probably 1 of the biggest things that we've done. So we have features that let Pros put their but they're logo on our term sets, for example. I mean that seems simple. That's advertising for the pro that's creating those leads or on loyalty. So I think that has developed a real tight connection.

Can I slip one more in?

Sure.

So if you think about these different end markets, HVAC, electrical security, I think I know the answer to this question, but which 1 of these verticals has the most upside for you as you kind of sit here today?

So -- holy cow.

To grow the relationship, I guess, how I'm thinking about where did the relationship be expanded?

The -- I mean I love the 3 channels that we play in all 3 of them. If I added Europe and called Europe a channel, I think there's still tremendous growth opportunities in Europe in terms of percentages, in terms of engagement at the contractor level. And I think that with our pipeline of NPI and innovation, hardware and software that we have in security as a percentage. I would say that's probably going to be a fairly good growth driver for us in the next few years.

We got a question that came in online. Tom, what -- it's a 2-part question. So first, what should investors be looking for in terms of mile markers and progress around the targets that we just shared? And then the second question is, what gives management confidence in achieving the margin profile over that targeted time period?

Okay. So how do we benchmark? How do we see that we're making the progress? And then the second part was?

Why does -- what gives you the confidence in the execution of that?

Okay. I think the metrics themselves are the gross property improvement, gross margin improvement and that we talked a little bit with Dan earlier, at what rate. It's not going to be linear. We're going to see a progression. We're going to continuously improve that. People should be looking at that. They should be looking at the products we introduced, the acceptance into the marketplace. It would be we should be getting feedback or any way to be able to get feedback from the channels to say, yes, they're winning. That product is great. And you should see it in the value that we're delivering and the margin improvement because the market rewards us for that value creation. And I think that if you look at those metrics, gross profitability and our ability to execute it, operating income or adjusted EBITDA, either one, those are great measures of our ability to deliver it. And I think those are metrics that we should be held accountable to as we execute all the way to 2030.

In terms of our confidence, I see the progress that's happened in the past 2.5 years. I mean, 2.5 years ago, we started, we said, here's what we want to do. We defined it. We created the strategy. We started saying what the execution time line was and we started bringing the new products to market. We started seeing the acceptance. Our hit rate right now, if we were in batting average, we're like scary high. I would say world as boding way beyond normal product, new products usually have about a 50% success ratio. We're blowing that away. We want to continue to do that. We want all of our products to be performing at that level because we understand the needs of what we're able to do, and we've identified it, and we're executing it. So my confidence is very high in our ability to do it.

And just to pile on to that, I think you guys have seen the track record of 12 consecutive quarters of year-over-year gross margin expansion. That should hopefully give you some confidence in our ability to execute.

We probably have time for 1 or 2 more questions. If there's none, we can end the Q&A by first saying thank you to everybody for spending time with us. We look forward to engaging with the community during our upcoming road shows as well as questions that you guys should feel free to send to me. We'll also have an opportunity to talk again when we release earnings, which should occur shortly after the separation date of August 3. And on that call, we'll talk more likely than not around the go-forward stand-alone -- pro forma stand-alone outlook for 2026. Thank you.

Okay. Good afternoon, everyone. Thank you very much for joining us at the TMC conference, Resideo Technologies today. My name is Tomo Sano, smid-cap industrials analyst at JPMorgan, and I will be your moderator for these sessions. So we are honored to welcome Mike Carlet, CFO; and then Chris Lee, Global Head of Strategic Finance from Resideo for a fireside chat about the company's business strategies and future outlook. So Mike, Chris, thank you for joining us.

Thanks for having us.

Thank you. Appreciate you.

So to start, I imagine there may be some in the audience who are not yet familiar with Resideo. So Mike, Chris, could you briefly share the history of Resideo, your core business lines and defining elements of your company culture, please?

Sure. Happy to. Resideo was a company that was originally spun out of Honeywell about 8 or 9 years ago in 2018. And today, we operate a 2-segment business. We call 1 segment, our P&S, Products & Solutions business. And that business is focused on developing and manufacturing products that are involved in the residential control and sensing. So if the home is a system of systems of your water system, your electrical system, your HVAC system, we are focused on developing products that control those systems that sense those systems and make them more enjoyable, more affordable, more comfortable, more safe for the homeowner. The primary focus on the product side.

The other side of the business, our ADI distribution business is a distribution business focused on the light commercial security, low voltage and high-end residential AV distribution space where we're selling to over 100,000 professional integrators that are installing those products into both people's homes and into all kinds of different commercial establishment. The business has operated in that way since it was spun off from Honeywell. But recently, last July, we announced that we're going to actually spread the business through a tax-free spin, separated into 2 stand-alone companies.

When Honeywell spun this off, there were some reasons that it made sense to do so under common ownership. But really for a number of years, we said, it makes more sense for these businesses to operate on a stand-alone basis. They have different go to market. They have different business models, 1 is distribution, 1 is product manufacturing. They have different capital allocation strategies, capital needs of the business. And we've always said it makes sense to separate them.

We had a bit of overhang from a related party transaction from Honeywell as a result of the spin that we couldn't separate them until that was settled. We settled that last summer, and we've now been working for the last 9 months or so and getting the businesses separated, and we just gave some updated information that we're going to effectuate that separation sometime between the middle of Q3 and the middle of Q4, given the time thing, time frame around it, it's either going to be the middle of Q3 or the middle of Q4. It's hard to do those things, end of August, timing of financial statements -- those are the 2 windows that are out there. Everything is green.

We feel pretty good about doing it sooner rather than later, but we need to make sure all the IT systems are set up, all the other things that allow both businesses to be successful or complete in them. So we'll continue to move that forward. We have announced that our Investor Days will be in mid-July. Each company will have their own stand-alone Investor Day, we will talk about the businesses on a standalone basis at that point.

Thank you, Mike. And then you're becoming CFO for ADI side, right?

I originally joined Resideo when the ADI side of the business bought my previous company, Snap One. So it made a lot of sense as we went through the separation as we talked about how set the teams up to make sure each business had the right folks on each side, made a lot of sense for me to stay with ADI to help them be a separate stand-alone public company. Chris Lee, who runs Investor Relations for us is actually going to stay on the P&S side. And so we'll have good continuity on both sides would be folks able to tell the story. In fact, we'll probably let Chris do most of the talking about the product side of the business today. You could do both sides, we can both sides, but we figure we'll start that process now. And we are -- as we announced, I think, last Monday, we filed our Form 10, we filed some other information about the separation. And we said that we are in the midst of recruiting for CFO for the P&S business as well.

Right. Thank you very much. So let's start into the business starting from Products & Solutions, P&S segments. So in the recent earnings call last week, you mentioned the demand in the retail and OEM channels was strong. And how do you view the current state and outlook for the housing and remodeling the markets for the P&S business, please?

Yes. Thanks, Tomo. I think when we look at the macro environment, with the Q1 print, it's the view is pretty much the same as we had at the beginning of the year when we set the annual guide, which is the residential market is still relatively press. It's probably clicking along at a very low single-digit rate. And I think it's for all the known and spoken reasons in the marketplace for the last several years. It's interest rate sensitive, it's availability sensitive. And I think there's a number of structural things that could provide tailwind in the future as rates improve, the market and confidence becomes more constructive, there's more evidence of homebuilding or the resale of existing homes.

So today, we would probably characterize that we're more so in a repair market versus a repair and remodel market. I think -- when we look at our preference and bias, certainly, the Products & Solutions side or the RemainCo Resideo prefers a remodel market. It provides an opportunity for greater sale, a greater opportunity for the professional to do work. I think in the current repair market, it still demonstrates Resideo's importance to the end user because we make best-of-breed products that are critical, as Mike said, to the operation of your home. And it goes back to the mission statement that Mike talked about, which is again, to reiterate, we make your lives more comfortable, more safe and secure and more cost effective.

And so when you think about you're sitting in the Northeast this past winter and it's awfully cold and your thermostat breaks down, you go out and buy a new Honeywell Home product because you know it works. So I think as we look forward and given some of the things we've talked about the last 6 to 8 quarters about the self-help, the things we've been improving upon, we feel well positioned to take advantage of an improving macro, if and when.

And I think it's last week, you also talked about the market share gains in safety products and strong adaptation of new offerings. What do you see as the Resideo's key competitive advantage in the PS segment versus major peers?

Yes. I think just to dovetail on something I mentioned before. We believe in manufacturing and selling best-of-breed product that leverages our long over century of heritage and domain expertise and continuously selling to our moat, which are the professionals. We think that as a virtuous flywheel that we can continue to perpetuate and build upon because we have an operating scale advantage. We have key brands that are very well known, like Honeywell Home and First Alert. We also have a brand that's very well known in the professional community called BRK. And all of those brands are synonymous with quality.

And I think we want to continue to live up to that heritage that we have around quality, around product excellence and frankly, around innovation, which is core to our go-forward strategy. I think relative to the competitive landscape, we believe we have market share leading positions in a number of the categories we play in. And I think that's buttressed by the amount of volume that we manufacture on our very large operating footprint.

And then if you could touch on the megatrends or tailwinds, the portions that you mentioned about for the P&S segment for the medium and long term, please.

Yes. I think when we look at the landscape, the residential landscape specifically, we believe there is an under housing that's been pinned by the lack of new construction. We also think that when rates come down, that will help to create more velocity in the sale of existing homes, both of which we would be exposed to. I think -- if you were to ask us where our greatest exposure is, it's more so to the R&R or the repair remodel part of the marketplace versus residential new construction. I would tell you probably over 50% of our exposure, we believe, is to R&R.

But when we look at where we play, certainly, we have a presence not only in R&R and in residential new construction, but also think about the replacement cycle. Many of our products have a stated lifetime, a smoke in carbon monoxide alarm, I think, has an 8-year life on average. And that's probably something that you really don't want to go too far on from a lifetime standpoint.

I also think we're able to penetrate new markets with our products. For example, we called out the MRO market, the maintenance and repair market recently, which has a lot of appeal and efficacy to us because they serve multifamily units by and large. And there's a lot of use cases for us in those types of large dense dwellings.

And then shifting gear to margins and pricing and costs. European segment has delivered 12 consecutive quarters of gross margin expansion. So if you could talk about the -- how much of that is due to pricing power versus mix? And if you could talk about the sustainability for the next couple of quarters, please?

Yes. No, that's a great question. And I think we have a really exciting part of the story here. I think with what I painted before, we've been able to execute in a low to mid-single-digit revenue growth profile with an improving margin expansion which has been born fundamentally on structural operating efficiencies that we've been gaining. When we -- when Mike gave the overview of when we spun out of Resideo, I think it's underappreciated that the Products & Solutions segment were product lines in disparate parts of Honeywell's businesses when it was contributed. So when it was contributed, we had a lot of manufacturing and supply chain sprawl that we had to work through and that some of the benefits you're seeing historically in the 12 consecutive quarters of expansion.

But I think going forward, there's still more room to be had. We think we're in the middle innings of that ballgame, where we can continue to extract operating efficiencies from, for example, looking at underutilized factories or looking at ways we can optimize the supply chain further. And then with the new product introduction that I mentioned earlier, we think there is some pricing power because as I mentioned, we believe our products are best of breed. We think they're differentiated relative to the competition. And we should be able to earn some price for that.

But then also think about the volume that we're manufacturing, which is large. And when you're manufacturing that amount of throughput across a healthier manufacturing and supply chain footprint, that's actually beneficial. So we're really excited about all that because, and I think we have a lot of things planned from a new product introduction standpoint.

So you just talked about the supply chains and manufacturing. So if you could talk about the strength and risks of your Mexico-centric manufacturing footprint? And how are you investing in automations or diversification.

Yes. I think 1 thing to call out, Tomo, you rightfully did is our philosophy from a manufacturing standpoint is near shoring. So for all the products that we sell in North America, we manufacture in Mexico, when we look at other parts of the world, we have a similar setup. I think because of the vast majority of our revenues are generated from North America puts a lot of focus on our Mexican operations. And currently, we were a beneficiary of the exemptions under USMCA, and looks like right now and continue -- we continue to be a beneficiary who knows what tomorrow will bring, right? But I think when we look at our flexibility, and this is where our scale our global scale from a manufacturing standpoint is to our advantage.

We have a lot of things in our playbook that could move some of the manufacturing or look at other alternative ways we can manufacture the product that maybe ex Mexico should that environment change. And -- but we're not banking on that. We're continuing to make investments down in Mexico in terms of labor, in terms of automation of of the manufacturing facility to increase that output. And we're very excited about what we're doing there. We'll talk more about it at our Investor Day.

And shifting gears to innovations and new products and with over 14 million connected customers via Honeywell Home. How do you plan to further monetize this base? And what role do software subscriptions revenues play out?

Yes. I think it will have a role in the future, which we'll likely lean into more so in the future. But I think today, what should be appreciated is we already have an existing base of recurring monthly revenue as part of our security business. And what I'm referring to is the -- or the back-end monitoring service we offer on a monthly basis to our customers. That's called AlarmNet. That's basically if the signal gets tripped on intrusion security, the signal goes to a clearing house, which we control, and then we route that to the first responder.

We think in our future, aligned with our new product introduction strategy, we intend to produce more and more connected product. But I think what's interesting and what we'll lean into more at our Investor Day is enabling an ecosystem that has more connected product that can interact not only with each other in our ecosystem, but with also with third-party product that is in the ecosystem enabled by our communication protocol and supported by a software layer. So again, we'll talk more about that at the Investor Day, but we're pretty excited about what those opportunities can bring.

Thank you, Chris. So I would pause here if anyone have questions on P&S. We're good. All right. Thank you, Chris. And moving to ADI. Thank you for standing by Mike.

I enjoy this, Chris. That was good.

I'm glad you can save your vocal chords. Do you want to sip a water before you go?

No. I'm good.

And then, Mike, if you could talk about the ADIs, the market environment. And I think as you talk about the sequential growth in security product categories. And then some rebound in video surveillance. How do you view the current state and outlook of the commercial securities and AV markets?

Yes. ADI really serves in 2 primary markets with growth in some adjacent markets. So again, that commercial security market is the legacy ADI business where we've grown tremendously over the last decade. And then with the [ SNAP ] acquisition, that was much in the residential AV. I think those are 2 different markets, right? Commercial security continues to be a very strong market. There's lots of innovation there if you think about both product innovation, the impact of AI on surveillance and security and video, putting those detection technologies, those identification technologies, when somebody walks into a bank. How do you identify them? How do you make sure you're keeping track of security situations like that is an emerging continuing evolution of technology, and we will continue to be playing in that and our integrators and install those products and continue to play in it. So that is a strong market, continues to be a strong market that we think will continue to grow at very healthy levels.

Video is certainly a big part of that. The whole surveillance, the whole security businesses changes surveillance in detection around that rather than break entry and lots of other things. So incredibly important part of the business. The residential AV business that we've bought from Snap is our business much more challenged. I think the big difference between the P&S business that Chris was talking about that is very residential focused, and this residential AV piece at the high end is the residential P&S part of the business is mostly nondiscretionary purchases. You're going to have a smoke detector. You're going to have carbon monoxide. You're going to have a thermostat. You're going to have a hot water heater where our ignition system is going to be on it. And most people choose to have a security they don't view it as a discretionary purchase.

I think at the high-end residential AV, there's a lot more discretion in there. And while we can all talk about the wealthy folks in this world and the resilience and the ability to continue to make discretionary purchases. I think when it comes down to the piece where when you tie it back to housing starts and the resale activity, people aren't waking up 1 day and saying, hey, I want to go put speakers my ceiling in the kitchen. Like that's usually tied to an event. And those events are happening less and less. So that market has been a bit more challenged. But I think overall, we feel really good about the overall markets that we participate in. We believe that the housing piece that the side we serve will come back and that will also benefit.

And I think the more recency, we probably underperformed the market a little bit, given some of the challenges we've talked about our ERP implementation, but we feel really good about the activities we have in place to offset that. And then from a growth market standpoint, those are the core markets. In the Pro AV side of the business and the Datacom side of the business, those are continuing to grow at healthy rates as well. Those are markets that we participate in. We've got good beachheads in businesses that are in the 9 figure, but they're so a relatively small part of the business. And we think we have lots of opportunity to continue to grow in those businesses. And we think that both of those areas are ones that we'll look to continue drive incremental growth.

Thank you, Mike. And then if you could talk about competitive environment for ADI. You've emphasized the ADI's operational stabilities and top-tier customer service recognitions. What is the structural advantage of the ADIs, 200-plus locations, omnichannel model? And how does the Snap One integration strength your moat?

Yes, definitely. First, we have too many locations. So I'll start there and say that from the Snap One acquisition, we have about 30, 35 markets right now in the U.S., where we have both an ADI store and a sub store, and you really don't need both. You got to make sure we're in the right spot, but our markets are not big enough we're not McDonald's, you do want on every corner. We're not Starbucks. And so we do think we have the opportunity to rationalize that footprint over the coming months and over the next 12 to 18 months, I think you'll see us get the store count down a bit more closely resembling from a store count standpoint, where ADI was before the Snap acquisition. There'll be a few more incremental locations, but pretty close to that footprint. That will drive a significant amount of cost savings without impacting the customer experience.

So -- but with that, ADI is very much an omnichannel business both our -- it's not just our store footprint, it's the omnichannel aspect. We talk every quarter about how much our e-commerce business grow. But even we talk about e-commerce, it's not e-commerce on a stand-alone basis. It really is the ability for these 100,000 integrators and shop with us how they want to get the product where they want to. So shop online, pick up in store, a given week, I don't remember the exact number, so Rob will yell me because I'll probably get this wrong, but it's north of 80%. It might be north of 90% of customers are interacting with us online. They're coming there and they're researching their learning. They might be shopping. They might be buying or they might just learn they then come into the store, they buy online, pick up in store, all those things are going on. So we really view that ecosystem of omnichannel experience as really the differentiated moat that ADI has from a go-to-market standpoint. And then we execute better than anybody else in the industry.

When I joined the ADI when they bought my company couple years ago when I watch what they did. We always do this from afar, but being inside the house and just seeing how well they execute, how customer-focused they are, how much they're ensuring that the customer experience is just absolutely great. It's just impressive. And so you put those things together, and we think we've got a great protective moat. We've got competitors out there that are trying to do the same things. And some are great competitors as well. But we think we outperformed the very single client that comes down to execution.

And you just talked about the e-commerce. So the revenue was up low teens year-over-year. and exclusive brands growing over the next 3 to 5 years, which product categories do you see as the biggest share of wallet gainers within your integrated customer base?

As we continue to grow, we love the e-commerce business. We think it's easier for our customers when they buy online, and we've seen a shift. I think this industry has shifted. We all talk about as consumers, e-commerce is like old, like Amazon has been around a little while. But I think in this industry, that purchasing behavior of shifting from either walking into the store, sending a PO in, it really has shifted more in the last 3 to 5 years than historically before that. And we do think that's a really important piece of the business that will continue to drive that growth.

Now again, we don't think about just as e-commerce is really the digital experience and the overall omnichannel growth, but that will continue to be a significant part of growth as we look at it. The overall exclusive brands look exclusive brands are great. ADI had exclusive brands before the Snap acquisition. They were more in the basic comp I would put it in a releasement -- and I think once we brought ADI and Snap together and we saw the opportunity of some of the thing Snap was doing on the residential side, on the more value-enhancing side of the business where you can add some products or add some services and support around the products. We think we can do that.

What we're focused on right now is continuing to have that product innovation, deliver those products within the residential AV market, but how do we leverage that expertise and bring it over to that commercial security side of the business. We want to do that in a way where we're filling industry gaps, right? We are and will continue to be a business that is primarily focused on distributing other products, our third-party products.

Today, sub 20% of our business is our exclusive brands business. In the future, we see that growing to low 20%. We're not talking about shifting this to being 50% exclusive brands or something, but we do think there's opportunities where the market is not being served by the existing product companies that we could incrementally grow our exclusive brands into the commercial space, continuing to identify the areas in the residential space to do it. There's a bunch of opportunities there.

We'll start with one. The Watbox product that we have -- that we built for the residential market has a lot of relevance into the commercial market. It's IP-enabled power that allows you to remotely access -- the integrator remotely access their job, manage the power situation, reset things remotely. There's a lot of things you can do there. And the lift to get that product commercial ready is not huge. Now you have to do things like you don't need multifactor authentication in a residential home, but you probably do once you put that in a commercial environment.

So there are tweaks of the products we need to make, but we think that's a really good one and easy one to continue that make that move. And there's other ones as well that to look at. But again, it's being done in a way that we don't want to start competing with our great suppliers. We want to find ways that we can fill in the gaps where they're maybe not meeting the needs that are out there.

Thank you. And then let's move on the margin side. Mike, if you could talk about the margins for ADI, what are the main delivers for margin expansion at ADI? You mentioned the business transformation actions and margin expansion targets last week? And how do you like Snap One integration digitalizations, excluding brand mix contribute to future profitability side?

Yes. If you go back and look at Snap and ADI prior to the acquisition, I think pro forma, if you added Snap and ADI together, we were running somewhere around the 7% EBITDA margin. We've actually stepped back from that a little bit over years. We've seen a little bit of underperformance on the residential AV side of the business from where we expected. And at the same time, at the acquisition, we expected to be making some investments. And so we've grown our SG&A piece of the business at a rate that's faster than what the revenue growth has been.

As we're sitting here today, the team said, okay, we haven't had quite the revenue growth we expected. Therefore, we have to fix the cost side of the business a little bit. So I think the very first thing that we need to do and are doing and we'll do this year is just go right size the cost base a little bit. Rob and his team are out there today. They've identified tens of millions of dollars of cost saving opportunities. That will impact the tens of million in year. And again, on a full year basis, that will be even that going to identifying areas that either we've invested a little bit at a rate that's not supported by the growth of the business or continued synergy and integration.

Again, we talked about the geographic rationalizing that. That's all in there. So we feel really good that the first thing we're going to do to drive EBITDA expansion is to get back to where we were in a little bit above that by just getting the cost back to right size in light of where the revenue has performed over the last couple of years. That's one.

Two, we think we're in a really good position to continue to grow that revenue. Last half of last year was tough for ADI. We put this once in a generation ERP system in place. It went well, right? I think from a technology standpoint, it was a b plus, like the technology all works like, but changing things that people have worked on for decades, it's tough. I started in public accounting and I remember Ernst & Whinney where I started was a lotus shop and Arthur Young was Mac, excel shop and E&Y merged right when I started and all the e-people got forced into the Y side and we became an excel shop, and they took the backslash away. Again, that was painful. And that's what's been going on in our stores, right? Is that sort of transition from system that people know how to use. It slowed down things at the stores when it slowed down things at the stores, we had a customer that we had 90% of their wallet share and they down the road a couple of times. And now we still have that customer.

We've lost no customers. lost a couple. But in total, we've lost no customers. We have lost a little bit of wallet share with some customers who have now spread their spend a little bit, and we've got a lot of actions in place to go back and reclaim that loss share. And we're doing those right now, again, Rob and his team, very, very focused on executing against that in the back half of this year, we feel really good about those things.

On top of that, the impact of that depression on revenue last year, we're lapping some pretty easy comps in this year. So all that is you get revenue back to where it should be, helps the margin profile as well. So those are all the short-term things, just go get them done right now if you think about our guide for the year, that's all baked, not totally baked, but at least parts of it are baked. Over the longer-term model, once we get that fixed, it really is about those couple of things that really drive the sale leverage. So one, exclusive brands have margins that are 2 to 2.5x greater exclusive or third-party products. Like to the extent we are able to tweak the percentage of sales up on that area, identify areas that we can bring those products to market, drive incremental growth in those areas, that is very much accretive to the bottom line from a margin perspective, a margin percentage.

E-commerce, as we talked about, just as a higher-margin business. It's easier for our customers. It makes us a little bit more money, not because we're charging more just because at the end of the day, it's a more efficient and effective way of doing business. So that drives a little bit of margin down to the bottom line as well. And we're going to continue to look for other opportunities from the cost standpoint to identify things to do.

And then one other thing to add, which might be relevant and interesting to the audience is in the current environment there's a lot of questions for everybody around inflationary cost pressures. And I think let's just address this now because it really covers both ADI and P&S, which is we've told the public and our customers that were raising prices in this quarter. And when we look at the impact in the second half of the year, we believe those price increases will cover more than cover the inflationary cost pressure. I think, however, in the second quarter, because we are implementing those increases now, there's going to be a gap in when they attach and as a result, a little bit of leakage that will impact our bottom line.

However, that leakage, as we talked about on the earnings call last week is immaterial to the total business, okay? So I think it's important for people to make sure they understand that because there's a lot of questions in general about fuel, about commodity costs, and we've been very thoughtful and proactive not only how we cover it this year, but we're also thinking about next year already.

Right. Thank you, Chris. And the last question is from Mike ADI. Do you plan to pursue like a [indiscernible] like Snap One. What does the ideal target profile like look like, if any?

Yes. The Snap-on acquisitions once maybe not 1 those sort of transformational things. You've got to have such a high level of confidence and underwritability we're seen that much synergy in the transaction. We talked about putting ADI and Snap together for years. We met Rob, on the same. We met Rob, I think it was 2017 before that. And so if we should put these 2 businesses together. And it took 7 to 8 years to get that done, but made a ton of sense. I think those kind of things. They come along very infrequently. That is -- we -- we're not planning for those they're looking and saying we have to do it.

I think the M&A that we look at on the ADI side is very much driven by as we think about those growth markets of Pro AV of datacom, where we don't have all the -- in the commercial security space, we have all the customers. And the high end residential AV space, we have all the customers. We're all the customers that we're going to get. We can get incremental, but there's no big customer base that we haven't attacked. On those other growth areas, there's a lot of customers out have. So if we can find bolt-on acquisitions, things that make sense that bring a customer that we don't have that we can expose to that great execution at ADI, bring them into our ecosystem where we serve the customer really, really well. Those are the kind of things we would do.

I think similarly at P&S, while we're not looking for customers because, again, we're selling through distribution, we have most of the customers we would have if you think of the direct customer and the distributor, the big box ever in is we're selling through. What we're thinking about there is we're the adjacent where we're in a category, we're in HVAC. We're the leader in thermostats, but we're not the leader in a lot of other things in there. Now again, we're not trying to manufacture the whole big unit in system. But what are the things that we can identify that might be bolt-on acquisitions that could augment our existing platform that we could go to our existing distribution network, bring those products in, layer our manufacturing expertise and the other things we're doing on top of it and bring those.

So I think on both sides, we think bolt-on M&A is part of the story. When we have the right leverage level, we start with we're going out there. We've got a leverage level today. That might be a little bit high. Again, from a management standpoint, very comfortable running the company with the leverage it has. But the markets don't like as much as management like sometimes. So we think we need to get leverage down to the right market levels to be very, very focused on in both companies post spin. And then we'll think about other capital allocation opportunities, whether it's bolt-on M&A, returning capital to shareholders out there. But I don't think transformational M&A is not in anybody's plan that it's never going to happen, but that's not the plan for either business. This bolt-on M&A certainly is.

Please, last question.

There's always been this interesting aspect about home automation, which is it seems very isolated in pockets, the camera system around the house, alarm systems aspects of the kitchen seem like you're now starting to [indiscernible] automated vacuum systems [indiscernible]. Is there something magic moment that things that you guys are partnering with...

Yes. Yes. Listen, I just moved into a new house 2 weeks ago, okay? We spent 6 months remodeling it before we moved in. And I have nothing but literally almost nothing. Well, I'm not going to mention the name, but except Resideo and Snap-on product or ADI product in the house because -- but I was very conscious about that, and it all -- I mean the product is great. So I have my Resideo First Alert app, which has my HVAC system control. It has my security system. All my smoke and fire is all in that system. And then my [ Control4 ] system through AI, my speakers, my halt, my media over IP that controls all -- like it's all there. It all works.

Now I could have probably done 75% of that with just the disparate systems, disparate apps. It doesn't have to all be controlled. How many apps do you want your phone? How do you want? But because I did it all this way, I will tell you, there's probably not a house in the U.S. that works as well as my house does on an integrated basis. But is that a little bit of incremental? That's the there's people like, I want Sonos or I want -- and we sell Sonos. We love Sonos, right? But it's not native to some of these things. As matter comes out, we'll continue to participate as a distributor and exclusive brands, we'll continue to sell products on both the commercial and residential side that customers want. P&S will continue to develop products that operate there and will either be integrated or stand-alone, it's all going to work. It works well together. It just works better if you do it together. It doesn't have to, though. I think that's a differentiation.

But to Mike's point, and I've been to his house, I've seen firsthand how well it works. I think...

We did have 20 people over week after we moved in. And my wife is not yet over it. So just...

[indiscernible]

No, no, let's not go there. But I think, look, Mike's house an example is emblematic of the ecosystem that I mentioned earlier. And I think that ecosystem, which allows for choice by the homeowner or the resident to use the best-of-breed products that we bring in or best-of-breed products that our friends who are the other third parties who will be in our ecosystem. Mike mentioned a communication protocol matter. We will have other things that we can talk about in the future. So I think, again, wait to Investor Day. There will be a lot more that you'll hear about this.

Thank you. I need to wrap it up. So thank you very much, Mike, Chris, and thank you, everyone, for participation. Thank you.

Thank you, Tomo.

Hello, everyone. Thank you for joining us, and welcome to the Resideo First Quarter 2026 Earnings Conference Call. After today's prepared remarks, we will host a question-and-answer session. [Operator Instructions]

I will now hand the conference over to Chris Lee, Global Head of Strategic Finance. Please go ahead.

Thank you, and good afternoon, everyone. Thank you for joining us for Resideo's First Quarter 2026 Earnings Call. On today's call is Jay Geldmacher, Resideo's Chief Executive Officer; Mike Carlet, Chief Financial Officer; Rob Aarnes, President of Resideo's ADI Global Distribution business; and Tom Surran, President of Resideo's Products & Solutions business.

We would like to remind you that this afternoon's call contains forward-looking statements. Statements other than historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Resideo's filings with the Securities and Exchange Commission.

The company assumes no obligation to update any such forward-looking statements. We have the principal risks and uncertainties that affect our performance in our annual report on Form 10-K and other SEC filings. In addition, we will discuss non-GAAP financial measures on today's call. These non-GAAP financial measures, which can sometimes be identified by the use of adjusted and the description of the measure should not -- should be considered in addition to, not as a substitute for or in isolation from our GAAP results. A reconciliation of GAAP to non-GAAP financial measures is included in the financial data workbook, which is accessible on the Investor Relations page of our website at investor.resideo.com. Unless stated otherwise, all numbers and results discussed on today's call other than revenue are on a non-GAAP basis.

With that, I will now turn the call over to Jay.

Thank you, Chris, and thanks to everyone for joining us today. I'm very pleased with the continued execution demonstrated by the entire team. Resideo exceeded the high end of the first quarter outlook ranges for all metrics. Total net revenue grew 8% year-over-year to over $1.9 billion. Total adjusted EBITDA grew 28% year-over-year to $215 million. Total adjusted earnings per share grew 3% year-over-year to $0.65.

Our first quarter results reflect the solid health of our operating fundamentals. Our Products & Solutions segment reported net revenue growth year-over-year, driven primarily by increases in both price and volume across most sales channels. Our ADI segment report 8% net revenue growth year-over-year, primarily from strength in our security business, partially offset by declines in our residential AV business. The strength of our combined operations, coupled with the elimination of the indemnification agreement resulted in strong bottom line results.

Resideo's execution continues to be steady in an uncertain global macroeconomic environment and with end markets still soft. I'd like to make 2 important points on recent macro events that are relevant to Resideo. First, on inflationary cost dynamics, we have largely absorbed cost inflation, primarily related to higher costs for freight in our reported first quarter results. We intend to raise prices later in the second quarter to combat increasing costs. There is broad understanding from our customers for the need to share the inflationary pressures and we expect to work collaboratively with our customers as we have historically.

Second, on the impact of cost inflation on customer behavior, Macroeconomic conditions have generally had an impact on consumer confidence and affordability. While the high-end residential audiovisual market has been softening, Resideo remains well positioned with the existing products, its upcoming new product introductions and its exceptional distribution footprint to take advantage of the markets we serve.

Not withstanding these macroeconomic conditions, as a result of our outperformance in the first quarter and other actions we are taking, Resideo is reaffirming its 2026 outlook. We believe our solid execution and proactive mitigation tactics will enable Resideo to manage through the uncertain environment for the rest of the year. Mike will speak more about this in his comments.

Before I hand over the call to Tom to discuss the performance of the Products & Solutions business segment, let me give you an update on our separation activities. We have achieved key milestones in our business separation process, including yesterday's public filing of ADI's Form 10. I'm very pleased with the high-caliber management team and Board of Directors that ADI will have as a stand-alone company, which is a testament to Rob and the entire ADI team for the business they have built.

And for Resideo, Tom has built a world-class team within products and solutions that will carry the business forward. We have accomplished a tremendous amount of work to get us to this point, and we have done so while continuing our strong business execution including providing high-level products and services to our customers. Additional details will be shared at a later date but we plan to hold Investor Day events for Resideo and ADI in New York during mid-July, where we introduce the full leadership teams and discuss each company's go-forward business strategy and value creation model.

As we noted in our announcement yesterday, we expect the spinoff to be complete between the middle of the third quarter and the middle of the fourth quarter. I'm very pleased with the focus, discipline, dedication and leadership demonstrated in the first quarter by the entire team.

Now let me hand the call over to Tom.

Thanks, Jay. The Products & Solutions team continued its strong operational execution, resulting in another quarter of year-over-year organic net revenue growth and the 12th consecutive quarter of year-over-year gross margin expansion.

Products & Solutions reported net revenue growth of 9% year-over-year, including an approximate 200 basis point favorable impact from currency. The impact of having an extra 4 days in the first quarter on net revenue growth was approximately 300 basis points. Net revenue grew across substantially all our sales channels and product families due to both price and volume driven by customer demand. Let me walk through our activities in each of our primary sales channels as our products can be sold through multiple channels.

In the retail channel, strong year-over-year net revenue growth was primarily driven by volume. There was an uptick in demand for our safety and thermostat products available in the retail channel driven by both weather and regulatory changes. Point of sales volumes at our key accounts continue to be strong and supported by healthy levels of channel inventory. Sales of First Alert products, including the First Alert SC05 connected smoke and carbon monoxide detectors showed increasing adoption, which we believe contributed to market share gain in safety products.

The OEM channel posted its sixth consecutive quarter of healthy year-over-year net revenue growth, driven almost equally by price and volume. Weather was a tailwind with notably stronger-than-expected demand in EMEA for our higher-priced and more profitable units. The electrical distribution channel had another quarter of year-over-year net revenue growth driven by volume. We saw continued demand for our BRK branded nonconnected safety products, primarily in the MRO and the manufactured housing market.

Net revenue from the security channel grew year-over-year driven primarily by price increases on our existing products. Security sales to a large customer were in line with our expectations. We are receiving positive market signals for our new integrated security platform scheduled for general market release in the second half of 2026.

Concluding our channel walk on a high note, net revenue from the HVAC channel was down only 1% year-over-year. Volume declines were partially offset by higher prices related to new products. During the quarter, we saw conditions in the residential HVAC market stabilize as we indicated several quarters ago. We saw a material reduction in the channel inventory held by our large HVAC distribution partners over the past 3 quarters, which we do not expect to continue going forward.

While we saw improved market conditions at the end of Q1, during the quarter, there was a modest volume decline that was partially offset by weather-driven demand and increased adoption of our new products. including continued strong demand for the Honeywell Home Elite Pro premium smart thermostat. Gross margin was 41.8%, up 40 basis points year-over-year. driven primarily by continued improvement in factory utilization, partially offset by product sales mix.

We achieved the 12th consecutive quarter of year-over-year gross margin expansion despite absorbing higher fuel costs. We increased investments in R&D to support new product launches and speed to market. Adjusted EBITDA grew 12% year-over-year due to continued gross margin efficiency, which led to operating leverage. We intend to continue driving operational efficiencies during 2026 and beyond. Looking forward, we're excited to capitalize on the profitable growth momentum from our continued new product introduction cadence.

And with that, let's turn the call over to Rob.

Thanks, Tom. ADI reported net revenue growth of 8% year-over-year. After accounting for 4 extra sales days in the quarter, average daily sales growth was 1% year-over-year. Both growth metrics include a favorable impact from currency of approximately 1%.

Net revenue growth was driven by demand in the security, professional audio visual and data communications categories. partially offset by the residential audio visual category due to a continued soft U.S. residential market. We saw sequential growth in security product categories, including an expected rebound in video surveillance. We saw stronger contributions from large accounts this quarter relative to the last 2 quarters, demonstrating conviction in our operational stability.

Performance in our international business was also a call out yielding a positive return from operational changes we made last year. In our areas of strategic focus, e-commerce continues to grow as part of ADI's net revenue while also being accretive to gross margin. E-commerce revenue grew 12% year-over-year and average daily sales grew 5% year-over-year, both driven by greater customer adoption.

Customer rating metrics continue to trend upward, and ADI achieved top-tier recognition for service, training and technical support from CE Pro, which is voted upon by the distribution industry. In another area of strategic focus, exclusive brands revenue increased by 7% year-over-year, while also generating 13% more gross margin dollars in the quarter versus the same period last year.

From a new product introduction standpoint, we added approximately 60 SKUs in the first quarter, including new Luma security cameras, Triad premium residential sound products and Araknis residential and SMB networking products. Also, the availability of the new Control4 operating system continues to broaden, resulting in an increased number of projects and attach opportunities for our Lutron lighting product.

Moving on to profitability. ADI reported 21.2% gross margin in the first quarter, down 40 basis points year-over-year. Gross margin was primarily impacted by higher fuel costs for freight. Operating expenses in the quarter were up year-over-year due primarily to incrementally higher variable costs during the 4 extra sales days as well as duplicate costs as we continue to optimize stores and distribution centers. ADI's income from operations was flat year-over-year, and adjusted EBITDA declined by $6 million due primarily to the previously mentioned decline in gross margin.

I said in the past that one of our key operating principles is our customer-first ethos: we pride ourselves in delivering an optimized customer experience that breeds loyal and profitable customer behavior. Another of our key operating principles is continuous improvement. We are pleased that we delivered against the Snap One synergy target. -- as well as implemented new operational systems integral to our future growth. We can now fully focus on business transformation actions, including optimizing our real estate footprint and streamlining our operating expenses globally that we believe will result in EBITDA margin expansion later this year.

Now let's turn the call over to Mike to discuss our first quarter's financial results and 2026 outlook.

Thank you, Rob. Good afternoon, everyone. Let's get straight into the quarterly results, starting with revenue. Total net revenue was $1.9 billion, up 8% year-over-year, including an approximate 2% favorable impact from currency, exceeding the high end of the outlook range. Gross margin in the quarter was 28.8%, down 10 basis points year-over-year. The slight decrease in gross margin rate was primarily driven by higher fuel costs on freight at both business segments.

Adjusted EBITDA was $215 million in the quarter, up 28% year-over-year and above the high end of the outlook range. The primary reason for the increase year-over-year was higher net income, driven in part by net revenue outperformance and the benefit of $35 million associated with the terminated indemnification agreement.

GAAP net income per share was $0.17 versus a net loss of $0.02 in the prior period. Adjustments to arrive at adjusted earnings per share include $0.15 of business separation costs and $0.12 related to a onetime litigation settlement impacting products and solutions. First quarter's adjusted earnings per share was $0.65, exceeding the high end of our outlook range and increasing from $0.63 in the prior year period.

Total reported cash used by operating activities in the first quarter was $145 million versus the use of $65 million in the same period last year. The year-over-year fluctuation was driven by business separation activities, higher cash interest paid and working capital dynamics. Our outlook for the full year 2026 cash provided by operations we provided last quarter, excluding separation-related payments, remains unchanged.

Now before I provide our financial outlook, let me walk you through some of our market perspectives and assumptions that are incremental to those shared with you last quarter when we set our 2026 outlook. As Jay stated, we believe uncertainty in the macro has resulted in increased operating costs and softer market demand in certain end markets.

From a cost standpoint, we anticipate higher costs during 2026 in areas such as fuel on freight. We do not anticipate material cost increases related to new Section 232 tariffs after conducting our assessment. Additionally, we do not anticipate material cost impacts for memory chips. As noted earlier, we intend to take pricing actions starting in the second quarter that are intended to fully mitigate these increasing costs. Given that our price actions will lag inflationary costs, there could be a slight headwind to the gross margin for each business segment in the second quarter.

From a market demand standpoint, we expect the ongoing uncertain macro to impact ADI more than Products & Solutions as questions around consumer confidence and affordability are anticipated to impact ADI's high-end residential end markets.

Now on our annual outlook. We are reaffirming our 2026 outlook. The shape of the company's outlook for the remainder of the year is now more weighted to the second half due primarily to a shift in fiscal orders for ADI. On net revenue growth, we continue to anticipate both business segments achieving year-over-year net revenue growth in 2026 and now forecast the growth rate of ADI and Products & Solutions to be approximately the same.

On gross margin, we now forecast total company gross margin percentage expansion to be flat year-over-year. We continue to anticipate that products and solutions will have greater gross margin percentage expansion than ADI. As Rob noted, ADI is executing against business transformation plans that we believe will be a benefit to EBITDA in the second half.

Our outlook for the second quarter of 2026 is as follows: Total company net revenue to be in the range of $1.916 billion to $1.940 billion. Total company adjusted EBITDA to be in the range of $216 million to $230 million. And total, company fully diluted earnings per share to be in the range of $0.71 to $0.75. Note that there is 1 less day in the second quarter of 2026 versus the same period of last year. We encourage you to visit our Investor Relations website to access our earnings presentation, which includes our outlook ranges along with key modeling assumptions for 2026.

Let me turn the call back to Jay before we open the call up for Q&A.

Thanks, Mike. Our outperformance this quarter is another proof point of Resideo's execution and product innovation pipeline resulting in profitable growth. Following the separation, there will be 2 pure-play companies. We expect the strategic focus for each company to be sharper and supported by greater financial flexibility that can be directed towards achieving their respective initiatives to create shareholder value.

We believe there is more opportunity for the investment community to recognize the positive progress we have made. We see our upcoming business separation providing another catalyst for a multiple rerating as investors can learn more about how each company is well positioned to deliver long-term growth and value creation for shareholders.

Let's now open the call up for questions. Operator?

[Operator Instructions] Your first question comes from Dan Stratemeier with Jefferies.

I guess maybe this question is for Mike. On a high-level basis, I think this reminds some folks of the third quarter, a really good quarter and a little bit more of a muted outlook in the very near term. Why are you confident your -- I guess, the price actions will be enough to overcome the macro and given your confidence in still hitting these numbers, just a little more comfort on that, but it's clearly a little bit of a deja vu for folks?

Sure. Dan, thanks for the question. So obviously, as we look out the rest of the year, there remains macro uncertainty. Every day, the news changes with what the outcomes are going to be between the war, other issues that are out there. we feel confident that we've got the right pricing actions. We've talked to our customers. Tom and Rob can certainly comment on that as needed. But our communication with our customers that we feel good we can pass through the appropriate pricing to pass along the cost increases that we expect.

There's a little bit of timing as these things come through when we roll through contracts when we can actually implement that pricing. But we're very highly confident that what we're doing will offset the cost that we see. Obviously, there's uncertainty out there, costs could continue to rise, they can moderate and we'll continue to adjust as needed, but we feel really good about the position we're in from a commercial standpoint as it relates to our pricing and our competitors and our ability to raise prices to offset.

All right. And Rob, I'll turn it over to you. You mentioned business transformation actions. Could you just dive into that a little bit further? How significant could they be? How quickly do you think you're going to be able to do those?

Yes. Thanks, Dan. Great question. I would tell you that they are quite significant. And in fact, to the point where we are doubling down on trying to bring as much of that into '26 as possible. And there in the area, some I mentioned on the call or in my prepared remarks, and some I didn't but the big buckets are, first of all, are rationalizing our real estate footprint. We're, I would say, first, second inning there in terms of looking at our stores and our DC footprint since we've actually acquired Snap One. So there's a lot of opportunity to rationalize the footprint there.

And then second, you may have seen the press release Monday yesterday on my leadership team, we reorganized the team. We put all the sales and operations reporting into Ali Copeland and then on Marco Cardazzi's merchandising team, e-com marketing and all of category management. And so that -- those 2, they have a lot of opportunity to look at redundant costs and optimize OpEx going forward. So between our real estate footprint and just optimizing our current head count across the businesses, we see a quite a bit of opportunity there.

Okay. And how about on the sales and growth side, understanding the high-end Snap One side. How about the sort of the core ADI, any initiatives to reinvigorate growth there?

100%. In fact, I'll use the term I was just using -- I was talking about this with somebody earlier today. I mean, we've got a number of powerful, very focused initiatives on driving and returning our commercial categories, really the strength of what we do back to year-over-year growth. And when you look at Q1 as a whole, obviously, up 8%, but 1% on average daily sales. I would challenge you to look past that. And I was very encouraged to see a number of our commercial categories actually return to growth. We've got a couple that are continuing to lag a bit behind, but that is where we are focused going forward.

And I'm very encouraged by what I'm seeing from the team and the categories that we did return to growth and what we're going to do with those remaining categories going forward. So I would just lastly tell you, look, this is the same team, right, that has delivered some really nice growth over the last decade year-over-year. And now they're equipped with better tools. And so there's nothing that makes me believe that we won't be back and pretty soon.

I don't want Tom to feel left out, Tom. The growth at P&S here has been a number of quarters in a row here, Tom, that's just above market, really aggressive. Give us the bullet points as to why P&S is just flat out outperforming the end markets and the overall industry, I mean, you're obviously as levered to resi as anyone in the entire company. So how about that number one? And then as everybody knows, these memory stocks are through the roof, memory costs are through the roof. There's a lot of concern that you're not going to be able to mitigate that. I heard the comments from Mike earlier, like how are you able to mitigate the memory cost increases?

Yes. So let's take that one second, let's go back to your first question, the outperformance. In the press release, we made a comment that we've assembled and have an extremely strong management team. And as I think through and I can give you specific examples, the person that's going to be heading up our sales and marketing and how that team has gone out there in just a tremendous job introducing the new products as well as some of the existing products and working with our customers and communicating the message of what we're trying to do, fantastic.

Our supply chain. I'm going to come back to that one a little bit. So let's just put a pin, but they've executed extremely well. Our product management and our engineering team shortening development cycles, creating new differentiated products that create and deliver value to our customers, exceptional execution. So in general, I think it's been the execution of that team that's enabled that. All right.

So one of the questions, so I'm going to come back to supply chain to answer the memory question. Mike did do a great job, by the way, of explaining that we have the fuel costs. We've got metals, we've got 232 costs. All of these, what I believe, are transitory inflationary pressures. And we have, as Jay mentioned, worked with transparency and sharing this information and working with our customers to -- that we've had to pass this on. And that how we're passing that on is over this next quarter, we've already communicated these price increases. They're going into effect, there will be a bit of a lag, but they're all set up to execute and we've had no pushback on that.

But the bigger question, how do we know we're in the correct position related to memory? That supply chain team, I was mentioning, they've been working on this since last year as we saw the first indicators that there was going to be a memory squeeze. And they worked with all of our suppliers to make sure that we had allocation commitments for all of 2026, but that's the allocation. On the pricing, there was also some pull forward in pricing and the engineering, product and supply chain have worked on other means of addressing this.

Our products only a minority have memory in them. And when we use memory, it's typically smaller capacity, so less amount of memory, and it's not the cutting-edge technology that's in such high demand at the data centers. So there's a little bit less pressure on that. But we've also tried to do whatever we can to try to maximize that value to customers by trying to see if there's ways we can reduce some of the memory or change how we execute but there is some cost to our customers that we are passing it was described as nonmaterial, and we feel comfortable that we have received the allocations we need to be able to execute in 2026.

Your next question comes from Ian Zaffino with Oppenheimer.

My question would be on the guide. As we think about the second half of the year, what's giving you confidence in that second half of the year? And I know we talked about price increases going through. But at the same time, you have some softness in some of the other end markets that may or may not recover? And what are you seeing maybe there that you think is going to improve? And then any other kind of factors that are driving kind of the guide to the second half of the year or the implied guidance for the second half of the year from a puts and takes basis?

Thanks, Ian. I'll kick it off, Rob, Tom, feel free to jump in with any color or commentary. But I think, first of all, when we think about our guide for the year, the first thing we look at is the current trends of the business and ask ourselves what's going to change for the good or the bad, what are those macro factors, what are our internal initiatives, and we try to bake all that into how we think about the rest of the year.

As we think about the second half of this year, Rob has mentioned the cost activities that he has in place some of which we've been planned, some of which we looking to pull forward. We've added some of that to our guide the year because we know that what we've identified we can get done. We know our current trends of our daily sales average. We know going into the second half at ADI specifically, we had a weak second half last year with some things that were going on operationally in the business that we're going to be lapping some easier comps. Same thing at the P&S side of the business, we're lapping that HVAC disruption in the market last year.

So all those things, as we think about the current trends of the business compared to how we were performing in the second half last year, gives us a lot of confidence on the top line. We've talked about the pricing actions we're taking to protect our margins. And again, the OpEx activities, specifically at ADI that we're implementing to pull some costs out of the business. We're highly confident will be achieved as well.

So all that together makes us feel like our guide for the year is very prudent and appropriate for what we think is going to happen. Again, we all would acknowledge the uncertainty that's out there, so things can get better, they can get worse and we'll react accordingly. But based upon what we can see today, we feel really good about how we're thinking about the full year.

Okay. And then as a follow-up, when we're talking about fuel and freight, what type of inflation have you seen there maybe in the dollars and cents basis? And then also in ADI, remind us how much of that is high-end AV and maybe how much of that -- how much was that segment down?

I'll do the first one -- second one first, it's easier. If you just look back when ADI bought Snap One. Snap One was about $1 billion business. we're about a $5 billion business, plus or minus today. So it's around 20%-ish. There's some pluses and minuses, but if you use that as a directional sort of proxy that will get you in the ballpark of what those numbers are.

As far as the fuel and freight costs, it's millions of dollars that we are incurring in each quarter right now. It's obviously changing as we speak. The cost of bunkers and fuel changes every single day but it is not an insignificant number that we're incurring at both sides of the business, both ADI and P&S, and offsetting that again with price. So for the year, it's going to be in the tens of millions of dollars of cost. The timing of how that goes through, obviously, varies as you go through inventory as you think about receipts and as you can think about the uncertainty that's out there in the market.

Your next question comes from Erik Woodring with Morgan Stanley.

This is [ Ralph Herro ] on behalf of Erik. Just with regard to the Form 10 you put out earlier this week, you outlined some leverage targets for Resideo or RemainCo. I'm just curious, how are you thinking about that time line to achieve your net leverage goal? And just any other checkpoints that you are considering to other checkpoints that you need to hit to consider M&A, share repurchases, dividends, et cetera? And then I just have one quick follow-up.

Sorry, excuse me. Thanks for the question. I think first of all, look, we have a lot further conversations about the separate companies as we go forward. As we sit here today, we're very focused on running the business today. We're certainly preparing for the separation. We posted decks for both ADI and P&S, RemainCo, separately that can be viewed on our website, so I'd encourage you to look through them.

I think at a high level, both companies on a separate company basis, are very focused on deleveraging. We've got 3x leverage as gross leverage as the target for both companies. We think we get there pretty rapidly. These are both strong cash flow-generating businesses. We think we'll get there pretty quickly. But we're going to hold off talking about specifics on that until we get further down the path, we get closer to Investor Day.

Got it. Makes sense, totally understand. And I just wanted to double-click a little bit on the memory supply chain dynamics that the other gentleman alluded to. So I know you talked about having relative comfort with the allocations you received in 2026. But we're hearing in the industry that in a lot of cases, there are constraints extending well into 2027. I guess, to the extent you're able to provide any color beyond 2026 in terms of what you're seeing in the supply chain, that would be helpful.

Sure. This is Tom, Ralph. I wanted to just explain clearly for 2026. It's not that we stop working on this problem at the end we're working on allocations for 2027, dealing with our vendors to do it. You're right. I would expect this to continue in 2027. But again, I'd go back to the comment that the products that are in the most demand are things such as DDR5 DRAM, right, which is the latest and greatest at high capacities. We're typically using DDR3, DDR4 and low capacities and then some nonvolatile memory.

Will it have the same duration of impact as some of the high-capacity high-performance, high-speed memory? I wouldn't think so, but we are making sure that we're taking the actions to secure our allocation as far out as we can.

There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.

Good afternoon, just afternoon. Welcome to day 2 of the Morgan Stanley TMT Conference. My name is Erik Woodring. I cover the U.S. IT hardware space here. I am pleased to be joined by Resideo Technologies today, President of the P&S business, Tom Surran; and then Global Head of Strategic Finance, Chris Lee.

Before we start, quickly from my end. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to Morgan Stanley sales representative. Chris, do you have anything that you need to do from your end?

No, I'm good.

Perfect. So Tom and Chris, thank you for joining us today.

Thank you for having us.

Thanks.

So there's a lot going on, obviously. So there's a lot to get into. I think maybe the best place to start, I want to do a look back in 2025 because it's such a transformational year in the company's history. But maybe if you could just give us kind of the 2 to 3 highlights of '25, but maybe more importantly, how that sets this company up for success in 2026. And we'll go from there.

I'm going to let you handle it because it's some corporate matters.

Sure. Yes. So in July of 2025, we announced the termination of the indemnification agreement with Honeywell. Under that agreement that we entered into at the time of Resideo spin out of Honeywell in 2018. We were obligated to reimburse Honeywell to the tune of $140 million a year for environmental liabilities that they incurred and attached us to help and remediate. That was a major overhang in term -- to the Street in terms of understanding our story and building a model for valuation.

We were able to enter into that termination because Honeywell came to the table in 2025 versus other historical times where they didn't necessarily come to the table to talk constructively. And we were able to come to agreement that settled and terminated the indemnification agreement for $1.625 billion of consideration. We paid that with cash on hand on our balance sheet and new term loan B debt in the amount of $1.225 million that was settled and paid in mid-August.

But what was important about settling that identification agreement beyond clarifying the story and helping with the valuation model was -- it eliminated all covenants attached to the indemnification agreement that previously prevented us from pursuing strategic and migration activities. And so in conjunction with the termination of the Honeywell agreement, we also announced the intent to separate our ADI Global Distribution business from Resideo. At that time, the news was very well received by the Street. I think it helped to clarify a lot of that overhang and gave a clear path toward valuation and potential re-rate for that sum of the parts.

Cool. So a great place to start. I'm going to kind of pivot and Tom, turn to you just as a Head of P&S. So there's a lot of -- a lot that we can talk about. Just very quickly to start, I want to just start on kind of like the macro backdrop, so to speak, or kind of the industry backdrop. As you look at it, housing starts, R&R, you just -- how would you gauge that backdrop before we get into kind of company-specific stuff?

Technically, I would describe it as "neh". So I mean it really is. I mean, so we could go through the statistics and say what's going on. The amount of homes being built per year is 800,000 units per year. That's running probably 300,000 short of what would be an equilibrium. The housing stock at 114 million there's 4.7 million short of equilibrium. So we're making things worse in the housing market. It's building up. Everyone kind of knows this is not a great housing market, but it's not sustainable. So it does need to break free some point which will basically create some tailwinds for the business.

Cool. And so you guys do a lot on your end. I called it a lot of a lot of different channels, a lot of different end customers, a lot of different products. What are some of the growth opportunities within P&S that excite you the most as we look out over the course of the next year? Are there any areas maybe conversely that face more challenges too. So just kind of each side of that coin.

Sure. So understanding the products that we serve. So we are controlling sensing in the house, all right? And what we create in that, let's just say, in HVAC market, sometimes we call it air, we have, say, the thermostat market. We've reinvigorated our product line over the past year, and we're not completely done with that. We sell over 12 million units per year by an order of magnitude larger than our next nearest competitor, and we were making substantial investments, and we expect that to grow well. We are in the safety business under the brand First Alert. So that product is the smoke detectors, carbon monoxide detectors. That business has done very well for this past several years.

And we actually have a new product that we'll be bringing out the middle of this year that we're very excited about. That's a new platform. It's a global platform. We'll concentrate all our volume on that and be able to expand geographically. So that should drive some growth for the business.

The OEM business is a little more driven by the demand for the products of our customers. And the time line for that is much longer development cycle. So we're creating some things for the '29, '30 time line. So that's a longer look, but it's a business that's been doing well for us. The business that we have to make a significant investment in and we're doing that right now is our security business. Historically, we've been very active in intrusion. And we want to create an all-inclusive security for the home, and we're making investments in those products, and we'll start seeing some of those come out this year.

Okay. I want to touch on kind of air and the HVAC market first just because that was something that was a bit of a trip up in the second half of '25, not as a result of you guys. But of what's going on in the background of the market. So at earnings, you talked about your larger distribution customers managing inventory levels lower below normalized inventory levels. On the other hand, some of the HVAC guys believe some of the inventory headwinds maybe won't clear until midyear. And so you're also launching new products there. A lot going on, but kind of is the issue from the second half of last year entirely in the rear view. And kind of second to that, just how does NPI contribute to the outlook as we then think about '26 for this market?

Sure. So what's being referred to is the HVAC market did have some issues with some equipment as they made a transition in the refrigerant. As that relates, it created some supply or cash issues with distributions, major distributors, that they basically constricted inventory of all their supplies and we were part of that. It happened in the middle of the year. So in Q3, we saw our revenue in the air business down about 13.5%. But at that same quarter, we grew our business 3%. So yes, it did have an impact on 1 of our segments, but our other segments outperformed and made up for that.

In the fourth quarter, we saw our air business impacted by minus 5.5%. And again, we had 6% growth overall in business. We see it ending here at the end of Q1. We think we'll be substantially done with it. Some people are saying you're not going to be completely done with it to the end of the Q2. That's very possible. But we're seeing it already kind of taper off. There will be some impact in Q1, no doubt. We're seeing it right now. But we also see the rest of our businesses still continuing to execute.

So it's more of a -- right now, we obviously have a little bit of a headwind. We're able to perform better than most of the industry has relative to those headwinds. So we are expecting that, that should be done here at the end of Q1. .

And just to add on real quickly, the headwind that Tom just mentioned, potentially in '26 is already baked into our 2026 guide. .

Okay, cool. Tom, something that you guys said at earnings, I kind of caught my attention was as it relates to the security business was the relationship with your large security customer has been reinvigorated. Just talk to us about kind of what that means as we think about that segment?

Yes. So historically, in the security market, we were an OEM provider. We have switched to become more of a general market. Now there is one large customer who still remains an OEM customer and the relationship had some bumps a couple of years ago. We've worked hard on that relationship, trying to make sure that they understand the value we can bring to it. We've brought new products. In fact, we've got some new products that are going in this year for some various customer bases. I don't want to announce their market. And just the engagement with the customer and the relationship has substantially improved. It's now one looking forward rather than complaining about things that could have happened in the past. So it's a relationship we think we can build on. But in the security market, our focus is to be a leader in the general market with our own branded products. .

Okay. We've talked a lot over the course of the last few months about NPI. And I'd love to get your perspective, again, I don't need to share state secrets, so to speak. But what are some of the more kind of critical or exciting areas of NPI that we should expect to see coming from you guys in 2026?

So the '26 is a little bit of a pivot year. I mean we are going to finish off the new platform we have for the HVAC market. So that's -- we've introduced a low-end product, we call FocusPRO. We've introduced a high-end product called ElitePRO and we'll be introducing our mid-tier as well as our European offerings this year. So that's coming out -- during the year, we'll announce a sequence of those. And the idea there is to get all the scale we have onto that single platform to leverage that to improve the efficiency. And we're very excited about the products themselves and what they bring.

In safety, similarly, we have a product that will be coming out the middle of this year, which is our new global platform. We're consolidating all our volumes onto that one platform. And then it is a product that we'll be able to do geographic expansion into Europe with. It's a product we expect to do well both in the retail channel as well as the professional distribution channel.

And in security, we'll start introducing products in the back half of the year. And the reason why I say the back half of the year is this year, we're going to be introducing our new platform, which we call [indiscernible]. And that is what creates the ecosystem for the future of the business. So it's pivotal for the future of the company. And the reality is, this year, we'll start bringing the new security products on to that. And it's is something that will play a huge role in the future of the business.

Cool. I want to touch on margins on the P&S business. This is something where you've had a multi-quarter track record of success and margin expansion. There's still more to come as you guys have described it. What are the most kind of important or repeatable drivers of that margin expansion as we look forward that we, as investors, can kind of underwrite and have the highest degree of confidence in? And are there any kind of onetime items that are kind of mixed in there as well that aren't just necessarily secular over a multiyear period?

Yes. It's really a collection of onetime things you're doing, right? So the idea overall is you're trying to optimize the value you're delivering to the customers, and that's through the NPI, create more value. We make better products, right? And that the customer is willing to pay for and then deliver them efficiently. And that's really what we're doing. So in any one of those, it's the automation of this facility in ores. It's basically a rebalancing of a line over here. It's closing a factory. It's creating new IP in the products that we're delivering to the customer, creating an ecosystem that drives more synergies across the products. So it's the secret to just continually trying to create more value and do so efficiently.

Okay. And maybe last question. How does this translate on the PMS side to our view on where it can kind of medium-term growth algorithm for P&S, medium-term kind of margin targets for P&S. What are you guys trying to build to as we think about all these moving pieces that we've just talked about?

So we've committed to a low to mid-single-digit growth rate in the near term. And as we start seeing traction, we'll reevaluate that commitment. We're pretty optimistic about what we have in the works and how we see the business developing. So I hope to be able to talk to you about some different numbers. But right now, we're committing to low to mid-single digits.

Perfect. And margin?

[indiscernible] margin?

Yes.

Sorry about that, guys. We are going to continue to focus to improve the margins. We haven't committed and we'll have an Investor Day where we give specifics about what our long-term outlook is on the margin. but you can expect us to continue to work on it. It is not going to be a linear process. I want to -- I know we've done 11 consecutive quarters of margin improvement. And we will continue every day trying to optimize the value and the efficiency of delivering it. But it's going to be a little bit step stairs as we go up, and that's acceptable, and we are going to continue to work on that. And by the time we talk at the Investor Day, we'll give you the long-term outlook of what the margin will be.

Okay. Cool. Chris, I want to maybe bring you into the conversation as we focus on the ADI side now. and maybe the broader corporate initiatives. First, again, kind of addressing a pain point from the second half of last year, which was the ERP upgrade in legacy ADI. You made cleared earnings. It's fully behind you guys now. One, any response to that, making sure there's nothing that we have to clean up there. But really, two, what kind of opportunities does that unlock for you guys on the ADI that potentially you couldn't capitalize on before?

Yes. So first, let's make it clear, and I appreciate the question and the lean in there. ERP is fully operational. It is in the rearview mirror. There are no revenue hedges and the outlook for '26. There's no expectation for onetime costs in '26 like we incurred in the second half of 2025. Now why did we do this? Well, one, it's a modernization project. And when you think back to what we were using prior to the new ERP, we were using a 40-year-old-plus AS 400 system. That was literally the green screen.

And if you look at what we've been able to build at ADI from a revenue perspective, almost $4.8 billion of revenue through last year with the scale, both in-store and on -- through e-commerce, through the digital channels, it's been pretty impressive. But what the new ERP really does for us is bring us to the future. And it's about things like price discovery and price discipline that we can maintain across that in-store and digital network that we had challenges with in the past. We also have better linkages from a data and management standpoint around inventory in the warehouse and at the distribution centers. And there's a number of other things that I believe Rob will talk to about those benefits going forward at the ADI Investor Day.

Okay. And maybe more broadly, what I think some investors are trying to do is gain conviction in the underlying drivers of the accelerating ADI growth that you laid out for 2026. So maybe first, just is there a way to help us understand the second half of the year was impacted by the ERP upgrade. Is there any way to understand kind of what second half of '25 ADI growth was? And maybe more importantly, what are the most important factors that are driving that kind of reacceleration in the business in 2026?

Yes. I think to put it in perspective, organic revenue growth posted by ADI was plus 8%. And when you look at Q3 and Q4, that decelerated down to a plus 3% in Q3 and flat in Q4, solely attributable to some of the challenges with the ERP implementation. What did the ERP do that we -- in 2025 that we don't expect in 2026? Fundamentally, the ERP was a distraction, okay? The ERP distracted the team and what they do best, which is execution. And ADI has always been known for very fast execution, very quality execution. If you're a professional who's ordering from us, you never had doubts about how much you receive, the mix of the items you receive, the timing and the location. It was all spot on. You had a high degree of confidence there, whereas the ERP created some of those operational challenges in the second half of '25.

So fundamentally, the team is very focused on that execution and when you look at what the execution is for, it's around the customer, the customer experience and winning back some of the customers who are temporarily shopping at some of our competitors because of the ERP challenges in the second half. If you look at our customers who is the professional installers, many of them are very dependent upon ADI to provide supply in order for them to do their job, which is to do the work in the commercial or the residential space.

Okay. Underlying this improvement in ADI growth, can you just help us also understand, you acquired SNAP One, call it a little while ago, more than 12 months ago. What's the contribution from Snap One? We can get to the cost side. Obviously, there's obviously cost synergies there. But from a revenue synergy side there, how are we thinking about the contribution to Snap and the broader kind of ADI landscape?

Yes. So let me reiterate and frame why we did the deal. It has strategic value. It was complementary to ADI's business. ADI historically had a commercial focus, Snap had a residential focus. It was complementary from a product category standpoint, audio visual complementing our strength in professional AV and adding the share-leading residential AV player, which was Snap. But when you look at the combined company, it offers a wider line card to more customers. And so that creates cross-sales synergies across that wider set of customers for a wider set of products.

And I mentioned in the response to previous question, we want to have that great customer experience because we have a very loyal customer set. And what we want to do is continue to incentivize and attract customer behavior to shop at ADI. You see that in our digital and omnichannel experience. You see that in the line card. You see that in our logistics and fulfillment. And we are winning back some of those customers that and mentioned we had some -- we had -- that were temporarily shopping during some of our challenges. And so when you look going forward, it's about leveraging all those capabilities of selling more products to that wider set of customers.

Okay. Very clear. Now I'll ask you the cost synergy side of that, right? So I think you captured the $75 million that you had outlined when you acquired the business or when you announced the acquisition. Is there more to do? How do we think about the opportunity to find more cost synergies if that's an opportunity?

Yes, it is an opportunity. I mean, while we were pleased to deliver $75 million in 2025, there's still more room to run. 2025 was the start of the real estate integration phase as planned. So you should expect a continuation of that in '26. And what we're talking about there is potentially closing some stores where there is a concentration in a specific geography. In other cases is about opening net new, especially when there's an opportunity to combine the stores to a bigger footprint with a wider array of products. The other area that we see opportunity for is in some of the websites and e-commerce platforms, Snap One's website, for example, is still operational and you can still shop through there. But you have ADI's really powerful website that we want to integrate and combine them together.

Okay. And those just maybe confirm on that, that's also kind of integrated into how you've guided. Is that upside? Just very quickly how to contextualize those opportunities.

So it is inherently baked into the guide even though we have not explicitly provided a synergy target that we look to achieve in 2026. I think you've seen over the last 2 annual periods, we've given the actual achievement in each of the years, the 6 months ended December '24 and the full year '25. We're not going to guide it because it's a pretty organic process as we manage the business.

Okay. Okay. Helpful. Last question on ADI before we maybe turn to the broader changing landscape for you guys for Resideo is, a similar question that I asked, Tom. As we look out 3 to 5 years, what's the kind of the growth opportunity for this business? What's the margin expansion opportunity for this business? And in that, I think it would be helpful since the plan is to spend, I realize that hasn't happened yet, just the associated kind of incremental costs that come with that spend. How do we think about that flowing into that margin as well?

Okay. So a little bit to unpack there. So keep me honest, I'll go from top to bottom. The ADI growth profile prospectively is a mid-single digit, high single-digit growth profile that's very consistent with the historical growth profile under Rob Aarnes, who is our President of ADI and the future CEO of the SpinCo. We see margin -- gross margin expansion opportunity of couple of hundred basis points, probably over the next 5 years. And the team -- the ADI team will likely expand on that a little bit more at Investor Day. But that will be partially driven by the scaling of the exclusive brands portfolio, which is more margin accretive versus a third-party sale -- third-party product sale as well as continued usage by our customers of our digital channels, which inherently are more profitable than in-store.

That's not to diminish the importance of in-store. In-store is very important for the experience to the customer. The ongoing corporate costs, I think was the last part of the question.

Yes, yes, just how that incorporates into....

So what we have shared with the community is currently, we have about $115 million of run rate corporate costs that's already in the P&L. We think there's an additional $35 million of corporate costs necessary to stand up both Resideo and ADI, Resideo RemainCo and ADI SpinCo as independent public companies. The nature of the costs in the $35 million bucket would be, for example, hiring my counterpart for 1 of the 2 companies, okay? That $150 million in totality should be divided into $75 million and the $75 million should be burdened on each ADI and P&S, at the spin.

Yes. Okay. So let's talk about -- before we get into the spin transaction, just capital allocation priorities for kind of the holdco as we lead up into the spin transaction. I believe the priority is deleveraging, but just like talk about the priorities, but then also just to address the leverage and kind of what the goal is there?

Yes. I think to set the frame, I mentioned earlier that as part of the termination of the indemnification agreement with Honeywell, we took on some more TLB. That brought leverage to a little bit over 3x. Our stated goal and what we've been executing since taking on that new TLB would be to delever. And we would delever by the strong cash flow generation of both businesses and grossing that up on the balance sheet. And I think you guys have seen that since the Q3 print.

Now, throughout all this, we've been managing -- the philosophy to manage the cash structure is we want to be a near investment-grade credit rated company, BB, which we are by both Moody's and S&P. And our targeted leverage goal is net 2 turns. And so I think that's likely the philosophy that will be promulgated at both companies. And we'll get into more of the details and the mechanics around the instruments and the path toward deleverage at the Investor Day.

Okay. And before we get there, obviously, you've shared some details out of the Investor Day ahead of the spin, for example, we know we're talking to the future CEO of the RemainCo. Can you just help us understand at least or remind us details that you have shared that we do know about as it relates to, again, leadership, target leverage, capital allocation. Again, we talked about growth rates and margins. But just any details that you have shared. Can you just remind us all of what those are?

Yes. I think -- we talked about some of them throughout the conversation, but we are still on track for a second half of 26 event. We anticipate having an Investor Day for each Resideo RemainCo and ADI SpinCo roughly 3 to 4 weeks before the effective date of the separation. And we would anticipate that the public flip of the Form 10 would precede the effective date by roughly 2 to 3 months. So I think those are some markers out there for the Street to keep an eye on.

We mentioned that both Tom and Rob would be the future CEOs of the respective companies. We have not yet announced other members of the management team. Nor have we mentioned members of the Board as we're still going through those processes, those selection processes and org design. And I think we just about capital allocation, you mentioned the growth rates and the margin profile. So I think that's pretty much it.

Okay. Two questions before. I'm going to turn back to you, Tom, towards the end of this, which is, Chris, just can you address the decision to spin versus sell idea, it's a question that I get really often. Why not sell? Why spin? Clearly, there's signals that you get behind the scenes. Just talk to us about the value unlock kind of that you guys think about a spin versus a sale.

I think I get a question every time too. Look, I think the company and the Board has done a tremendous amount of diligence around the options here and the Board has determined that the separation is really the most optimal way for value creation for our stakeholders. Just to be very clear, we're not running a sale process, a formal sales process. And I think the decision at the board level for separation was unanimous.

And so let's just lean in there because the second most common question we get is CD&R and their presence here.

That was going to be my next question.

Geez, thank you. They're not exerting control. They work collaboratively with the Board and the management team. They're very constructive in their conversation. And so look, they clearly see value, which is why they have bought stock in the open -- resi stock in the open market. And they've demonstrated that conviction in the boardroom.

And maybe bigger picture of the CD&R involvement. Just speak to the leadership oversight that you get from them? Obviously, they have 2 board members now they've been the Snap One acquisition. Just again, leadership, what they bring to, not just the spin process, so to speak, but just the overall oversight of the business and where it's going.

Yes. Look, I think Tom should also chime in on this as well. But look, deep domain expertise in both the distribution and Building Products segments. They have a great view of the capital markets, and they're just fundamentally really good people to work with. They're collegial, they're thoughtful and they're constructive.

That's exactly right. They are the of directors if you want in the business. They add significantly to the Board. We have a strong Board, and they just enhance it that much more.

Okay. Cool. Before I kind of wrap up on the -- one on you, Tom and then kind of the last question. Obviously, tariffs in the news with Supreme Court. You guys are primarily manufacturing Mexico, so USMCA compliant. Just clarify, nothing has necessarily changed post Supreme Court ruling. I just want to make sure that....

USMCA was kind of honored and grandfathered into anything that's done under the new provisions. So there's really not a lot of impact to us there. There's obviously some small impact on some of the smaller amounts of importation we do for some of the Far East countries and some of the European countries, but it's small dollars.

Okay. And then, Tom, for you, obviously, congratulations. I haven't actually formally congratulate you on being named the future CEO there. Just any early insights about kind of leadership mantra, what you kind of bring to the table. As a CEO, investors inherently are going to be betting on you don't want you to share anything that you would share at the Investor Day. But just what's the message as you step into -- as you realize you step into that seat in the future?

Sure. I think it's important to realize this is a separation rather than the spin, okay? So these are 2 strong businesses that are executing independently right now. And the strategy that we've had over the past 2-plus years in the P&S business, we're going to continue to execute. We have very specific things that we'll be doing and would love the opportunity and take more than a minute in '26 to go through exactly what that strategy is that we'll be executing in P&S. But we're on the path. We're going to continue with that because we see the success it's bringing. We know how much more it can bring us. And so that's exactly where we're going to be executing.

And the reality is when I got to the company, the quality of the people and the brands and the strength and the domain knowledge that's in this company and our ability to be successful is just absolutely incredible.

Okay. Great. So with that last minute, I'll give you each the opportunity to kind of give us a final word on either what most excites you, what you think is maybe most underappreciated However, you each want to take that, please?

I'll go first, let me finish up. I think it's important to look deeply at each of the businesses independently. And I know they've been obscured through the co-mingling of the 2 businesses. But when you look at them independently and say, okay, let's look at this business. I think it's underappreciated the strengths we have in the products and how we go to market and how we're viewed by our customers. So don't just look at the category of, oh, they make a thermostat, oh, they make gas control valves. Oh, they make the smoke detectors as though those are generic. There's a lot of differentiation we can create in those products. There's a reason why our pro customers trust us, and we have such success with them and how we can create even more value. So I think that's underappreciated how good we can make this business.

Yes. And to build on what Tom said, I think at the onset of the conversation, we highlighted the valuation unlock opportunity. I think what the Street should appreciate is the sustainability of that value creation, given our positioning in the market, the brands and strength of the products in each domain that Tom just mentioned. And I think underpinned by a very focused leadership team with that domain expertise, that's what creates the conviction for a sustainable profitable growth.

Perfect. That's a great place to end, Tom, Chris, thank you very much.

Thank you.

Thank you. Awesome.

Good afternoon. My name is Yilma Abebe, and I am the industrials analyst at JPMorgan. This afternoon, we are pleased to have Resideo Technologies. From the company on my near side, we have Mike Carlet, CFO; and my far side, Chris Lee, Global Head of Strategic Finance. Gentlemen, thank you for coming.

Thank you.

So this is going to be a fireside chat format. I'm going to have questions for management, but I will leave time for folks to also ask questions, so keep that in mind. The way I envision this conversation is I'll first start off with high-level overview-type questions and followed by perhaps on the strategy side and touching on the separation from -- on the ADI side. Maybe touch on tariffs and product-related questions and then wrap it up with recent performance and outlook. Does that sound okay?

Sounds perfect.

Great. So I guess maybe firstly, I guess for folks that may not necessarily be familiar with the Resideo story, can you provide a high-level overview on what Resideo's businesses and market position is? Maybe can you touch on some of the key items that differentiates the company in the marketplace?

Sure. We won't use many slides, but I think there's a good slide here that gives a bit of a general overview of the company. Resideo is a 2-segment business today. And background, Honeywell -- Resideo was spun out of Honeywell about 8 years ago. Honeywell was getting out of their residential products businesses. They had thought about spinning off ADI as a distribution business, really didn't fit in the portfolio. And Honeywell spun the company off 8 years ago.

We operate in 2 segments. Our Product & Solutions segment, just over $2.5 billion of revenue last year with such leading brands as Honeywell Home on the thermostat side. We have First Alert smoke and fire and products in the security space, products in the water and leak detection space, products that are tied to combustion around boilers and water heaters. So very much a product company. We manufacture our products ourselves. We have close to double-digit manufacturing facilities throughout the world, where we are innovating on those products, manufacturing those products, bringing those products to market.

On the ADI side, ADI has historically been a commercial distribution company, the leader in the commercial security, the fire and AV side. They bought a company called Snap One about 1.5 years, almost 2 years ago now, which really got them even more on the AV side, the very high-end AV, both Pro AV and on the high-end residential AV side. So together, those 2 businesses getting close to $8 billion of revenue on a run rate basis and really, really strong performance, both leaders.

One of the things that ties them very closely together, both the businesses are very, very focused as the installer as their customer. We don't think about the end user, the end customer. They're important. We -- we're designing products for those people. But really, our go-to-market strategy is built around the professionals that install and service those products. That's what really differentiates us in the market and allows us to really perform very, very well.

Thanks, Mike. I guess maybe touching on some of the demand trends. Can you touch on what you're seeing across Resideo's end markets? Perhaps touch on the residential side, residential side, repair versus remodel. If you can give us a bit of an overview in terms of what you're seeing there?

Sure, absolutely. The P&S side of the business, we view ourselves as a leader on control and sensing in the residential space. So if you think about products and solutions that go into the home and are built into the home, they're your HVAC system, controlling your HVAC system, controlling your security system, water and leak detection, those type of products that are built in.

Obviously, very, very closely tied to some kind of event associated with the home. You usually don't wake up in the morning and say, "Hey, I want to change my security system or I'm going to put a new smoke detector in." Like those things are typically tied to some kind of event, whether you're buying a home, whether you're remodeling a home. So very, very closely tied to the residential space, probably at about a 3:1 ratio. It's much more repair, remodel based than it is tied to the new build, but new build is obviously a big driver of the business as well. So again, putting our products into those spaces that are out there.

Those markets have both been -- I think we would classify them as pretty anemic over the last 3, 4 years. There has not been a lot of growth in those businesses. I think most analysts would say that the U.S. remains underhoused. Mortgage rates have been a bit high. Supply on the residential side, on the resale side has been a bit constrained. I think the administration recently has been talking about things that they want to do to try to influence that market, understanding how it's a growth driver of the economy. But I think overall, a lot smarter people than us are out there following the new housing market and the remodel market. We follow those same folks that you read. I think most people feel that market has been pretty constrained.

As we think about last year, this coming year, we don't think it's really changing. It can change. I think there are things that can drive it up. There are things that can drive it down. Over the long term, I think we still view that as an overall tailwind to the business. We think that, that market over the long term will get better. The U.S. is still underhoused. We think there's more activity coming. We don't expect big changes to that activity in the short term. We think right now, outside of a drastic change in interest rates, outside something significantly changing, we think the market will just sort of continue to move where it's at, and we think there'll be some upside out there in the future for us.

On the ADI side, ADI is much more focused on the commercial security and intrusion space. While that is certainly tied to some of that commercial project activity, there's a bit more of a technology bend to that piece of the business as well. Again, at ADI, we're distributing mostly third-party products. We do have a piece of that business we call our exclusive brands business, where we are designing and sourcing our own products generally from contract manufacturers or JDMs, joint development manufacturers. But we primarily distribute third-party products.

But we do see in that space as technology changes, as more enhancements come to security to access control, people will go out there. It's not necessarily tied to a brand-new building. It's tied to, hey, there is some new technology out there that will enhance the security, enhance my ability to control access to my facility, and they will go out there and do a little bit more project work.

So on the ADI side, we think about GDP as a proxy, but plus a bit for that technology piece that's out there. A couple of points of growth from a market standpoint that's in excess of GDP is sort of the market trend that we see on ADI. And that's been continuing to perform that way for quite a while now.

Great. I think that gives us a good overview in terms of the two businesses. I guess maybe the next set of questions I want to touch on is really around the strategy for separating the ADI business. Can you remind us what the strategic rationale is for spinning this business? Maybe you can touch on that.

Sure. Chris and I started about the same time, about 18 months, plus or minus a little bit more. And as we started to meet with investors, it was really amazing. Every investor would ask us why these two businesses together. And I think there's two basic answers to why these two businesses are together, maybe three. First of all, every company needs to be owned by somebody, right? So whether you're owned by Chris, whether you're owned by the public markets, whether you're owned by a private equity firm, everybody needs to be owned by somebody.

When Honeywell spun the business out, they thought it made a lot of sense to put the two businesses together. So Honeywell made the decision 8 years ago to combine these businesses. Again, they were getting out. Part of the reason they did that is to try to create a little bit of scale. They wanted to be able to support something called the IRA, the Indemnification and Reimbursement Agreement.

And when Honeywell spun the company out, one of their strategies there was to have the company indemnify Honeywell for Honeywell's environmental liabilities. Not for Resideo's, by the way. So these environmental liabilities were not ones that were on our books. They were not facilities that were Resideo. These were Honeywell's facilities throughout the globe. It was an interesting bit of financial engineering from their standpoint. So every year, every quarter really, Resideo would indemnify Honeywell for 90% of their global liabilities. So some place in -- pick a location anywhere, China, Honeywell will have an environmental liability. They would pay $1, and Resideo would have to reimburse Honeywell $0.90 of that dollar.

In order to -- so as we look at these businesses, I think for years, the management has said, while every business needs to be owned by somebody, these businesses probably shouldn't be owned by the same people. And they certainly shouldn't be the only two businesses owned by somebody. There's not a lot of synergistic overlap. There's mid-single-digit percentages of revenue of ADI that are P&S products or P&S products that get sold through ADI, but it's a relatively small number.

They operate very, very independently. We have strong CEOs, presidents on both sides, Rob Aarnes on the ADI side, Tom Surran on the P&S side that are running their businesses. And so freeing these businesses up to have their own capital structure, their own Boards, be able to make their own investment decisions, we think provides benefit, provides clarity to the markets, takes whatever sum of the parts discount might exist in our equity price where people can't really value these things separately, takes it away.

But we couldn't separate it because of that IRA that was out there. We really had to find a way to settle that IRA with Honeywell to allow us to separate the businesses. And for a number of years, we would talk to Honeywell about it. And they were good partners, they would say, "We're happy to help, but we don't want to change it. We like the way it's structured. We structured it this way for a reason." And over the last year, really, I guess, 2 years ago now, 18 months ago, when we were engaging, they said, "We think it's time. We think we can reach an agreement." We worked closely with them. They were good partners, and we're able to reach an agreement to settle that liability.

Settling that liability then took away those impediments to to allow us to separate the businesses. So because these things don't really belong together, because the markets are confused valuing them because they do have different capital allocation strategies, one is a product company, one is a distribution company, different margin profiles, different M&A paths forward, we've always said separating them makes the most sense, and so we're excited to be able to do that now.

Great. Yes. I think that's a good overview in terms of the indemnity with Honeywell. If you can maybe touch on the commercial relationship with Honeywell going forward for those newer to the story?

Yes. It's relatively -- well, I would say it's strong, but relatively limited now. So on both sides, there is a commercial relationship, and there will continue to be a commercial relationship between both ADI and P&S post spin. But they are relatively limited in scope. A, obviously, we're using the Honeywell Home brand name. We love the Honeywell Home brand name. P&S will continue to use the Honeywell Home brand name. It is the leader in residential thermostat in America. Our license for that brand name goes another 32 years, so I don't think -- and hopefully, most of our -- at least work lifetimes, that we'll have to worry about that. And so that's very strong. We love that brand.

As a result of the spin-off, we have a couple of facilities where we sublet real estate to Honeywell. We do still manufacture OEM, a few small products for Honeywell. It's a very, very small part of the business. And there are products of Honeywell's that ADI does distribute as a distributor. Again, it's not a big part of the business. So it's a relatively limited relationship, but we think it's a good commercial relationship as we go forward.

Okay. Great. You briefly touched on different businesses, different capital structure. Can you touch -- elaborate on that a little bit? What does the financial policy look like for the two companies post-spin? Maybe touch on the debt conference. Maybe you can touch on leverage targets, ratings targets, maybe broadly, capital allocations as you forward here post-spin?

Yes. I think Resideo today, let's start where we are today as a combined company because I don't think it's really going to change much, at least in the short to midterm post-spin. Resideo today is a high BB-rated lender. We have a very, very strong credit profile.

Because of the Snap acquisition and because of the settlement of the IRA, we have looked to -- we've let leverage get up a bit higher, but very intentionally than we thought it make a lot of sense. So leverage today is around 3.5x, which higher than we want it to be on a run rate basis, but very, very supportable by the business and very rational if you think about the opportunity to settle that IRA. We'd like to target leverage at more about a 2x basis. And right now, we would say deleveraging the company to get down to a net leverage of around 2x, it would be the primary capital allocation of the company.

That doesn't really change for either business upon spin. We think both of them will end up in about the same spot. Basically, we'll work through this, and we'll obviously have Investor Days and bring models out at the right time. But at the highest level, you would think that there's a certain amount of EBITDA in each business. There's a certain amount of cash flow in each business. The cash flow profiles of both businesses are relatively consistent.

And so we'll take the existing EBITDA, we'll take the existing debt. We'll split it up in a way that makes sense and go through all the gyrations to make sure we have the right debt on each company. But both companies, we would expect that spin to have a little bit above 3x net leverage. We would expect both to be good BB credit rated just below investment grade. And we think the primary policy of both companies post-spin will be to delever to the appropriate point.

Right now, we would say it's probably something below 2x on both companies. You can argue on the product side of the business that there are some peers that have lower leverage so maybe the target of P&S should be a little bit lower than 2x. You can argue as a distribution company, maybe there's a little bit more leverage there. But I think as we sit here today, we would say that deleveraging down to the appropriate leverage level based upon the peers and competitors will be where we focus, and we want to maintain those strong ratings that we have on both businesses.

One more question on sort of the spin-related and then I'll move on to other topics. I guess as you look forward here in terms of M&A opportunities, how do you see each segment looking at sort of M&A opportunities post-spin?

I think post-spin -- first, I would tell you that having been around this a bunch. You go to a bunch of product managers and category managers and ask them for a list of potential M&A targets, and you will get a list much longer than is ever actionable. So we have no shortage of pipeline that we're speaking to.

I think you view that pipeline as both the opportunistic pipeline, would we consider this if it came to market? And you have what's really important, what's the strategic pipeline? What are those things that you want to say, "hey, that would be a great fit." And whether somebody is looking to sell it or not right now, we should be maintaining relationships with them and talking about it. So I think M&A will be part of the strategy for both companies.

Neither one of the businesses is a roll-up. I think they are both out there and M&A is strategically important for growth, but it's not a roll-up strategy. So on ADI, we have over 100 locations in North America right now. We don't need to go roll up a whole bunch of locations at ADI to grow the footprint. We think there's opportunities to expand into new markets and new products, but not really from a -- just physical location standpoint.

Same thing at P&S. We're in a number of categories. We think we're well positioned in them. We think we have opportunities to grow either in those categories or adjacent categories. So that we can do organically or through M&A, and we'll keep evaluating those opportunities. But it's not an imperative to go out there and roll things up.

The only thing I'll say on M&A is during the spin process, we're actually really fortunate that because the two companies operate very independently, the operating folks, the sales teams, the marketing teams, the operating teams, the product development teams are very, very isolated from the activity around separation. The teams around finance, legal, HR, IT are working at 150% capacity on those type of things.

Where does M&A really hit sometimes? It hits all those people. Those are the people that get M&A done. So the likelihood of us doing M&A prior to the transaction are pretty limited just from a capacity standpoint. Like we can't take those same resources that are 150% working on spin and say, "Oh, by the way, we're just going to throw an M&A deal in here for you to work on." If a perfect deal comes out, we're certainly not afraid to go look at it. But I think right now, we're focused on getting the spin done, getting it done right, setting both companies up to be successful and then let them both pursue their strategies post-spin.

Great. Thanks, Mike. The next topic I want to touch on is tariffs. How -- what has been the impact of tariffs so far? And how is the company mitigating potential tariff-related risks going forward?

Yes. I think -- by the way, this could change any day, so let's all just acknowledge the uncertainty that's out there with tariffs. I think last year as we went through the uncertainty of tariffs, the teams executed really, really well. They were not overly impactful to the businesses last year, a little bit more impactful at ADI. At P&S, much more minimally impactful, the way they were implemented.

At ADI, we do source product both on a 3P basis, our third-party suppliers, as well as on an exclusive brands basis out of Asia. Some out of China. China is relatively limited, but we do have a small amount of exposure there. And last year, we're very, very effective in passing through to our customers any cost increases that we had. So working with our customers, they understand that. Because most of our business is on the third-party product side, it really impacts all the distributors the same, and we all raised our prices last year and offset that cost.

In fact, last year at ADI, we did have a benefit because as you think about the timing of passing through that price increase, you're carrying a product at $1, you're selling it for, pick a number, $1.20. And the price goes up by 10%, you raise your price, but your inventory is being carried at the lower pre-tariff price. So on the front end, you get a bit of benefit. On the back end, if it ever unwinds or whenever that happens, you get a little bit of a detriment. That could be whenever it happens. So we did get a little bit of positive boost last year at ADI, 20 to 40 basis points of margin enhancement for a short period of time between Q2 and Q3 as we sold through inventory that had a lower carrying cost as we waited for the cost to roll through. So that's a little bit of a headwind going into this year that we've got to be overcoming on a year-over-year basis.

At P&S, lower impacts. Again, very much able to offset the impacts of tariffs with price, with other strategic alternatives. And we continue to look. The one thing that we've said is from a tariff standpoint, the biggest risk is in Mexico. 98% of what P&S sells in the United States, we manufacture in Mexico. We have a nearshore strategy around manufacturing. And so if anything causes USMCA to be impacted, that would be impactful to the business. Right now, almost everything we sell is excluded from tariffs under the USMCA. But if that changes, that would be impactful. We've got a very long extensive playbook we've developed sitting in the bottom door to pull out if we ever need it. But hopefully, we won't need to do that.

Okay. And I want to touch on sort of inflation more broadly than the business. It's somewhat related to tariff answer that you've had. But if you can perhaps touch on how inflation broadly has impacted the two segments?

I think recently, it's been relatively minorly impacted. If you go back to COVID and the supply chain disruption, obviously, there was lots of price activity going on there. There were lots of things from a pricing standpoint and margin standpoint that got impacted.

Over the last couple of years, I think inflation has been relatively low in our business. And we've seen very little pricing activity over the last year or 2 as it relates to cost inputs. We keep an eye on it. We don't think there's anything today that's dramatic. One of the big things out there today that we keep an eye on, obviously, is the whole memory and chip that's out there. We all read about it every day.

We use chips in our products. We like to say that in our products, we have one chip as opposed to a car that's got thousands of chips in it. So it's not nearly as impactful to us as it is to others, but something we need to be thinking about less from an inflation standpoint, more from just ensuring we have a supply standpoint. And we've got a great supply chain team that's really on top of that and really focused about it. But overall, we think the inflation today is relatively small impacts and generally able to pass through whatever price increases we're getting.

Okay. Great. So I want to touch on sort of product-related questions before we move on to some of the outlook and recent performance. Can you touch broadly on innovation? Which newly introduced products are you most optimistic about to drive future growth at the company?

There's a bunch. I think, again, most of the product innovation's on the Products & Solutions side of the business. I'll touch first just briefly on the ADI side because it's important there, but it's a little bit [indiscernible]. We talked about our exclusive brands opportunities there and how that's a part of the business. That really came out of the Snap acquisition, was very, very focused on the residential AV market.

But as we now look at the resources we have there, the R&D resources, what we look for on the exclusive brand side within that distribution business is where is the market need not being met by the third-party providers? Where is the market looking for a solution that third parties are not providing and how do we add value into that? And if we think that, that value is there, we'll look for that opportunity.

And we think ADI's presence on the commercial side of the business is very strong, and we think there's opportunities there where we can identify market gaps in existing products and bring products to market to allow us to grow there. We launched over 400 new products last year from an ADI standpoint, which is really, really good. We think that will to be out there. And those products are in numerous categories.

On the P&S side, since the spin from Honeywell, for the first few years of the spin-off, the company was more focused on fixing its operations in NPI. We had to bring together some disparate product companies that existed within Honeywell, get them on a common operating platform, rationalize the manufacturing base, work on the supply chain. So that was really the most important step, probably to the detriment of NPI.

Today, over the last couple of years, the team has been very, very focused on bringing new products to market, whether that's our smart SC5 smoke and carbon monoxide detector, whether that's our new thermostats, the Focus Pro, the ElitePRO thermostat on our thermostat line, some new products that we're launching on the security side. All these products are really enhancements, improvements, updating of products that we have in existing categories. So while they're really important, we're very excited about them. We can't keep many of them in stock. They really are more about bringing the products that we're already in up to the current and beyond the current market specs that are out there.

As we think over the next 3- to 5-year period, the road map we're following is let's get those products up to speed. Let's get our existing portfolio where it needs to be. Let's then look for adjacencies within our existing categories, and we've got a number of those that we're thinking about. Surveillance within the security space, P&S is a good one. We've typically been very, very strong in the historical security side, control panels, access, detection sensors, but we haven't been on the leading edge of surveillance. We there's some opportunities there. So we think about those expansion opportunities within our existing categories. And then beyond that, we'll say, hey, what are other adjacencies that we can continue to develop products in.

Let me jump in here for a real quick second. I think one thing to keep in mind about the Products & Solutions strategy tied in with new product introduction is about differentiation. And it's about the features and functionality that we provide relative to the comp set in a specific product family or product cohort. We're attacking the market tactically, as Mike said, with the ElitePRO. That's really targeted for the high end of the thermostat market to go up against the peers who produce products in that set. But when we launched the Focus Pro over 12 months ago, that was targeted at the low end of the thermostat market, and that's been very successful. It's gained a lot of adoption.

But it also allows us -- when we come out with new features and functionality to allow us to price for the value we create for the end user. And then when you take all this into account with some of the structural efficiencies that we've been gaining on an operational standpoint that sustained the 11 consecutive quarters of growth -- of year-over-year gross margin expansion. Part of the work that we're doing that Tom, our leader of the segment, has been spearheading is to make the operation, the assembly, the production even more efficient and to replatform down to 1 or 2 platforms per product family, which will then allow for even more profitable production downstream. So this is core to the current strategy as well as the long-term strategy and one of the underpinnings of continued margin expansion that we see in the future.

Thanks, Chris. That's very helpful. I guess maybe the last question on sort of on the product side. AI, very topical. We have multiple panels here over 2 days on AI. Is Resideo using AI, and how?

I've never heard of AI.

Neither have I.

Listen, I think there's two ways you think about AI within Resideo, how are we using it in our products and how do we use it in our company. So within our products, there's lots of opportunities for AI. I think the -- probably the easiest one to talk about something like smoke and fire detection -- or surveillance, I'm sorry. Distinguishing between when a squirrel crosses your property line versus when a person crosses your property line is the beginning of it. But it goes way, way beyond that to understand what's happening around your house, how does -- surveillance becomes the new security over time, and AI has got a huge role to play. How do you put that at the edge? How do you think about managing that? So that's an easy one.

But I think in many of our products, we think about the data that we capture and how do we analyze that data, and AI plays a huge, huge part of that. So across our product portfolio, there's a number of ways we're looking at AI to enhance the value of those products. What's really good about our products from a disruption standpoint, almost everything we do has to be installed. And so we build a product, that hardware has to be installed, and we're talking about the installer having to go do that. And AI can do a lot of things, but it cannot yet go out and put a smoke detector in your ceiling or can't go and put a camera up in the corner here. And so we think we're really protected from the disruption of AI in a lot of ways because our hardware is what captures the information that enables AI to be productive, and we think we're really well positioned to benefit from that.

And then obviously, internally, we get lots of data, whether from our customers, whether from our products. And how do we analyze that data to know how to make better products, how to better serve our customers, how to better meet the needs of both our direct installer customers as well as the end users is something we're constantly looking at, as well as sort of just the general infrastructure of the business and things you can do to optimize your sort of internal processes and deploy AI where you need it. So we're looking at all those. I get most excited about just the amount of data that we have. Our products are capturing data, our smart products, the things that we're doing, how do we look at that data in a way and how do we analyze it? I think AI is a real enabler around those things.

Great. I want to touch on sort of recent performance and outlook. But after this question that I have, I do want to open it up for the audience. If you do have questions, prepare them, and we have mics that can help you. I guess starting off on the recent performance. The company's fourth quarter performance exceeded your expectations. What are some of the key drivers for that results exceeding your expectation?

Yes. And if you remember, for those of you who were there, we actually took down our expectations at the end of Q3 when we guided Q4. So we felt we were doing great the first half of the year despite the tariff disruption.

And coming into Q4, we saw two things out there that were providing some headwinds. One was we are going through a system implementation at ADI. And all the headwinds, everybody who's done something like this knows you go through some headwinds. And then two, the HVAC market at -- on the P&S side was really being impacted by some regulatory changes that were out there.

As we thought about expectations for Q4, I think most things were pretty much in line with our expectations. We got through the implementation of the ERP system at ADI. That's behind us. The system is up and running, and so we're good to go there. I think on the HVAC side, there were a couple of things that were more positive than we expected. One is that the weather helped us. Weather is an interesting thing in there. And the worse the weather, particularly the small distribution customers, they will come out as small customers come out and they're buying more for the immediacy of projects. And as weather turns, you get some benefit from that, and the weather was a bit worse than we thought. So that was really good.

The other thing is, as we said and thought, a lot of our other channels, the retail channel, some of the other areas really were doing quite well. And so while the HVAC headwinds that we saw out there were not quite as bad as we feared because of the weather, the rest of the business has been performing really, really well. And we feel good. We think we're taking share in many of those areas. We don't think the market has fundamentally changed, but we think we had a bit more share activity given the new product launches, given our go-to-market actions that are out there that are helping boost up the business a bit.

Great. And then maybe if we can touch on the outlook for 2026 a little bit here. If you can discuss some of the key assumptions that's driving your guidance for the year?

Yes. I think the first one, let's acknowledge we're in a very uncertain macro, right? And so when you're in an uncertain macro, I think our philosophy, my philosophy is don't try to predict the future. Like we can't tell you, if you asked us 3 weeks ago, would we be going -- taking action in the Gulf like we are? We couldn't have predicted that. So really hard to predict, and even harder to predict sometimes with the current administration.

So our assumptions in our model and our guide are that the macro is going to stay relatively where it is today. We were talking about housing earlier. We don't expect it to get better, we don't expect it to get worse. It could change. It could change tomorrow. But right now, that's our expectation.

So we're talking about the business on the top line. It's about a 5% growth company. We've said that we think ADI is going to grow a little bit more than P&S. So you can sort of split the baby on that and round where the numbers come out. It is not 10% and 0. So if you're trying to think about it, that's not the number.

And so we think about the underlying activity being continued anemic housing performance. We are going to continue to bring new products to market and do well with those products. We think ADI, particularly in the back half of the year, given the challenges we had this year with that system implementation has a relatively easy comp in the back half of the year. And so we think we're going to continue to see improvement there. We'll capture a little bit of share there like we typically do now that the team can really focus on our usual operational excellence and activities around that. But overall on the top line, we think we're really well positioned to be executing in a market that we think remains uncertain and not very growth oriented.

On the margin side, we're talking about margins being up slightly I think is the way we worded it, slight improvement more on P&S than ADI. We talked about that headwind we have at ADI from a performance standpoint given that benefit we got last year from the price increases that went up there. And at P&S, we're going to continue our efforts to enhance margin. We have just announced our 11th consecutive quarter of year-over-year margin increase. We're not going to have 142 consecutive quarters of year-over-year margin increase. We think we still have room to go, whether that's new product launches, continued efficiency in the supply chain, but we think that we'll continue to see a little bit of margin improvement.

And then cash flow. On our call, I think we said that cash flow next year will be similar to last year. You can really word that as at least, to be somewhere at least or about the same words. We have a little bit of a hard time just given the ability to guide cash flow under SEC guidelines and adjust cash. We know that the spin creates a lot of uncertainty around timing of cash flow. So we don't want to specifically guide.

From an operating standpoint, we feel really good about cash. A couple of people have asked, we settled the IRA, where is that benefit? And it's there, but we also offset that with interest. We had to borrow the money to pay for that IRA. So part of that benefit from an EBITDA standpoint gets offset in interest. And just from a working capital standpoint, we feel great about both ADI and P&S and the cash flow conversion characteristics of both companies. P&S specifically had a really strong working capital cash flow conversion last year. We think it's returning to more normalized levels this year going forward. So year-over-year, that's a bit of a backwards, but it's not a backwards from a performance, it's just getting back to normalized levels.

Great. We have a couple of minutes. Any questions from the audience? All right. Mike, Chris, I think it's a good time to pause. Thank you very much. Appreciate the time. Appreciate it.

Thank you. Thank you, all.

Hello, everyone. Thank you for joining us, and welcome to the Resideo Fourth Quarter and Full Year 2025 Financial Results Conference Call. After today's prepared remarks, we will host a question-and-answer session. [Operator Instructions]. I will now hand the call over to Chris Lee, Global Head of Strategic Finance. Chris, please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us for Resideo's Fourth Quarter and Full Year 2025 Earnings Call. On today's call will be Jay Geldmacher, Resideo's Chief Executive Officer; Mike Carlet, our Chief Financial Officer; Rob Aarnes, President of Resideo's ADI Global Distribution business; and Tom Surran, President of Resideo's Products and Solutions business.

We would like to remind you that this afternoon's call contains forward-looking statements. Statements other than historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties.

Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Resideo's filings with the Securities and Exchange Commission.

The company assumes no obligation to update any such forward-looking statements. We identify the principal risks and uncertainties that affect our performance in our annual report on Form 10-K and other SEC filings.

In addition, we will discuss non-GAAP financial measures on today's call. These non-GAAP financial measures, which can sometimes be identified by the use of adjusted in a description of the measure should be considered in addition to not as a substitute for or in isolation from our GAAP results.

A reconciliation of GAAP to non-GAAP financial measures is included in the financial data workbook which is accessible on the Investor Relations page of our website at investor.resideo.com. Unless stated otherwise, all numbers and results discussed on today's call other than revenue are on a non-GAAP basis.

With that, I will turn the call over to Jay.

Thank you, Chris, and thanks to everyone for joining us today. I'm very pleased with how our business finished 2025, largely exceeding our financial outlook in the fourth quarter. Products & Solutions delivered results driven by better-than-expected activity across multiple channels, including HVAC. ADI reported flat results, but on a positive note, achieved operational stabilization providing conviction for future growth.

Our sustained execution throughout 2025 enabled Resideo to report record highs in net revenue, adjusted EBITDA and adjusted EPS on an annual basis. We also exceeded the high end of our 2025 outlook ranges in net revenue, adjusted EBITDA, adjusted EPS and adjusted cash provided by operations during a dynamic and uncertain global macroeconomic environment.

Looking at the full year results and the growth compared to the prior year net revenue was approximately $7.5 billion, growing 11%. Adjusted EBITDA was $833 million, up 20%, adjusted earnings per share was $2.68, growing 17%, and adjusted cash provided by operations was $453 million, up 2%.

Let's now go into some of the annual highlights for each business segment before I hand the call off to Tom and Rob to talk about their quarterly business highlights. In 2025, Products & Solutions grew organic net revenue by 4% year-over-year, driven primarily by strong volume demand for our safety products and increased prices for our OEM products.

Gross margin expanded by 110 basis points year-over-year as we continue to gain improvements in operational efficiency. Our commitment to introducing the new and differentiated products remain evident with 10 major new product introductions in the year, including the First Alert SC5 connected smoke and carbon monoxide detector and the Honeywell Home Elite Pro thermostat.

We believe customer reception for these new products has been very positive and is building demand momentum for another year of exciting new product introductions in 2026. In 2025, ADI grew organic net revenue by 3% year-over-year driven primarily by growth across all product categories and accomplished with 3 less selling days.

Organic average daily sales growth was 4%. Gross margins expanded by 200 basis points in 2025 versus the prior year due primarily to favorable product mix and sales of lower cost inventory. We are proceeding very well on the integration of Snap-On. Rob will talk more about the team's progress to date.

In closing, we demonstrated resilience in 2025 by maintaining our execution focus which generates conviction and momentum toward our anticipated business separation later this year that we believe unlocks significant shareholder value. Our separation activities are progressing well. We intend to provide more details in the coming months as we get closer to the official separation anticipated to occur in the second half of 2026.

Let me now hand the call over to Tom.

Thanks, Jay. The products and solutions team closed out the year strongly, highlighted by healthy net revenue growth and the 11th consecutive quarter of year-over-year gross margin expansion. In the fourth quarter, PNS net revenue grew 6% year-over-year, which includes an approximate 1% favorable impact from currency. .

Revenue grew due to both volume and price across many of our product families and sales channels, which more than offset the performance of our air products that were impacted by a soft but improving HVAC channel. Let me walk through our activities in each of our primary sales channels as our products can be sold through multiple channels.

Let's start with the retail channel, where revenue growth was very strong year-over-year and highlighted by a new record high quarter in revenue dollars. Point-of-sale volumes for higher-priced products were robust and demand was broad-based across both our key accounts and products.

Sales of new products introduced earlier in 2025, such as the Honeywell Home Focus Pro thermostat and the First Alert SC5 connected smoke and carbon monoxide detector show increasing adoption. Weather was a tailwind during the quarter, which contributed to the strength of the quarter.

The electrical distribution channel had another quarter of very strong year-over-year revenue growth. We saw continued demand for our products, primarily BRK branded safety products culminating in record high annual revenue in 2025. Dollar content per new home continues to increase as we achieve broader penetration of our portfolio of products with residential homebuilders despite the soft residential housing market.

We also saw strength in the MRO market as demand for our products appear to be coinciding with a replacement cycle. The OEM channel posted its fifth consecutive quarter of year-over-year revenue growth, continued stabilization in the boiler heating system market served as a tailwind that drove sales in the Americas and in the EMEA and OEM channel.

Revenue dollars in the security channel were down only modestly year-over-year given the high baseline in the same period last year when we introduced a new security panel and posted strong sales with a large customer.

In the fourth quarter, our sales were ahead of plan with that large customer. Revenue in the HVAC channel was down by a low to mid-single-digit percentage year-over-year. This was better than anticipated as there was an increase in user demand through many of our smaller distribution customers as the weather turned colder.

We also saw our larger distribution customers managing the Resideo inventory levels down as expected given the residential HVAC conditions discussed last quarter. On a positive note, we are starting to see normalization of channel inventory levels with those large customers. In addition, we started to ship the new Honeywell Home ElitePro premium smart thermostat during the quarter and the strong customer demand has exceeded available stock.

Moving on to profitability. Fourth quarter gross margin was 41%, up 20 basis points year-over-year driven primarily by continued improvement in factory utilization, partially offset by product sales mix. This is the 11th consecutive quarter of year-over-year gross margin expansion.

Even with the planned R&D investments to support our new product introduction road map, adjusted EBITDA grew 6% year-over-year due to continued gross margin efficiency and operating leverage achievement. Looking forward, we are excited about the profitable growth opportunities we believe are ahead of us as a stand-alone building products company after completion of the anticipated separation. We believe that we can continue to leverage our operational scale to introduce a number of new differentiated products that expand upon our leading positions in key markets.

With that, let's turn the call over to Rob.

Thanks, Tom. In the fourth quarter, ADI saw a small year-over-year decline in net revenue and the seventh consecutive quarter of year-over-year gross margin expansion. Now before I go into the details on the quarter, I'd like to build upon Jay's comments. ADI is now fully operational on our new ERP system.

We are seeing increased customer confidence in the stability of our operations noted by growth in project business from our top commercial customers and progressive improvement in our operational metrics. Now on the details for the quarter. ADI reported a decline of 50 basis points in both net revenue and average daily sales year-over-year.

Both include a favorable impact of approximately 80 basis points from currency. From a product category perspective, we saw year-over-year growth in multiple commercial security and professional audio visual product categories, which was more than offset by a decline in the video surveillance category.

We anticipate video surveillance returning to growth in the near term as the pipeline is refilling nicely for products that have a multi-month sales cycle. E-commerce net revenue and average daily sales grew 3% year-over-year, continuing the trend of our digital experience becoming a bigger part of ADI's total revenue. We continue to see positive returns on our digital platform investments as customer behaviors continue to leverage digital.

Examples include year-over-year growth in after business hours revenue generation, given the 24-hour availability of our platform as well as higher ad to cart and conversion rates following a number of product page enhancements. Growth in e-commerce is strategically important, given the differentiated omnichannel experience we want our customers to have as well as the margin accretion that accrues to the business.

Exclusive brands net revenue increased 2% year-over-year, while also generating more gross margin dollars in the quarter versus the same period last year. We continue to accelerate cross-sales of Snap-On exclusive brands to legacy ADI customers and broaden the availability of the new Control4 operating system.

From a new product introduction standpoint, we added approximately 100 SKUs per quarter in each of the last 2 quarters. A product highlight in the fourth quarter was the launch of our episode business music line targeting the professional audio visual category.

Moving on to profitability. ADI reported 22.7% gross margin in the fourth quarter, up 110 basis points year-over-year and the seventh consecutive quarter of year-over-year gross margin expansion. The margin expansion was primarily driven by favorable price and mix. The increased gross profit dollars generated in the quarter were more than offset by SG&A costs related to completing the ERP implementation and ongoing investments in real estate and digital, resulting in a small decline in adjusted EBITDA year-over-year.

Snap-On synergy achievement continues to progress well as we are about 18 months post acquisition. In 2025, we achieved approximately $75 million of synergies,18 months sooner than expected. We are driving to achieve even more synergies over the next 18 months.

Before I hand the call over to Mike, I am encouraged about our start to 2026. Achieving operational stabilization was critical because the team can refocus on our customers and on taking share. We will look to generate this momentum throughout the year as we become a stand-alone specialty distribution company.

Now let's turn the call over to Mike to discuss our fourth quarter's financial results and 2026 outlook.

Thanks, Rob, and good afternoon, everyone. Jay reviewed the full year highlights, so let's get straight into the quarterly results, starting with revenue. Total net revenue was $1.895 billion, up 2% year-over-year including a 1% favorable impact from currency. Net revenue exceeded the high end of the outlook range.

Both Tom and Rob spoke earlier about the drivers of organic net revenue in their respective businesses. Gross margin in the quarter was 29.6%, up 110 basis points year-over-year. The increase in gross profit dollars was primarily driven by continued operating efficiencies at P&S and favorable price and mix at ADI.

Adjusted earnings per share was $0.50 at the high end of our outlook range, but down from $0.59 in the prior year period. The primary reason for the decrease year-over-year was higher interest expense of approximately $20 million related to the incremental debt incurred to terminate the Honeywell indemnification agreement. Adjusted EBITDA was $226 million in the quarter, up 21% year-over-year and above the high end of the outlook range.

The primary reason for the increase year-over-year was higher net income, driven in part by the $35 million benefit associated with that terminated indemnification agreement. Total reported cash provided by operating activities was $299 million. This amount was higher than anticipated due primarily to strong cash collections and the timing of payments.

Year-over-year, we received a net operating cash benefit of approximately $40 million associated with the aforementioned agreement. Before I provide our 2026 financial outlook, let me walk you through some of our market perspectives and forecast assumptions. Note that we are providing our 2026 outlook without regard to the business separation anticipated to occur in the second half of 2026.

Starting with our market perspectives, our outlook on the global macroeconomic environment is cautious, given the current uncertain geopolitical landscape. With respect to tariffs, including the recent Supreme Court ruling and related measures taken by the U.S. administration, our assumption is that the exemptions we enjoy under USMCA and for certain electronic goods will continue.

Resideo will continue to take proactive steps similar to last year to mitigate the cost of tariffs. We remain agile and believe we will be well prepared to react to potential tariff-related changes. Our assumption is that the 2026 U.S. residential housing market continues to have little growth.

The repair and remodel market continues to be forecasted as a low single-digit percentage grower, the sale of existing U.S. homes has not accelerated even with a small reduction in U.S. mortgage rates. There is still a persistent shortage of housing supply.

In the commercial market, we assume low single-digit U.S. GDP growth given mixed signals across industry verticals. GDP growth could be negatively impacted by tariff and fiscal policy uncertainty as well as by societal dynamics impacting the workforce.

Now our forecast assumptions. Our 2026 financial outlook is based on December 31, 2025, currency rates and does not assume any future currency rate fluctuations. We anticipate both business segments to achieve year-over-year net revenue growth in 2026. We forecast the growth rate of ADI to be higher than products and solutions. From a linearity perspective, we expect slightly higher revenue in the second half versus the first half, in line with last year's seasonality.

Note that there are 4 extra days in the first quarter and 4 less days in the fourth quarter versus the same period in 2025 due to how our 445 fiscal calendar falls within the annual calendar.

Moving to gross margins. We expect very modest total company gross margin expansion year-over-year. We anticipate that products and solutions will have greater gross margin expansion than ADI. We will look to drive greater operating leverage in 2026 versus 2025, while still investing in both businesses to drive future growth. We anticipate total company R&D expenses to be a similar percentage of revenue to the second half of 2025's run rate.

We are not providing an outlook for 2026 cash provided by operations due to the uncertainty of the specific amounts for separation-related costs and the related timing of payments. We anticipate 2026 cash provided by operations, excluding separation-related payments to be similar to last year. We will continue to report this number in our external financial reporting during 2026.

Considering all these assumptions, here is our 2026 financial outlook. For the full year, we expect total company net revenue to be in the range of $7.8 billion to $7.9 billion. We expect total company adjusted EBITDA to be in the range of $935 million to $985 million, and we expect total company diluted earnings per share to be in the range of $3 to $3.20.

For the first quarter of 2026, we expect total company net revenue to be in the range of $1.866 billion to $1.890 billion, Total company adjusted EBITDA to be in the range of $193 million to $207 million and total company diluted earnings per share to be in the range of $0.58 to $0.62.

Please go to our Investor Relations website to access our earnings presentation, which includes our outlook ranges along with key modeling assumptions. As Jay indicated, our business separation activities are progressing well. As a result, we expect to unlock value and deliver 2 strong and growing companies to our shareholders. We look forward to hosting you at our Investor Day events that are expected to occur before the effective date of the separation to discuss the go-forward strategies, operational and financial frameworks and capital structures for each company.

Operator, let's now open the call for questions. .

We will now begin our question-and-answer session. [Operator Instructions] Your first question comes from the line of -- Your first question comes from the line of Erik Woodring from Morgan Stanley. Erik.

Congrats guys on the quarter and the guide. A few quick ones for you. Maybe just first a clarification. Maybe this is for you, Mike, but anyone. Can you guys just maybe provide a bit more detail on just where things stand with the HVAC inventory situation in ERP upgrades.

It sounds like the ERP dynamics are fully in the back seat. But I just want to make sure we understand where those issues stand today, what is entirely behind you? And what is having an impact on 2026 outlook? And then a quick 1 after that, please.

Sure. I'll start, Erik, I'll turn it over to Tom and Rob, I'll just highlight on both. From an ADI perspective, the ERP system is done. It's running. It's up there. as well. And so that implementation is fully behind us. That's ongoing as an operating system, but it's -- the implementation is all done.

From an HVAC standpoint, from inventory I'll echo what Tom's comments said, we have seen our large distribution distributors take down their inventory levels below what were the historical norms. And they're readjusting to a new normal. We think we're reaching sort of the new normal operating standpoint. We can never guarantee that they're not going to move them around again in the future. But as we sit here today, we feel like most of that inventory adjustment to your specific point is behind us. Tom, Rob, anything to add?

Well, I think the HVAC market, as we've said before, we were forecasting it to go through the end of the first quarter. And as we had checks with many of our customers and their customers, we continue to believe that is the correct time line in what we're seeing.

We also know the reason why our customers were able to reduce the inventory is our execution for getting products on time to request. So that being a partner with them, help them to be able to execute and make it through these times. I'm also very pleased with how we executed relative to a market that's been down. When we look at our performance in the HVAC market, relative to the market, we performed well. Rob, do you want to cover that?

Yes. I'll just throw a few more pieces of color on that, Erik. I mean, Mike failed it. Right now, where we are today is exactly where the team wanted to be, and that is we are now leveraging a fully operational, stable mode. That was the goal coming out of Q4, and that's exactly what we did. And I can tell you that with personal testimony being out in the field, engaging dozens of our team members across stores, DCs, all across the business.

The difference between Q3 where we were trying to provide great customer service, as we always do, but also grappling with maybe a new system versus what we saw in Q4, especially later in Q4 through November and December, which our team now coming in every single day from morning until evening, being able to focus 100% of their priorities on providing great customer service and taking share.

Now that's going to take some time because we know some of our customers during that time frame spread some of their share of wall around. That's okay. We know who those customers are. And now we're in a position, though, to spend 100% of our time engaging with those customers, leveraging a fully operational system.

Awesome. I appreciate that color for most of you guys. Bob, I think if I could just say on you. I believe the team has previously framed ADI is a business that can grow revenue over a multiyear period, kind of mid- to high single digits. We just saw call it, 1% year-over-year decline. If we just normalize for any of the ERP upgrade costs or disruption, can you give us a sense of what growth in margins for ADI would have been in the quarter? And what gets this business to reaccelerate with strengthening margins the second quarter. .

I would say -- as I mentioned in my remarks, look, our -- 1 of our largest categories is video surveillance, right? And it's a multi-month sales cycle. And so it wasn't a surprise to me as I look at Q3 versus Q4, right? Any amount of activity or projects that we might have had in the hopper that might have actually gone elsewhere temporarily would have affected us in Q4.

And what gives me confidence now, as I mentioned earlier, is -- we're starting to see that video surveillance business and pipeline recover nicely, which is the biggest indicator we've got to returning to future growth in that mid- to high single-digit area.

In fact, I think the other thing I mentioned was most of our commercial security categories in the fourth quarter were actually up year-over-year in that range. It was just the video surveillance category that kind of brought us down a bit, but we're seeing improvement there, and we want to be able to build on that momentum early in Q1 as well as throughout the year.

And then maybe if I could, just 1 question, Mike, for you. 1Q revenue and adjusted EBITDA guidance, I think it's 6% year-over-year growth and 19% year-over-year growth at the midpoint, if I got that right. Full year guide is a little bit below that 5% rev growth, 15% adjusted EBITDA growth. Just Help us understand kind of maybe why we will see a deceleration in those metrics through the year, even if we saw -- even if 1Q has more selling days, it's just -- is that influenced by NPI? Or just trying to understand maybe the linearity of growth rates. And that's it for me guys. .

Thanks, Erik. Really 2 things drive that. One, you just hit on it. That number of sales days does impact Q1 versus Q4 and does drive the first half versus the second half. So that is a factor. The other factor, if you recall, last year, our performance in Q1 was better than it was in the second half. Both of those headwinds that we just talked about, whether it was the ERP system or the ADI, the HVAC headwinds at P&S or second half of the year issues. And so we do think the back half of the year on a days adjusted basis will be a little bit stronger than the first half of the year on a normal days adjusted basis.

Your next question comes from Ian Zaffino from Oppenheimer. .

Okay. Great. I wanted to just ask about the comments about ADI being able to grow fast at least this year. I was just thinking as far as P&S, you have a bunch of products introductions coming out of product launches coming out, maybe housing gets better. So just kind of -- kind of trying to understand how you're thinking about those just vis-a-vis each other? I mean ADI, I know you had the ERP system issue, but it does seem to me that P&I should probably be a pretty good grower in '26 as well. So any thoughts there? .

Yes. I'll start and then sort let Rob and Tom jump in. I think Listen, we think our guide is the right guide for where we sit here today. We are excited about the product launches that we have. There's obviously a ramp and a build on all those product launches as you go out there. There's products they're replacing that are in the market, but we feel great about our product pipeline. .

There's uncertainty out there. While housing could get better, the whole macro still remains a bit uncertain. The whole tariff environment readings and certain the supply chain has some uncertainty in it. And so we think our guide right now from what we can see is the right prudent guide. We feel really good about it. And we think on both sides that we're well positioned to deliver the results that we're forecasting. Anything you add, Tom, Rob?

Yes. I think it's great that you hit the housing market and its condition because that clearly has a huge impact. I think -- and we're thrilled with how we see our product line and our developments and the new products we're introducing. And all of that's tied to a strategy we have for each of our markets.

But 1 thing to consider is in the building products market, adoption is slower than in other markets, such as electronics. People's business are based on that quality. And that's why we always make sure we deliver a super high quality. But we know that it's going to be a little bit slower adoption than you may see in other markets. And when you look at what we've introduced, we did the Focus Pro at the end of last year, at the beginning of this year.

We just introduced the LeadPro. So it's just going to be getting traction as we go through the remainder of this quarter and through the rest of the year. And the products that we are very excited about coming out in the middle of the year and the back half of the year, they're going to have an impact, but they're going to continue to grow over the next couple of years.

So between the conservative, you've got to look at the market conditions, and we're looking at what's going on in housing. And we say this isn't the best market, but we're really happy with where we're positioned for our product road map.

I would add something, this is Jay. -- just on top of Tom's comment. And I think I know Erik, Ian and you and Erik and others have seen that. But if you look -- think about the last 2 years in terms of NPI momentum I mean, it just continues to build. And I think that consistency and demonstrating the NPI funnel going into the marketplace as well and how it's been -- how these products have been well received. It's kind of like proof of the pudding. And so you heard me say in my remarks beyond the excitement of what was introduced in 2025, I think that momentum is going to continue in 2026. And so we'll be anxious to be able to share those as Tom brings those out. .

Yes. I was going to ask about the spin-off. If you could give us any kind of more color on what's going on there as far as timing, milestones, 100% spin, 80% spin. Is there any other type of color you could give us on that would be great. .

Yes. And I think -- listen, I think the spin is progressing according to our plans. We've said second half of this year. We're still right on our time line to deliver in the second half of this year. I think as we said, we'll be holding Investor Days. Obviously, the next big event that will happen is at some point, we'll file a public Form 10 -- that will be the indication moving forward.

When we do that, all the information will become available and told that all I can really say is that things are progressing right in line with our expectations and according to plans, and we're all real pleased with the progress that we're making on the separation. No real surprises, no real impediments as we sit here today.

Thank you for your question. At this time, we have 1 remaining question in the queue. [Operator Instructions] Your next question comes from the line of Dan Stratemeier at Jefferies.

And look, great see you get back on the winning ways here. First question for Rob and then for Tom, Rob, first, a quick follow-up to Erik's first -- 1 of our questions there. there's no additional significant costs that you foresee being spent on the ERP, correct? That's what you're saying?

That is correct.

And then on a high-level basis, Rob, I wanted to -- ask you to explain why you're excited about Snap-On. The market struggles with this 1 a little bit because it's such different end markets, huge synergy number, obviously, the revenues were down since you bought it. Obviously, I'm sure that was all factored into the purchase price you paid for what these synergies looks very attractive. But -- just help us understand on a high-level basis, why this was smart, -- why are you so excited about it? Mike says that these 2 companies were just made to be put together -- and then overall, on Control4, has that positioning changed or not in the marketplace? And how is it doing?

Thank you very much, Dan. This is a great question. One I haven't had to answer in a while, so it's good to revisit this. Myself and my team, just we've we've been after Snap 2015, I think, was the first time we first engaged and we always thought this was a very complementary deal for us back then.

And certainly, when we finally got to do the deal back in '24. So this is a great deal across all fronts, operationally, financially, strategically because of the complementary nature that it has with ADI. And despite the fact that the resi eV, macro environment has been soft, we see greater potential even beyond that. I mean, at some point, it will come back. And in the meantime, we made a couple of very strategic decisions to: one, accelerate synergies to compensate for some of that growth, and we delivered $75 million 18 months sooner. That's part 1.

Now as I look for -- look toward the future, right, there's still more synergy dollars to go get. If you think about right now where we are, we want to obviously combine under 1 common platform for both operations and go-to-market that's part one. When it comes to real estate, right, there were basically the first inning second inning.

In terms of our store and DC rationalization or what I call footprint optimization, and we'll be engaging in a number of activities over the next 18 to 24 months to garner more synergies. And then the real, I think, magic is going to come from the ability and attractiveness really to this deal was the ability to transition some of this R&D firepower that now we have as a distribution business and exclusive brands.

And where Snap was traditionally played in the resi AV market, now we're going to point and be able to start driving NPI for the like commercial part of the business, which for ADI, right, that is the majority of our customers. I mean that's 75,000-plus active customers in our database, that now are kind of ripe to target for new MPI in the commercial space.

And I anticipate being able to ramp up and see some of those products start to hit late '26 certainly into '27. So if you think about our ability to scale the structural margin accretion capabilities, the expanded exclusive brand opportunities, I mean this has the potential long term to be a significant benefit to almost across all of our financials.

Coming to your second question around Control4. We believe in this product actually. It was 1 of the areas that we wanted to revive, if you will. In fact, we launched the new Control4 X4 operating system last year in April. It was the first time we had seen an upgrade since 2019, '20 time frame. And we returned the Control4 business to growth for the year, which that hadn't been the case for a number of years before that. And that obviously has pull-through capabilities. And we plan on now launching upgrades more to kind of like every 18 months to 24 months versus every few years. So there's a lot that gets me excited about this deal. I know in the short term, right, it doesn't appear so, but it's got real long-term benefits for us.

It all makes sense. How hard is it to port, say, the residential AV product to a commercial product? Are they pretty similar? .

There are definitely nuances, right? I mean commercial has a much, I would say, a much higher level of stringency, if you will, because there's more riding on commercial applications. So we've got to make sure that we're building products and launching new products that have applicability, feasibility to our light commercial customers. And we've got that. We've got a very robust road map that we've been working on really since late 2024. These things don't happen overnight. We've got the products designed got to get it in development, working with our supplier partners for launch in the back half of this year and into '27. .

Perfect. Tom, turning over to you man. Listen, the margin progress and expansion over the last few years in such a difficult market has been truly exceptional. And the way we think about this is it's a clear positive attribute of your company going forward. I think you've said you're in the early innings of that new product introduction. So if you could spend a minute on the overall margin ramp that you're thinking about and how you and the finance team manage the trade-off of continuing to roll out all these new products and drive growth, but also keeping a mindset on expanding margins at the same time. .

Okay. So you're talking about the adjusted EBITDA just to add to that. .

Gross margin, too. .

Well, yes. But in terms of the investment, offsetting the 2, so the counterbalance, so I assume that, but I'm happy to deal with gross margin. Gross margin is a metric on the efficiency. Okay. gross margin is a metric for us delivering value to our customers.

Now we're a product company. So I'm going to talk about products in a second. But as a product company, I want to be clear that we have a sales organization and a customer support organization that are completely focused on making sure our customers are delighted with their experience with us. Same thing with our supply chain team and how well they execute and efficiently delivering the products that we create.

Now the products that we are creating and as we look at it, there are a lot of variables. And I know we've had 11 consecutive quarters, and that sounds like, well, it's just easy, you just kind of keep going. I would never expect it to be purely linear, because what we'll be doing is we're going to continue to deliver products that offer superior value and doing so efficiently, but it will not be every quarter consecutive as we've had.

I just want to set that expectation correctly. But we will be continuing to improve it. And the products that we're introducing, the reason why I say it's early stages, 2 years ago, we set up a strategy for each of the markets we serve and then 1 that's cohesive that ties all of those product segments.

And we are executing that in each of the markets. We know what we want to do in the air market. We introduced the low end. We just introduced the high end. We're going to be coming in with our mid-tier. We've got ventilation things that we're working on. We've got humidification -- humidification products that are coming out. So that will be driving that.

Very happy with what we've done in the safety market, and we've got some great products. I don't want to preannounce things that will be coming out this year that we're very excited about. Security is this is going to be a very big year. And all of these things that I'm talking about, yes, we are going to be delivering more value, more differentiated products that helps contribute. But the efficiency of the team, the understanding of the marketplace, our sales to understand and appreciate the value we're delivering, all has to work together for the company to be successful. And -- that's what so far has been happening, and I expect that to continue to happen. And as I look forward, I'm very excited about the opportunities. When the market starts improving, and we don't have the HVAC headwinds we've had over this past year in a market with the housing market to be in a more normalized situation, then I think you'll even see things really clicking.

There are no further questions at this -- there are no further questions at this time. This concludes today's call. Thank you for attending, and you may now disconnect.

Hello, and welcome. Please note members of the media and press are not authorized to participate in this event and should disconnect from the call now. The content presented on this conference call is proprietary to and are subject to copies of Jefferies third parties. You may externally record, transcript, publish or otherwise publicly disclose any portion of this call. Please note this call is being recorded. By attendance of that, you agree to all of these. And with that, I hand it over to Neil to begin.

Great. Good afternoon, everyone. My name is Neil Matalia. I work on the event driven desk at Jefferies. I want to thank you all for joining part 2 of our webinars on Resideo, where we're going to be doing a deep dive into the ADI Global Distribution business. Today on the call, we are joined by Rob Aarnes, who's the President of P&S and recently named the CEO of the ADI business post spin and Mike Carlet, Resideo's Chief Financial Officer.

We're going to try and hold some time at the end for questions from the audience. So if you have any questions, please send them to Dan Stratemeier on Bloomberg, and he'll filter through them. So with that, Rob and Mike, I really appreciate the opportunity to speak with you guys today and dig into ADI. Maybe you guys could start off by just giving a quick background on yourselves.

Yes, sure. Thanks, Neil. I'll go first and turn it over to Rob. Mike Carlet, probably a lot of you heard me last week when we did the P&S side of this conversation. Resideo's CFO, been here about 1.5 years, and I was fortunate enough to join when Resideo, specifically ADI and Rob bought the Snap One business I was previously affiliated with. And so been able to sort of set the Resideo headquarters, watching Rob and his team do a phenomenal job integrating ADI and Snap together and driving that business forward. Rob?

Yes. Thanks, Mike. So Rob Aarnes, pleasure to be here. I've been with ADI for roughly 13 years now. So I was part of ADI when we were with Honeywell when I first joined and then obviously led the spinout from Honeywell since then, ran operations, was GM of the North America business and then for the last almost 9 years, been the Global President.

Excellent. Rob, first off, congratulations on being named CEO of ADI post spin. I think it's been pretty clear that under your leadership, this business has performed really well for quite some time now. And our conversations during our due diligence process suggests you've done a really, really excellent job at the helm. And we have no doubt that this performance is going to continue forward.

Thank you. Thank you very much. Appreciate it. We have a great team.

Maybe to kick things off, it would be great to hear your high-level perspective on ADI.

Yes, sure. So to your point, incredibly proud of the accomplishments that we've delivered and I'll really speak to my tenure since 2013. We've more than doubled the size of the business, both top line and bottom line. And we did that through a myriad of different macro conditions where we were part of Honeywell for quite a long time.

And -- and that was -- we learned a lot during that time frame with Honeywell. We were the only distributor as part of a very large manufacturing company, not really allowed to invest in the business the way we wanted to. So that -- look, there's some good that came with that. We were forced to be very scrappy, forced to continue to grow, take share without really the use of a lot of technology investment, which I know we've been -- we were all waiting to do.

And the time actually came when we actually spun out from Honeywell in 2018, where we're really then able to lean in hard and invest in a number of different areas to both modernize and digitize the organization to where we are today. And that makes me really, really excited about what we're going to be able to achieve going forward. For those of you that don't know a whole lot about ADI, right, we are the #1 global distributor of low-voltage security and AV products worldwide with growing business in really nice adjacent spaces like Pro AV and datacom.

We built those capabilities over the last few years. We're international business, as you know, the majority of our business is here in the Americas between Canada, U.S. and Puerto Rico. And then we have international presence across EMEA as well as Australia and parts of APAC. We're very omnichannel focused distributor. So we pride ourselves on giving our customers the best possible experience no matter how they choose to shop with us, whether it's online, and I would put our website out there and the experience that we deliver from an e-commerce perspective against anybody out there in distribution.

Are there some that are better sure, but not many. And that has been a monumental asset for us as we continue to invest there really over the last 4 or 5 years. And then, of course, an expansive branch and DC footprint that provides shopping and localized inventory, a robust amount, by the way, for our 100,000-plus integrators based on where they're located.

Typically, we can get any of our products that we stock into the hands of our integrators either same day or next day in about 95% of the geographies that we play in. And as I mentioned earlier, right, what's all that attributed to in the last few years, doubled the size of the business since 2013 as well as our EBITDA, and we're just getting started.

Excellent. So you hit a number of points that I want to touch on, but I think the most important thing I want to start with is I think it would be helpful for investors to understand what exactly is special and differentiated about ADI. What is your moat and competitive advantage?

Yes, that's a great question. I love answering this. And it's really evolved over the years. But I would say, first and foremost, and look, a lot of distributors can kind of say this, but we really can back it up with the fact that we have deep, deep customer relationships with our 100,000-plus customers worldwide.

I mean you don't double the size of the business in the time that we have without being able to leverage those deep customer relationships. The same goes for our supplier relationships across all the categories that we play in. We've helped so many of our suppliers grow along with us over that time. And that's built a lot of trust and the ability to do some special things for customers that I'd say other distributors just don't have the ability to do.

I would also say, and I mentioned earlier, our omnichannel experience. I would not underestimate this at all. This is a signature strength of ours. And I think it might be good to talk about how this came about. One thing that makes us very special is we are relentless, if you will, almost maniacal about understanding how our customers want to do business with us. And what does that translate to tactically? Every year, we launch 70,000-plus surveys. And it's not just the NPS stuff. Yes, we've got world-class NPS scores in the mid-60s. It's not that.

It's the questions we ask around what are the key decisions or factors that you look at when deciding which distributor to buy with. And as you can imagine, back in 2014, when I first got here and we started doing these, what came back at that point, very different than what it is today. And that's just the evolution of those that are buying products, those that are now running the actual integration businesses.

Back then, it was -- have the right inventory, make sure it's priced right, have knowledgeable salespeople, things like that. Today, overwhelmingly, number one is you've got to be able -- I have to be able to do research online to understand product content and be able to do research before I make the purchasing decision. How can you be the easiest to do business with?

So sometimes I'll need a salesperson. But in a lot of ways, how can I actually get through the entire transaction, design a project, make sure that project is priced right and do it all with really some human intervention or none, right, the easiest to do business with. And so as those customer -- as that customer feedback came into us over the past decade or so, that has largely marked how we've allocated our capital to spend on building these capabilities.

So I know that started with me saying our omnichannel experience, but that's really where it came from. And it started to get so -- I mean, that response started to become so, I guess, pervasive in the last 5 years that we redirected an overwhelmingly proportionate amount of our capital to building the omnichannel experience we have today.

As much as I'd love to say, hey, we're done. We've crossed the finish line. I'd say we're still in the -- as good as we are still in the fifth or sixth innings. I mean we have so much more that we want to do in that space. So in the end, we pride ourselves on being a heck of a lot more than just box movers that doesn't -- I don't think that sustains and drives the kind of growth that we've been able to do for as long as we have without -- without doing our best to kind of make distribution look se**, if you will, right?

The investments we're making in technology, omnichannel, the digital tools we provide to our sales team, those things really set us apart, and I think give us a leg up to be able to say, hey, we're -- we feel very confident about continuing this growth trajectory going forward.

And a couple of the points I think might be worth hitting on this topic, just the footprint of your facilities currently. And also, I think you guys in the past, during our diligence, you've talked about this ability to integrate into your end customers' workflows. So you're not just that supplier products, you're working with them to plan their entire project. So you really integrate your products, whether they're your first -- or your private label or your third-party supplier products into -- you spec them into the project.

That's right. Well, I think it's the third kind of the -- we act in a lot of ways. If I think about what's important to our customers, right, whether it's our large commercial integrators or our small residential security dealers, how can we help them lower their cost to serve, win projects, win business with the end user, right? And it varies based on are you playing in the enterprise? Are you playing in light commercial and anything in between. And so we've been able to, again, back to kind of listening to our customers and having that strong ethos.

One of the things that's very important to our large accounts, large national accounts is if we can act as the strongest 3PL for them and actually enable them to decrease the size of their DC footprint, become a true fulfillment arm for them and be able to bring to them, right, the latest and greatest products, latest and greatest technologies at the best price points right, at the lowest registered price points and working with our suppliers, that absolutely helps them win those projects.

And then when they win those projects, right, we're able to do things like staging and kitting, ship those products to them exactly where they need it, when they need it. So we -- this is what we do well. It's not necessarily what they do well. They don't want to do well, right? So we're able to do those things for them, provide a significant competitive advantage in that way.

And then you mentioned it. 2 other areas that are incredibly strong that make us sticky is our exclusive brands offering, which terrific technology, in many cases, with a services ecosystem depending on the application, great price points, technology that's relevant, again, allows our dealers to come in and win projects at lower price points, makes them more competitive and then a wide swath of services that I think some services we charge for, a lot of services we don't that are just simply value adds that our competitors just do not have. So all those things across the board help us maintain a very sticky customer environment.

So one of the most interesting parts about what we found on ADI is if I look back from, call it, 2015 through 2024, and I even exclude the Snap One contribution in 2024, you've grown at an average of like 6% CAGR. And to the point you made earlier, that's without having had much investment in the business during the Honeywell years, too.

And even post spin, a lot of the Resideo had to focus on P&S and ADI hasn't necessarily been completely unconstrained. And I think if I look back over that same 9-, 10-year time span, the worst year you guys had on a top line perspective was 1 year, you were down less than 1%...

Yes. But believe me, 2023, it haunts me to this day, okay? It's the only year...

It would have been a perfect...

Happened to us and [ that's I did ]. So thank you for that.

But again, all that to say that that's just a very impressive track record, especially given some of the hiccups you guys had on. So what is it about your business that's really driven this steady, consistent growth year-over-year? One thing we've heard is that security "never goes into a recession."

Yes. I'm going to say that's someone -- look, if you go back to 2008, 2009, that was a tough time for security, right? So that was the -- whatever the Great Recession, I think they may have called it, right? That was a little tough. And I wasn't here then. But even then, back then, the business kind of held its own. So there is certainly a resiliency in commercial security, right?

It seems -- regardless of kind of macro trends, commercial construction indexes, right? Some people follow the Dodge Index. Whether that's up 7%, whether it's flat, whether it's down, the commercial industry continues to have resiliency and it grows in that kind of low single-digit growth rate, sometimes higher. And I would tell you, and you hit on it, a lot of that is because of technology, right?

So the advancements in technology across a video surveillance, right, fire and life safety, which is a little bit of a slower mover, but an absolutely needed piece of technology in any commercial building. But you find a lot of verticals like, let's say, banking, like retail, like education that are highly dependent on the latest and greatest technology to provide maximum security for either their customers, their students, what have you.

And as technology advances, whether they might have put in an entire system 2 years ago, but they've had -- some point of our technology has advanced to the point where these are going to give them a significant advantage in terms of heightened security capabilities, they're willing to kind of rip those out and replace and put in the new products.

And we see that across a number of the categories we play in. So if I think about the industry, the commercial security space in general, there is a nice advantage there, how technology does have an ability to drive top line growth. But again, that's not the only piece. You have to have the other complement of services that I mentioned earlier in the call to be able to help your customers win that share and outgrow, right, the kind of the low single-digit GDP number, right?

And that's what we've been able to do. And so the last point I'll make about this is just a culture piece, which gets a little squishy, I understand. But you don't have to spend a lot of days within the ADI team to understand that we don't talk internally a lot about macro. We don't talk a lot about this headwind or that headwind. We believe and we have a fundamental culture that is committed to growing even if we have to take share.

And so to your point, as we look across an entire kind of 12-, 13-year period, 6-year organic, maybe even higher than that if you throw in the Snap acquisition or definitely higher than that. It's that kind of mindset around continuously understanding what our customers want, building that capability, go above and beyond and having a mindset from leadership all the way down to our folks that are out there on the front lines that there's always share to be taken.

So if I think about then what the next 5 -- 3 to 5 years look like, a lot of the same drivers should still be in place, right, this idea of rip and replace, this idea of tech advancements.

So it's not like the products that you're putting in today have a 10-year replacement cycle where they put -- integrator put them in and then they just never go back to that customer for the next decade. These integrators are constantly going back to that same customer every few years just to upgrade what they previously put in 3 years in the past. Is that the right way to think about this?

That's 100% the right way to think about it. I mean -- and probably the most significant one is our banking vertical. Obviously, we obviously -- we don't sell directly to those verticals. We have the -- our customer is the pros. So those large commercial integrators that have great relationships or contracts in some cases with, say, banking institutions, you can imagine the need for security, right, in that particular vertical.

And I mentioned other verticals, too. But if you look back in the last 10 years, gosh, certainly in my tenure here, that vertical is a great example of how technology drives a rip and replace type of scenario.

Okay. And you touched on some of the tech advancements specifically, but can you just kind of dig into those a little bit more? Like what exactly are the new advancements that are coming out with some of the technologies your customers or your suppliers are coming up with that should drive greater adoption over the next few years?

It's -- in fact, it's all the things you would probably think about. So if I think about video surveillance, I mean, it's obviously resolution, it's advancements in VMS. It's actually now being able to use AI, being able to actually gather data quicker, use it, machine learning on the edge. I mean these things are continuously evolving. And there are so many great players in this space that the competition is terrific, and we benefit as distributors as well as our integrators as well as the end users. So that's one great example.

I think the other one is just technology convergence in general. If I think about, gosh, 10-plus years ago, right, you had and just the integrator network, like I think about our customer base 10, 12 years ago, you had IT integrators, you had security integrators, you had Pro AV integrators, you had datacom integrators, right?

And they kind of -- even electrical integrators are kind of stuck to their space. As now technology is advanced, but the convergence is driving all of those products now be on the same system, right, the same system. Now you have large commercial integrators that 10 years ago were maybe just playing in security are now able to leverage that convergence and be the one-stop shop.

So now they can provide security applications, datacom in some cases as well as Pro AV, and we then can help them win the entire job because we have the line card to help them do that. So that creates more speed, right? The design capabilities become less complex, if you will, through the use of tools like AI, right? And so I don't see any shortage of -- or slowing down rather of technology as a driver of growth in this space. Hopefully, those examples were relevant to you.

Yes, that's very helpful. And obviously, especially this year -- in recent years, we've seen a number of catastrophic events happen, whether it's on [indiscernible] or some shootings on college campuses. Do those things -- are you seeing an increase in the need or the demand for some of the products you have, especially from places like universities or schools that tend to be a little bit further behind in their technology ramp?

Yes, that is -- so look, it's no one single event, unfortunately, right? It's the combination of these events that happen that affect the world. You're exactly right. They are incredibly unfortunate. They're sad in every way. And however, if I look at how it affects this industry, it's in exactly the same way as I was mentioning a few minutes ago, where the threat is always there. It's constant.

And so if there is -- there are advancements in technology that can help these universities. These hospitals is another big one, right? These banking institutions, these commercial buildings, right, up their game and deter right, these actions from happening on site. Those investments are absolutely, first of all, worth it.

I think you and I would agree to that. They certainly agree to that. And is -- the byproduct of that is continuous demand in the channel for these things. So I think as long as our suppliers, and I know many of them, obviously very well, are committed to investing in advancements in technology to help deter these catastrophic events, we will continue to see growth and rip and replace happen at the end user level.

Got it. Perfect. So before we dive into the inorganic side of the story here, just to summarize everything you just said, ADI, incredibly steady grower every year. Industry in and out itself probably grows low single digits, if not higher. You guys are growing above that due to a variety of factors you just laid out. And there's -- with tech advancements and the way you guys work with your integrators, we should expect that, that growth should continue for the foreseeable future, low to mid-single-digit growth.

Yes. I mean, especially as we are thinking about now spinning out to be our own organization and now where we can just apply what I would call laser strategic focus, right, on ADI and really determining how we allocate capital to best continuing to build these capabilities within the organization now more than ever in our history. And then with the kind of the launch of our new ERP system, we've taken a major step forward to be able to help us grow even more with that because we'll have even more access to growth-driving technology. So I mean, no reason to think otherwise.

Perfect. Okay. Great. So moving on to Snap One. Mike, would love to bring you into the conversation here as well. Again, as we just talked about has largely been an organic grower until last year where you guys acquired Snap. Mike, can you tell us a little bit more about the acquisition? What is Snap? What was the rationale behind this?

Yes, I'll kick it off. I was on the other side of the transaction. Rob and I met with our ex-CEO, John, on the Snap side back, and I think it was 2017 originally, Snap was being recapitalized by its PE partner at the time. And Rob was still running ADI under Honeywell. And way back then, we looked at each other and said, it makes a ton of sense to put these 2 companies together. It wasn't the right time for either one of us at the time.

And from '17 until 2024 at various points in time, we get together and talk and say, how do we get these 2 things put together? Do we buy you? Do you buy us? Do we merge them? Like how can this all work? And really, the reason the rationale made sense is the underlying business philosophies of both companies, while there was a lot of difference in operations and exclusive brands versus third party, the focus on the professional, the understanding the needs of the professional, being there to service that professional integrator with the products and solutions and services they need when they wanted them, how they wanted them, allowing them to be more successful, more profitable, that drove both businesses.

The ADI team historically more focused on the commercial low-voltage space, the Snap team more focused on the residential entertainment space. But both of us looking at the others market as expansion opportunities that we thought made more sense to do jointly rather than separately and compete. We always were great admirers -- what Rob and the team at ADI were doing from an e-commerce standpoint and an omnichannel standpoint was very, very impressive. Snap started as an e-commerce company. I was there over a decade. When I got there, we had 3 national warehouses, and it was almost purely e-commerce before we got into the more regional and local distribution.

And I think the ADI team invested more in 2 years in their e-commerce platform than Snap did over the entire time I was there. The commitment to that part of the platform and growing it and being there for dealers was really, really impressive. So as Snap was going through looking at strategic alternatives, I would have taken the bet right upfront that ADI would be the successful buyer. We wanted them to be.

And after a process, it turned out that Rob pounding his fist on the table with the Resideo Board and saying, we need to do this deal. This is the deal to be done, got it done and did a great job. I'm actually in a really interesting spot. So since I joined Resideo, I'm actually in the corporate headquarters.

And so I try to keep my fingers and hands out of the day-to-day at ADI. Rob is doing such a great job with the team there. So whenever he needs a little bit of counsel, I'm happy to provide that. But I get to watch from across the room as he and the team drive just a great integration, a lot of success. He's brought the teams together. Things are going really, really well. But I'll let Rob comment all that as we go forward.

Perfect. Anything you want to add to that, Rob?

Well, 2 words come to mind for me, slam dunk. This was -- I mean, as Mike said, right, this was that he was not joking. I stood up at -- with our Board and I said, this is the deal to do. And to Mike's point, I've been thirsting over this thing since 2017 when we first met in New York City way back when timing wasn't right.

But culture, strategy, the investments that Snap was making and trying to get into security, Pro AV, the investments we were making to try and get into resi AV, which broaden our exclusive brands, bring in services capabilities. I mean, the complementary nature of the 2 businesses was just way too good to pass up.

And then the ability, once we've -- now we whatever, 18 months in and integrated to be able to take that engineering kind of firepower that Snap had as they built that very robust resi AV offering and exclusive brands and now be able to move that and gain and give access to that product line to our 100,000 customers is just a win, especially when the exclusive brands, as you know, Neil, are 2.5x the gross margin, right? And then the services capabilities that go with it.

But now more importantly, the future, right, to be able to take that engine and start to now actually continue to drive NPI. Don't get me wrong in the residential AV space. We're the key -- probably the leading player there with this acquisition, but now turn some of those capabilities and launch some new NPI in the light commercial space, right, and offer maybe even some services packages in that space is the real kind of margin play here.

And one of the early successes that we're seeing around just cross-selling. And so these things, these NPI engines take 18 months, 2 years to get rolling. And so I'm really excited about late '26, '27 time frame when we can start really itching that getting more into the light commercial space. But this was a slam dunk. And I think we've done a really good job bringing these 2 very strong, different but very strong cultures together at this point.

Perfect. And I want to touch on a lot of the points you just made, but maybe first, obviously, ADI legacy is more commercial focused. The business now today is probably what we've heard like 65% commercial, 20% or 35% residential. Given the exposure to the resi market, how has Snap One performed year-to-date? From what we can tell, it's actually held up significantly better than the broader housing market. So I would love to hear the drivers there and...

Yes. You've seen the macro environment, right, in the housing side. I mean, certainly you're certainly very familiar with that. And while if I look at the 18 months in, it's a little muddy at this point, but I'll look at the just the resi AV category for you. I mean, being up low single digits right? We are absolutely not only holding our own, but I actually think, right, that would indicate that we're actually taking some share and which, by the way, makes all the sense in the world.

We now have -- the Snap customers now has an expanded footprint of stores, right? We have all the Snap exclusive brands product or most of it in all of our ADI locations. That started happening, by the way, Neil, 9 days, 9 days after we finished the acquisition, we had the entire WattBox line, the power line in every ADI store and up online. Now the logistics to be able to do that, I just want you to is very challenging, but it speaks to kind of our execution capabilities.

But today, right, that is now the advantage we give to those residential AV dealers with our footprint, with our offering, with our logistics capabilities, with our omnichannel experience, right, with the rewards capabilities that we're now putting in place today as well as what they will become in the years to come, starting really in 1.5 months, right, and even expanded more robust offering. So I mean, I think I look at the last 18 months, and I'm really proud of what we've accomplished. And in many ways, we're still just getting started here.

Yes. I think interestingly, too, we've talked to a number of integrators on the resi AV side. And while certainly business isn't once -- or isn't what it once was in the immediate post-COVID boom, they're still all incredibly busy. Like they have plenty of backlog. They have plenty going on. And I think -- correct me if I'm wrong, the important point here is that you can't just look at the resi market as a whole and compare it to what you guys are doing in Snap One. Snap One really is a bit more on the higher-end resi side, and that's giving it some insulation from what's going on in the broader market. Is that a fair statement?

I think that's accurate. It is accurate. I mean you've got certainly the product line, the breadth of the assortment and the technology, especially in our exclusive brands line, but also in the third-party brands that we offer in the resi AV space.

It has the ability to play to, what I would say, light residential all the way up to luxury residential with our Control4 offering. And most notably is the launch of our new user interface, right? It's called X4. The last time -- this is -- this is, by the way, a very strong statement in terms of our commitment to investing in the Snap One space, right, in the right way.

So the latest -- if you look at the last Control4 user interface upgrade, it was 2019, okay? As soon as we got the business, we said, "Oh, man, we got to ramp this up, right?" We got to -- let's make sure we get something out there. We upgrade the user interface to kind of today's -- more of today's look and feel, but then also start a cadence going forward where every 18 months, 24 months, we are launching a new update, right?

But we launched that back in April, and that had kind of stayed flat. The Control4 installations in that business had kind of been flat for a while. We're happy to report high single-digit growth ever since we launched. That, in combination with our new luxury lighting line and a myriad of other NPI products that are just doing exceptionally well now that the customer base is larger as well. But yes, we tend to play. Control4 certainly has a commanding position in the luxury high-end residential homes. But the product line has flexibility to go up and down, right, entry level as well as luxury.

Okay. You touched on this maybe a couple of minutes ago, but there's some level of complementary customers between -- you guys have the commercial security integrators, you guys have the resi AV home automation integrators for Snap. Maybe just dive a little bit further into that cross-selling potential. Is it really just that -- these are by and large or at least in some capacity, the same integrators that can do both, and they're learning to build that new capability by going from resi AV and doing light commercial, and they can come to you as a one-stop shop for everything now?

Great question, by the way. It really depends, okay? So let me try and break this down as simple as I can. So you have certain kinds of integrators that we'll shift back and forth between security and resi AV. There are some that stick to their lane only new resi AV, there's some that stick to security. But there's a lot over the years, again, remember back to that technology converted statement I made, where, hey, there's better ways to grow my business, but I'm in the house already, my technicians in the home, let's get the security system installed, let's also talk about things like thermostats and AV, right? And there are a number of our residential security dealers over the years that, by the way, have played in both those categories.

And in fact, we did an analysis when we were looking at doing the deal there were thousands of them that shopped, they come into ADI, they buy the security equipment, they walk across the street to Snap buy the AV equipment for the same job, okay? And we said, okay, this is a gold mine, right? We bring them all together, one-stop shop, help them win the job, bring all that revenue under us and not only just bring it all into one route, but then help them grow, just based on the logistics capabilities we have.

Now you have the -- let's talk about the real magic here, okay? Because that was kind of happening already. We just did not find a way to accelerate it a bit. Real magic is when you think about our large regional commercial security players and even the big nationals that play in the enterprise level, there is already a strength of products that play in that -- in those spaces, right? Now we're not -- Snap doesn't is going to make an enterprise level video surveillance camera. We would -- we're never going to do that. They won't hunt there. However, power systems, wire, right? I mean datacom capabilities, servers, racks, jacks, mounts, you have an existing product line, some of which, right, was only in the resi AV space because that's all that Snap really went after some Pro AV too.

But now we can take some of those products that have applicability to our kind of larger regional and national security integrators that helps them, by the way, maybe shift away from -- they may have their own offshore branch, which are not that reliable or we've got some brands that maybe compete with a third-party branded product that they're buying from somewhere else that we can bring that business now in-house at a lower price point, again, helps them win jobs at the end level, end user level.

So that was the -- back to that slam dunk comment, right? We didn't even -- when we -- the day 1 when we bought Snap, the existing product line, which, again, was almost entirely focused in the resi AV space, had applicability to our large regional security integrators as well as in a lot of cases, to some of our larger nationals as well without having to necessarily need enterprise-level product. Does that make sense?

A ton of sense. Yes.

And then I'm going to follow that up, Neil, with, again, starting in late '26 into '27, we're now going to shift the product development machine to start actually producing commercial-focused products for our security dealers, our Pro AV dealers, and in some cases, even at the nationals, again, not at the enterprise level, but products that we know that they need from us right now. So again, just getting started.

I want to hit on the exclusive brands point in a second here. But just last question on Snap One. What are the areas of cost of revenue synergies? And how are those synergy opportunities going so far? And I think one of the things that you mentioned here, Rob, and one of the things we've heard is a lot of these Snap One facilities are set up pretty close to ADI facilities to the opportunity to I don't know, consolidate here is relatively -- I don't want to say easy, nothing so easy, but it makes a ton of sense and it's straightforward.

Great question. So let me just start by saying we came out and we said we're going to deliver $75 million in synergies by the time we exit year 3, call that 2027. I think in the last earnings call, we look to be favorable even above that number, right? And so that's part one. Where is it coming from, right? Let's talk about the one you just mentioned, which is real estate consolidations, right? You think about it, in fact, we picked up about 44 Snap brick-and-mortar locations, about 2/3 of which are -- well, actually, almost all of them have an ADI within the vicinity, okay?

In some cases, they're very close and it makes sense to consolidate, right? In other cases, like -- I'll give you one that's close to where I am right now, Riviera Beach, Florida and Boynton Beach, Florida, are 25 miles apart. Scottsdale, Arizona and Phoenix, Arizona are about 27 miles apart. It doesn't make sense to consolidate those. So we're going to keep them separate. But 2/3 of the 44 we did pick up, it makes sense to bring together.

And let me tell you what. This is -- is it difficult? Yes. Especially when you talk about ERP systems and you got to have point of sales that all line up and everything. But the stores we have opened up where they're either we started to consolidate locations or we're just rebranding existing ADI locations, right, to be more resi AV friendly, if you will, because remember, over half of Snap business was done through snapav.com versus the stores. So that means you have a boatload of Snap customers out there that don't have a store in their vicinity, a Snap store, so they were buying Snap product online.

However, based on ADI's footprint, there's an ADI store there, right? So we've taken now the opportunity to say, "All right, let's renegotiate those leases, let's expand the footprint a little bit, go higher up, bring in several hundred TVs, stock with a more robust resi AV offering, localized inventory for our resi AV dealers. Again, out -- being able to outgun any local resi AV distributors in the area. So I think we've done close to 10 already. And we look to have -- we look to want to complete all the real estate consolidations, which include some DC footprints being able to move around as well in that '27 '28 time frame. So that's is another area.

Perfect. Yes. I think I wanted to shift the conversation over to what I think is probably the most interesting part of the ADI story, like the growth rate, the sustainability of that, the steadiness of that is incredibly powerful. But I think the real juice will come from something you guys mentioned on the earnings call, which is you think you can take EBIT margins from, call it, 6 or so percent today up to low double digits in 3 to 5 years, which is a very significant improvement, and from what we understand, the main drivers of that are: one, synergies, which we just discussed. The e-commerce opportunity and the exclusive brands opportunity.

Maybe we can dive into those latter two and to the extent there's other ones you want to touch on, too, that would be great. So on the e-commerce side, earlier in the call, you mentioned that we're in maybe the fifth or sixth inning here of this opportunity. What's the real benefit of this omnichannel approach for customers? And how much more -- what's the added benefit you think you're going to get from sales into the e-commerce channel relative to where you sit today?

Oh my gosh, how much time do we have?

20 minutes to make it.

Well, I'll just say this one has an infinite number of possibilities. I mean, I already talked about the fact how much our customers are begging for it, how much when distributors do this right, like I believe we're doing, we can create just a stickiness factor, which by the way we see it. Customers that -- transactional customers that move their business online, they hang with us. They don't go anywhere, okay? That's kind of part one because the transaction is easy. They get everything they need, and we're continuing to launch new development almost weekly, okay, to enhance the user experience, becoming very Amazon-esque, that's the first thing.

Two, the website delivers a couple of hundred basis points higher gross margins than the base business, right? You have a probably -- no knock to our 1,000-plus great salespeople, don't get me wrong. I think we have the best sales team in the industry, but we're talking about an omnichannel experience that uses AI search, recommendations, right, highlights exclusive brands in the right way, targets customers in a way that only a complex set of algorithms and platforms can do right. You just ultimately have, you're selling more and you're selling at higher margins.

So the more we can shift transactional customers right, online, the stickier they are, the higher margins, the more exclusive brands will sell at a higher price. I mean it's just -- the data is the data, right? And today, we're sitting about 25% in terms of our total, give or take, our total e-com revenue. I would love to get to that 10% adjusted EBITDA operating margin you're talking about. We've got to drive that number somewhere north of 35%, 40%, all right? Absolutely doable based on the trajectory we've got. Two other elements. When I talk about e-commerce revenue, I group it in a classification that we call touchless revenue, okay, meaning no human interaction needed. It's why I kind of emphasized transactional business okay? Because there's a lot of that, that happens on a day-to-day basis.

And so EDI is another component, right? A lot of our large nationals interact with us through EDI. Again, you don't need a lot of human intervention there with the exception of maybe some things where product is not available, stuff like that, but that represents a large part of our business as well.

And then we've invested in a couple of software platforms that basically convert inbound e-mails to sales orders, which sales order automation is what it's called. That's another 10%, 12% of the business. If you throw all that together, in the next 5 years, I want to have total touchless revenue somewhere north of 60%, 65%. All right? Now you may say, okay, what is -- oh, you're just going to -- when that happens, you're just going to cut a lot of salespeople, absolutely not.

What that means is I can then turn and I can take my elite sales team both inside and outside, arm them with even more technologically advanced sales tools than they even have today. And by the way, they are armed to the hilt. Now I would put our tools up against anybody to spend time with the customers that need them the most, right? And I'll give you a data point. I mean -- and this is an approximation okay? If I look at the last -- if I look at the time since we've spun, how much we've grown in the last 5, 6, 7 years, it's a significant amount, right?

And then how many salespeople we've actually added to the business that would shock you. Outside of ProAV and Datacom, almost no additional people in the branches in the inside kind of outbound telesales team. Why is that? Because so much of that revenue has shifted over, right, to our omnichannel platforms and then our existing sales team is able to actually grow their productivity on a per customer basis because now they have more time and they have better tools. We call it turning order takers into market makers. They can call me on that. That's a big thing within the ADI business, but it is working and working very well. So that's kind of the primary thesis around helping us get there along with the stuff you talk about exclusive brands, services capabilities. And you heard me also on the earnings call talk about this ERP conversion.

Yes, right now is preventing a bit of a headwind, got it. It's short term, it's short-lived, but this will also unlock capabilities for us to further automate so many different aspects of the business to include our customer experience, where now I can drive better and quicker fixed cost leverage, grow my sales faster than I'm actually adding OpEx, which is the key to distribution, if you will. So all those things coming together give me a lot of confidence that we can achieve that objective despite kind of where we are today and where we need to get to in the next 3 to 5 years.

Okay. And then just quickly, I want to touch on the ERP in a second here. On the exclusive brands component, can you just tell us where you are from a penetration level today? What percentage you were targeting? I know you mentioned that the margin on those are 2 to 3x third-party margins?

So today, we're right in that 15% range, okay. That's -- so that's thanks to Snap. I mean, before Snap, we were kind of knocking on the door of 5%, right? So if you look at most distributors, most are in that 5% to 7% range. With the exception of legacy Snap, which started with exclusive brands. But us being at 15% is a -- we already talked about the myriad number of advantages, this brings to the organization. But I know I don't see that percentage being in that kind of north of, let's say, 25% range. I just -- there is a line where -- and we're always conscious of it, where we got to respect our branded third-party relationships too.

They bring a lot of margin dollars into the business. They bring a lot of credibility into the business, right? These large brands, many of which you know, household names, if you will, we help them grow, and we do a great job protecting both sides of the house. So while I think there's a boatload of opportunity to improve our mix, especially in online channels, I see max potential of getting somewhere in the low 20s in terms of mix, right, somewhere in there and as well as the rest of the business continues to grow as well. So did that put in perspective for you?

Yes, that's perfect. Perfect. And then just on the ERP, Mike, feel free to chime in here, too. I think everybody understands what happened. This is a truly transitory event. Everyone, I think, tends to have ERP issues. And when they come up, they're always kind of a headache. So we don't need to rehash this in too much detail, but I do want to spend a quick second just level setting where things stand today. First of all, can you just help us understand why this upgrade was necessary from what we have gathered. The prior system was about 40 years old, which is insane to think about.

Neil, were you born then?

No, I was not.

Yes. So basically -- I was jabbing you there. But basically, we launched that in 1985, okay? So you're not joking, right? This thing was launched in '85. I was born then. But however, I'm going to start -- I get asked this question a lot , what are the benefits? I got to start by saying the cost of not doing this first, right? Something I think a lot of distributors out there that still are using the AS400 green screen or coming to grips with every single day. I mean, I think about it from our perspective, the money we were spending in support costs, this scarce amount of resources. I mean how hard do you think it is to go out and recruit somebody that knows COBOL programming, right? I mean you're talking about people that are much older than even I am, right? And that's fine.

But at some point, those resources really start to just kind of go away, right? And then the third big piece of not doing it is the amount of dollars that you have to spend, if you're technology focused like we are, understanding that we have to be able to advance the business in a way that our customers expect that you're having to spend -- you're either upgrading your ERP system or you're spending an exorbitant amount of money on middleware, right, trying to get old systems to connect with new systems, which, by the way, is oftentimes not possible, not even possible.

And so we had all of these kind of platforms, right, whether they were digital tools, whether they were going to drive further enhancements online, design capabilities, AI applications that we just had to keep on the sideline. Unable to actually deploy and use. So there was, first and foremost, this cost of not doing it to continue to add up, right? So that's one. Second, to actually -- I already talked about on the earnings call, a lot of the benefits and this -- how this represents probably the most significant milestone for us in terms of advancing the organization forward and better modernizing and digitizing all of our capabilities going forward.

And we've already -- even just in the 3 months since we've launched, we've been able to deliver dozens of new automations, bots, right, where we're seeing productivity gains at the sales level. And again, we're in like halfway through the first inning here. And so we think about our road map going forward, the technology we'll be able to invest in, all in an effort to really do a few things: one, improve the customer experience, make it faster, make us even more easier to do business with, drive more productivity at our individual team member level, whether you're in sales, whether you're in the DCs, whatever role you have. And then that byproduct of now being able to grow the business, do more with less and drive fixed cost leverage, right? So this was a key accelerant to being able to get there.

Yes. And I think just importantly for investors to understand where things stand today, too. What's the update on the implementation? I think on the third quarter call, you guys have given some numbers around where the pipeline stands today in terms of how much activities come back to your system, what customers might still be waiting? Maybe just give an update on to where -- as to where things stand on that front today.

Yes. I'll use a lot of the same language that I used a few weeks ago now to your point. I mean what we're seeing is in October, now into November, we're seeing that kind of daily sales average we call it DSA, right, continue to approach pre-go-live levels, adjusted for seasonality. This time of year is when your DSA kind of ebbs down, not year-over-year down, but just ebbs down from where it would have been in the summer. That's our heavy installation project time. So it ebbs down a bit from there.

And so we're seeing that now. We're seeing the learning curve, get a little bit less steep as our team is getting more used to the system, they are now able to spend more time doing the things that kind of make us great, what you and I talked about for the last hour, selling, engaging with customers, really following up on quotes, which is the kind of the next piece I'll talk about, which I think you were alluding to, which is really great to see in September and in October, our pipeline, right? Our project pipeline grow to a record level for the year.

Normally, June, July is the highest level, right? But October, boom, shot up to our highest level. And I think some of that, to use your language is some of it's just getting back to the day to day. Some of it's customers that probably were patient with us October, September and now coming back, and we're starting to quote them again, which is great news. And then going forward, we fully expect at some point in Q4 into Q1, that pipeline conversion rate to be where it was historically, right? And then we can honestly say, "All right, the majority of the learning curve is behind us." While it was disappointing, it took a little longer to recover than we wanted. We have a fully functioning system. It works. It's just the team getting more mature with it.

Perfect. And then, Rob, just one last thing I want to touch on here with you specifically is ADI is going to be its own company pretty soon in the next few -- 6 months or so. What are the changes or benefits you think ADI is going to see from being able to run on its own, being able to operate in a way that you think? If we look back 3 years from now, what do you expect the business to be doing relative to what it's doing today?

It's a great question. This is one of more exciting things for me, I'll be honest with you. And for me to be the CEO of the business after 13 years and lead us into the new territory is incredibly exciting. I'm humbled and honored in so many ways. I think first and foremost, I mentioned this earlier is just strategic focus, right, strategic focus. And what does that mean? Ever since I've been here, we've either been part of a large Honeywell business unit or even part of Resideo, which I've enjoyed, don't get me wrong. But in any situation like that, you've only got so much capital, and it's got to be allocated in certain ways. And the Snap One integration is a great example of that.

Snap One, we were able to do it. But that meant, right, there was going to be some give or take from the P&S side, right? We did this deal. And by the way, P&S, when they bought First Alert, a great acquisition for them, there was some give and take on the ADI side. So from a strategic focus perspective, every decision we make, every dollar of capital we look to allocate can now actually be through the lens of how it's solely going to benefit ADI.

And by the way, same thing for P&S as they look to be their own company now. So -- what does that translate to, more investment in our growth, both organically and some of the areas that I mentioned earlier, but also inorganically. And we maintain also -- we always maintain a very robust M&A pipeline. So that's the benefit. In terms of 3 years, what do I look at now? We've hit on this -- we've hit on this many times more, even more so than we are today, a more technology-abled organization that's modern, that's nimble, that is able to adapt even quicker with the times, invest in technology quicker versus a couple -- taking years to do so.

M&A, I'm able to integrate organizations so much faster than I was able to before with this new upgraded platform. I am driving and leveraging productivity across the organization because of these technology advancements, all that translates into an optimized customer experience. An ability to make customers that much more sticky with us. The Ability data is another really big one. We didn't touch on that a whole lot here. I should have hammered that home a lot more. There's buzzwords out there I think about master data management, and the massive heavy lift that comes with that to categorize, customize all your data, so you can leverage it in a way where you can even think about AI being a strategic weapon versus tactical. That we are now able to make significant advancements to, to not only use in-house but also potentially be able to monetize data forward, which is a trick in and of itself. So many different ways we'll be able to just be a better organization and take that next big leap right away, towards doubling the business again, which is my ultimate goal here.

Perfect. I know we're coming up on time. If you guys don't mind running a couple of minutes over. I want to just -- 2 quick questions I came in through the audience, I want to run by you. So the first one is, and Rob, you have touched on this a bit here. There's a desire to do M&A with some of the cash you guys generate. Maybe just touch on the areas of M&A you think are most interesting to you. Are you trying to diversify into broader categories away from certain categories? How do we think about that?

Yes, great question. I would say right now, there is a strong focus on 2 real categories for us that are growing well into the double digits right now, and that's datacom. Right? Datacom is a terrific business for us that we launched into about 5 years ago. We've done a couple of small tuck-ins there. I would like to really start to explore some bigger acquisitions that bring in different capabilities for us, bring in -- strengthen our line card, right? And we've got some terrific targets to go out there. It's a really accretive business for us.

So is Datacom getting you closer to data center type work?

That is essentially what it is.

Okay. So you guys don't have any data center exposure today. This is basically you're trying to say that this is an area that you want to grow and expand into.

No. We have a -- I wouldn't say we're a very small player in this space right now, but it's growing for us. And it's a very accretive space for us. I think there's aspects of the -- there are certain -- you have to look at data centers. There's -- it's divided into a few different areas. Right now, we play in a particular space, and I think there's a lot of opportunity to continue to grow and expand in that space, both organically and inorganically. So that's a high target area for us.

I'd say the other one is Pro AV, professional AV, which has a lot of overlap with both security and residential AV. We started that a little while -- I mean, 7 years ago-ish, we've done some acquisitions there, too. And that is a -- it's a growing space. And we see a -- there's such a large total addressable market size in that space too, to get after. So kind of a lot of room to grow there.

And then I would say, third, now with the Snap integration and really a product development capability technology, technology that's going to either enable greater NPI, strengthen our services ecosystem, maybe bring new products and categories to market. But I'd say those are the big 3 buckets that we're focusing on from the day we spin forward.

Perfect. And then last question, CD&R, what's their angle here? Obviously, they have a very strong history of distribution. Can you just tell us a little bit more about the relationship from your perspective?

Yes. I have the utmost respect for our 2 CD&R Board members. I have met also several other members of the CD&R team as we really began to engage with each other when the Snap deal was starting to come fruition. And then certainly, with Board participation going forward, I mean they have been terrific, terrific assets. They know distribution inside and out. They have been able to provide great counsel for us and for me, in particular, even members of my leadership team on path forward. They were great partners for us during our ERP implementation just in terms of advice, things to look at and even during when we were in hypercare. So I'm not sure I could have asked for a better partner than what we got in CD&R.

So suffice to say you guys work pretty closely together. This isn't some -- like they're not just an investor in the stock, they are actually in the weeds working with you to help the business grow and...

Absolutely -- it would be irresponsible of me if I didn't take advantage of that partnership. They're on the Board, why not take advantage of that partnership. And I mean they've invested in several distribution companies, they get best practices just like we do and having them to be able to pick up the phone and call is a true advantage.

Excellent. With that, I think we're going to kind of close out the call here. So Rob, Mike, if you guys have any closing thoughts, we'll turn it over to you.

No, I just -- Mike, go ahead, Mike.

No, you go first.

No, I was just going to say, I just appreciate the time. I appreciate the time. I appreciate the questions. It kind of brings things full historical for us. Obviously, this is a very, very exciting time for us as we look to spin out, be our own stand-alone company in the back half of this year. It's what we've been waiting for. And the upside is there. It is, especially now that we'll be able to deploy greater strategic focus on building capabilities that really benefit ADI, leveraging our partnerships and really continuing our growth trajectory. So thank you for the time.

Neil, from my standpoint, I said this last week, Resideo is really fortunate that we have 2 great companies led by Tom and Rob that we get to be involved with. We use the word spin-off here for what we're doing. I don't -- that word seems to have a bit of a negative connotation. We're not -- one is not being spun away from the other one because it doesn't fit. It's really a separation of equals here. We've got 2 great companies. They deserve to stand on their own. We're going through that process. As you said, it's probably 8 or 9 months away than 6, 6 months doesn't get us to the second half of next year. So I don't want to rush it. But second half of next year, we'll get these companies separated. They'll each have their own board. Their own capital allocation strategies to be able to operate.

In the meantime, we'll continue to get the great performance out of both of them. We're sitting here a couple of weeks after our guidance. The market is basically operating the way we thought it would, so I haven't had any surprises. We're listening to what others in the market are saying, we've seen some folks come out recently and just talk about some weakness out there. We haven't seen that yet, but obviously, we're looking at the macro to make sure we're paying attention to what's happening out there, but we feel good about the business. We feel great about Tom and Rob's leadership of each one of our business segments. We look forward to continuing to drive them to get them on their own 2 feet and see what happens after that.

Excellent. Great. Rob and Mike, thank you again for spending some time with us today and digging into ADI and Resideo as a whole. With that, I hope everyone have has a great rest of the day.

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And with that, I hand it over to Neil to begin.

Good morning, everyone. My name is Neil Matalia. I work on the adventure of -- in desk here at Jefferies. I want to thank you all for joining part 1 of our webinars with Resideo. We're incredibly excited today to have members of REZI's management team with us today. We're joined by Tom Surran, who's the President of P&S and recently named CEO of the P&S business; Mike Carlet, who is the Chief Financial Officer of Resideo; and Chris Lee who is Head of Investor Relations.

Just a quick overview of the agenda for today. We're going to spend a few minutes first talking with Tom about the background on P&S, and we're going to talk to Mike about the financials of the company, ask a few questions on that. And then we're going to spend the majority of the time really digging into the P&S operations with Tom. And we'll try to hold some time at the end for questions. And if you have any questions, please send them to Dan Stratemeier on Bloomberg, and he will filter through them. So with that, Tom, Mike, we really appreciate the opportunity to speak with you guys today and dig into this.

Glad to be here.

Maybe just -- yes, awesome. If you want to maybe just open this up by giving some quick background on yourselves.

I'll go first briefly, and then why don't you dive in and give your background, you can talk about the company a little bit and the background of P&S and I'll get out of your way. Thanks, Neil. Thrilled to be here. Mike Carlet, CFO. I've been at Resideo for about 15 months now. I joined in late 2024 when Resideo actually purchased Snap One, my previous employer for the decade before that. And really, Snap One has been integrated to the ADI side of the business, and we'll talk a lot about that on next week's webinar.

Before I joined Snap a decade ago, I spent about 15 years, the bulk of my career in the automotive industry with Driven Brands and Sears and some other companies like that.

So Tom, do you want to go from there?

Sure. So Tom Saran, I joined Resideo 2 years ago, just about. I came to the business from Lear, where I was Chief Operating Officer. And when I got to the business, I was thrilled with the opportunity because just kind of personal background, I spent a lot of years doing construction work and just being around it's actually building science is something that's a personal interest. And so the P&S business of Resideo is the portion that's focused on being the leader in residential control and sensing of the home.

And the goal is using that control and sensing to optimize comfort protection and savings inside the business -- building of the home. And we do that by control and sensing in the air systems, the water, security, safety, and then we also have an OEM business. And we sell those products through First Alert brand, Honeywell Home brand, BRK, Brockman and Resideo. So those are the brands, and those are the general product categories. And we can go further into those if you want to talk about what specifically product categories we do to do that control and sensing.

But just to give people a sense of the scale, our products are installed in 150 million homes. We have 13 million connected customers. We were the inventor through our legacy of being the spin-off of Honeywell of the thermostat and several other systems. We have 100,000 pro installers, dealers, OEMs that distribute our product. And we do about 15 million installs per year. So that's the biggest overview of what Resideo P&S is.

Now in those areas, we could talk about the air. That's your thermostats, ventilation, humidification, dehumidification, filtration. So that's focused on all those air systems. Those are the product categories. In water, we do both potable, which is the stuff that comes out of the tap that you'll be consuming using cooking or even showering or what have you as well as the hydronics. Those are the water systems related to conditioning the air of the home.

We have our security products that historically, we've been just a pure intrusion play. That's the classic alarm system for the residents. We're expanding off of that, making ourselves more of a modern all-in-one integrated solution, incorporation of video access control and other systems. And then safety, what that means is things for us at this point is primarily around fire threat and it's smoke detectors. We also have fire extinguishers and some other carbon monoxide gas detectors and products like that.

I mentioned the OEM. So one of the businesses we have is selling products that control combustion to OEMs. So whether that's furnaces, boilers, water heaters, we provide components to those manufacturers that allow them to control some form of combustion or just even the interface and control systems for their products. So that's the last piece of it. So hopefully, that's a good overview of what we do.

Yes, that was excellent. I think it'd also be helpful if you wouldn't mind spending a couple of minutes, just maybe a bit of a history lesson here. post spin, what the business looked like? And obviously, today, it looks a bit different. You've taken over 2 years ago and the business is in a much better place. It'd be helpful just to walk through that history of how you got from where you were to where you are today.

Yes. I probably don't want to -- I'll tell you, the spin-off is just to make sure, again, everyone understands, Honeywell had a business that was focused and it was the legacy Honeywell business that was focused on exactly what I described, those control and sensing in the home. And they had off also the business in aerospace and other areas as well as buildings, commercial buildings. And they spun off the residential as Resideo. Now that period, what happened from the date of that spin-off until when I joined, I don't want to comment too much about why it was doing or what it was doing.

I can tell you when I came in the door, I wanted to make sure we were focused on the right thing. So we established a strategy and said, look, this is the strategy, and it really was about focus. not only on the product side, but also on the execution. And what we're trying to do is create differentiated solutions. That's the big piece. And that means we're not just doing buy to sell, try to live off the brand. We want to create stuff that's special for the home that really optimizes that comfort protection and savings. And we can talk about all the products and what we were doing and where we're going with that. We want to leverage our scale. So there was a lot of products that were all over the place. We weren't using platforms correctly.

So if you look at, say, the new thermostat line, we've introduced our low-end line, which was the Focus Pro. We've introduced now the Elite Pro at the high end. We'll be introducing another product. I don't want to disclose it yet in the mid-tier. That's one platform. And that leverages that scale we have to provide superior value to the end user. And we're doing that all the way across all of our product lines because when you think about the scale we have in all of these things, it's quite significant. We're in order of magnitude approximately larger than our nearest competitor, say, in thermostats. That scale advantage is significant. And we want to be focused on the Pro.

Now the company had been focused on the Pro, but maybe that we're taking it as much to heart as they should have. And that's really what we do today. So when we think about how to create differentiated solutions, always in our mind is how do we make this better for the Pro and how do we allow them to deliver better value to their customer, the end user. And we're focused on expanding geographically. We have an extreme strength in the U.S. and some of the markets.

We have pretty good strength in certain markets in Europe, like particularly strong, say, in water, potable water in Germany or in some of the Western European countries. We have thermostats across the world. But again, there are certain products where we don't participate outside the U.S., which we have strength in the U.S., and we're going to expand geographically with those.

And then there's some very interesting product categories as we want to do -- deliver the overall homes controlled sensing that we need to participate. So there's some adjacencies. I don't want to predisclose that, where we'll be entering those markets.

Let me follow up on Tom real quick. I think Tom is right not to talk about the ancient history too much. But I think to just add a little bit of color, I think the big takeaway that I've gotten and Tom and I are both relatively new to Resideo. When Honeywell spun the company off, the most important thing to know is P&S was not a company. It was not an organization within Honeywell. There was a bunch of product lines that existed in different spots.

And so I think the big difference is Honeywell took those businesses, as Tom said, wanted to get out of the residential product space, package them together and spun it off as Resideo. And when they did that, the first thing the company had to do was get its feet underneath it to bring those businesses together, make sure they were operating effectively and efficiently. And it took the company a while to do that to get a common ERP, common supply chains, fix the manufacturing base to optimize and make it efficient.

A couple of false starts around that. COVID got in the way of all that. I think starting when Jay got here under his leadership back in 2020, the company started being more effective on bringing those components together and operationalizing the business. And then since Tom has been here in the last 2 years, not only continue that excellence around execution and operational excellence, but also as Tom is talking about really leaning in now more on the product development side of the business as well.

So I think that's really what's changed is getting us ready to grow and under Tom's leadership, really starting to pull the levers that are going to allow us to be more impactful from an innovation and product development standpoint going forward.

That's very helpful. Thank you for that introduction and context. I do want to focus over to you, Mike, for a second here. There are a number of investors on the call who are pretty new to the story. And I think just about everyone we've spoken to, especially over the last week and probably over the last couple of months, I think that this is just a really interesting opportunity. The valuation screen is extremely attractive, especially on sum of the parts basis.

Now as Dan and our team likes to say, well, REZI has been in the public market for 6 years, you really only just came public a couple of months ago with the buyout of the Honeywell Indemnity and the announcement and separation of the 2 businesses. So I think it'd be helpful, Mike, to just maybe start off by giving a high-level view from your vantage point, what is it that makes P&S and ADI good companies from a financial attribute standpoint, margin growth rates, cash generation.

Yes. Great kickoff point, Neil, I think that both of these businesses are really good fundamental businesses. They're different, right? P&S and ADI are different businesses. One is a product development, engineering manufacturing company, one is primarily a distribution business. P&S is more focused on residential. ADI historically more focused on commercial. So clearly different aspects to them. But underneath it, while they're different, they are both 2 very good businesses. It's sometimes hard.

One of the reasons we're separating them is because of those different characteristics and making sure that we can talk about each one with clarity as we go forward. But they both are strong cash flow generation businesses. They both have a long history of being operationally essential to our customers. Tom talked about servicing the professional on the P&S side, and ADI does that the same on the distribution side.

Just for clarity, single-digit percentages of P&S' product are sold through ADI. And likewise, at the ADI side, a single-digit percentage of the products they sell are the P&S products. So there's a strong relationship between the 2 businesses from that commercial standpoint, but they really operate independently.

The most common thing they both have is this focus on the professional, making sure that the installers, whether we're selling through distribution channels, whether we're supporting them directly, make sure those professionals have the products, services they need to allow them to be successful, meaning they have products that we stand behind, meaning that those products are easy to install and support, meaning that we allow the installer to make the appropriate margin on those products, making sure those products and services delight the end user so that the end user is happy with the professional when they install those products.

That all goes into how we think about the commonality and how we drive the business. That's really the protective moat of what we have. Professionals look to us on both sides of the business to be the provider of choice that will support them. As we're doing that, both businesses have shown the ability to grow despite the fact that as we've gone through the headwinds of P&S, we have been generating incremental growth.

At P&S, we've had 10 successive quarters of year-over-year margin expansion as we continue to drive that business forward. On ADI, the long-term history over 13 years, the business has grown at a CAGR of like 6% per year, which has been very, very powerful and strong. And again, very...

And on that point, how cyclical has that been for ADI?

Not...

[indiscernible] pretty steady.

Pretty steady, pretty steady. I think both businesses -- and now with ADI buying Snap, which is a little bit more on the residential side, I think P&S is a little bit more subject to the cycle, subject to the residential remodel and repair cycle. ADI has been a little bit more insulated from that. ADI's primary customer is focused on the low-voltage commercial security access control. And there's a lot of different factors that go into that besides commercial construction as technologies evolve, as securities move much over to surveillance, there's lots and lots of other opportunities for those products to be installed and support the professionals that are doing that. So pretty steady, not very cyclical on the ADI side, a little bit more cyclical on the P&S side, subject to, again, those housing metrics.

Makes sense. Can you tell us about the balance sheet today? What you expect that to move to going forward? And what your plans are for deploying the cash that you guys generate?

Yes. So as I said, we're a strong cash flow generation company. Cash flow from operations this year, we've guided to be $435 million. I think at the midpoint, could be off by that. We just changed it. Totally the number yet, but we're right about there. So very strong cash flow generation characteristics. You talked about the settlement of the Honeywell IRA earlier. That has been an impediment to our strategic imperatives really since we got spun off. And that IRA is complicated. We can dive into it if we want to. But we've looked for years for the ability to settle that.

As we've settled that now, Honeywell was -- as they're going through their changes, they were -- worked with us to reach an agreement to settle that. And we took what was a $140 million a year liability that would have lasted the next 17 years, and we're able to convert it into more normal debt on the balance sheet, more normal leverage. From my standpoint, it actually is a benefit. We're spending $140 million a year. The interest on our -- on the debt that we used to fund that $1.6 billion of debt, really $1.2 billion of incremental debt using cash from the balance sheet for the remainder to settle that has an incremental interest of $60 million to $70 million.

But really, what that's allowed to do is clear the confusion. People don't like, I don't like, nobody like an environmental liability indemnification to another company that had nothing to do with our environmental liabilities. It was really indemnifying Honeywell for theirs. I think it just caused a ton of confusion. So making that go away has been great. I think it's caused our leverage now on the balance sheet to be a little bit higher than sort of the optimal number. We're in the 3.5x leverage type of number, which we're very comfortable with, by the way. From a comfort standpoint, it's great.

Our target is to get the company down to 2x leverage. And over the next 1.5 years or so, we'll generate sufficient cash outside the separation activity that we'll talk about. If we weren't separating, obviously, we'd be generating cash flow to allow us to get down to that horizon over the next 18 to 24 months. And once we got there, that's the primary focus. We'd be thinking about other uses for cash, whether that's returning it to shareholders, whether it's investing it in organic growth in the business, really strong M&A opportunities. Both P&S and ADI have shown that they can go do material large M&A transactions.

As Tom said, we bought First Alert about 3.5, 4 years ago. ADI bought Snap in the middle of '24, both really successful M&A transactions, both with really, really high returns on them, really significant synergies, really great strategic fits. So if those things come up, we would certainly think about doing them. Other than that, we'll be disciplined with our cash flow. We'll have our capital structure in the right spot.

We'll have the appropriate leverage in the short term, getting leverage down to that 2x would be our sort of overall goal. Again, we'll separate the businesses as we've announced before that happens, and we'll make sure each business on a stand-alone basis has the right capital structure to support their strategic initiatives going forward.

Perfect. So with that, I do want to shift over to the guidance. Just first before we get into it, generally speaking, how do you, Mike, go about setting guidance? What's your philosophy?

Yes. I think our philosophy is we want to make sure we have a guidance range that we generally -- based upon the facts and circumstances when we know it, that we have a high level of confidence that we could deliver results within that range. We want to look at our internal forecast. There's always risks and opportunities without each forecast. And you want to make sure that what we're telling the world is something we believe we strongly that we can be within that range.

And then you adjust it as you go forward. Ideally, right, you'd like to be able to execute on more opportunities than risks when you set that guide and that forecast. And so you'd like to be above the midpoint if you can. But I think having a lot of comfort that you could be within the range is always how we set the forecast and the guidance.

Makes sense. So I think that leads me to a question that I'm sure absolutely no one has asked you this week. Can you help us think through the fourth quarter guidance? We can save the details of what's actually happening in the HVAC market for Tom to discuss shortly, but how did you go about thinking through setting the fourth quarter guidance range? What can you say to help give people some more ease about the range through the course of this quarter?

Yes, Neil. I think let's start with saying when we set the guidance in the third quarter -- for third quarter guidance that we announced in August, we delivered our third quarter numbers. So I think we had good clarity of what was happening over the next 3 months when we thought about early August when we gave the guide for Q3. And we delivered numbers within that range, comfortably within that range. Around the midpoint on some -- towards -- between the low end and midpoint of others. We'd like to be higher than that, but that's where we were. And so I think it's important to start with as we set the third quarter with the things that were right in front of us, we saw.

What happened as we went through the quarter, we went through Q3 and a couple of factors out there in the market that we didn't have visibility into early on evolve. And so as we look to the fourth quarter, we evaluated the impacts of those items. We look across the entire business, what else is changing? What else do we see happening in the business? Where is the pluses, where is the minuses? Again, where is the risk, where is the opportunities? And we said, you know what, fourth quarter is going to be weaker than we thought in August as we gave guidance last week.

There are really 2 big factors that we've talked about driving that. One is the HVAC market. And again, Tom will put a lot more color on so I can provide color as well. But obviously, that market has had a lot of dynamics in it. We didn't think we were going to be nearly as impacted as we have been. We didn't have nearly the same dynamics that some of the other OEMs had with inventory build in the channel. And so as we were sitting here back in August, we had a very good view of how we thought that market was going to evolve. It's changed. And so we reflect the guidance that gave our best guess of how we thought we'd be impacted.

I think on the HVAC side, important to realize that it's about 20% to 25% of the P&S business. So the other 75% of the business, all the other product lines that Tom was talking about still continued to perform and they're not being impacted the way HVAC is. So this is really isolated within the HVAC category. It doesn't appear to be anything that's tied to a macro housing change, a macro remodel activity change. Again, the other categories have performed in Q3, have continued to perform in Q4, and we expect that to continue within our guide.

As we thought about the HVAC impacts, we looked at what we saw in Q3, we talk to our customers, our distribution, the channel, talk to the professionals. Tom, I'm sure, will mention our big conference we had where we had over 400 of our professionals at a few weeks ago, talking to them about what they're seeing. And we baked in what we thought was the prudent amount of downside impact from the HVAC market that's there. And within our range, there's a plus and minus. There's a risk and opportunity that we see within that, and we baked all that into the potential outcomes as we gave that.

Likewise, on the ADI side, the big unknown that we had was our ERP implementation. We knew we were implementing an ERP system. We knew it would have headwinds around it. We accounted for those headwinds as we set our Q3 guidance. what we didn't expect and what we didn't foresee was that it was going to take a bit longer to get through that ERP implementation than what our plans were. As we sit here today, basically, that we're through that entire implementation. The system is up and running. Any of the initial hiccups, any of the initial training and learning curve that we expected, again, that took a bit longer than we thought are behind us.

We're working day in and day out to make sure that the customers that during that transition, some stayed with us, some somewhat stayed with us, but they say, "Hey, I need product today and you're having some hiccups, I'm going to go buy somewhere else," making sure they're all coming back. And the vast majority of those customers we've seen come back. All of our national accounts are buying at levels that were the same levels they were buying at pre-ERP implementation.

Our backlog is at the same point, if not bigger than it was before the ERP implementation. Our order rates are just about back at pre-ERP implementation levels. There are still a few customers out there, I'm not going to lie that say they're still in the show-me stage, and we still have some work to do to win a few folks back. But the vast majority of that is behind us.

So again, as we sat here a few weeks ago and looked at what was happening from ERP, what we saw customer behavior to be, we said we're going to set our guide accounting for what we see and what we expect to happen at a prudent level.

So you're currently sitting here halfway through the quarter. Our quarter-to-date trends as you expected within the guidance range, especially on the HVAC side? And maybe relatedly, how bad would things have to get, Mike, for you guys to not be within the range of guidance for this remaining part of the quarter here?

Yes, all of our trends, plus or minus, nothing is -- if we had perfect visibility, these jobs will be really easy. So there's always pluses and minuses there. But overall, the trends that we're seeing through the quarter -- and really, there's only about 5 real business weeks up in the quarter, right? You got Thanksgiving week, which is always slow. As we go into the end of the year, Christmas week is really, really slow. There's 5, 6 weeks left that we're sitting here.

All the trends have been in line with our expectations. A couple are outperforming a little bit, a couple of underperforming a little bit, what you would expect the normal ups and downs within a multisegment business with a lot of different product lines, but everything is where we would generally expect it to be at this point in time.

Okay. So assuming that your business continues operating as expected or as it has been, the HVAC market would really have to fall off a cliff very rapidly and meaningfully for fourth quarter to not really hit your range. Is that the right way to interpret?

Yes. Our average quarterly revenue, and we should see this in our financial workbook that's available on our Investor Relations website. Our average quarterly revenue in our Air Products business is about $200 million a quarter, plus or minus. There's a little bit of seasonality around it. All of HVAC is not in Air Products, and Tom will talk about that as well. Some of it touches on a few of the other categories as we do revenue disaggregation. So the revenue disaggregation out there, I don't want to confuse.

Air Products is not strictly HVAC and HVAC is not solely in Air Products. There's a little bit of noise around it. But it's a good sort of proxy. It's a good sort of directional view of it. We were down 13% year-over-year in Q3. And on $200 million of quarterly revenue being here now 6, 7 weeks into the quarter, you'd have to see a really dramatic drop to materially change where our results are going to be for this quarter.

Excellent. Mike, thank you for that insight. I think the last thing I want to focus on with you is the real story here that I want investors to focus on is 2026 onwards. The presentation you put out earlier this week, you laid out, and I think you put this on the earnings call, too, you laid out some onetime nonrecurring items that you expect to effectively be add backs to 2025 to give you a base level of EBITDA. Can you just walk through that and help us understand what exactly this base level of EBITDA is today?

Yes, absolutely. I'll tell you something funny, Neil, and I've said this a few times. Obviously, our stock has been really volatile this year, going back to tariff noise early in the year and uncertainty going into liberation day about what was going to happen prior to our announcement of the IRA settlement, the separation of the company, post that, post our earnings last week. Generally, other than settling the IRA and the impacts of how that impacts our numbers, our view of 2026 hasn't materially changed over that entire time frame. So a lot of volatility in the stock price this year, but our view of next year and really the 5-year plans for the business have not materially changed over this entire time frame.

We still believe these are very, very good businesses that have good mid-single digit, depending on ADRP that's where it's going to be growth opportunities, continued margin enhancement opportunities, both in the gross margin, the EBITDA margin levels, both good strong cash flows that are out there. So despite all the noise, we still feel great about the future potential of this business on both sides.

As it relates to specifically for next year, we look at this year's guidance and we say, what's the baseline that we're thinking about internally as we set our budget, as we set our financial planning for next year. We're going through a detailed work right now. So I'm really not commenting in this conversation about what's our organic growth rate going to be next year, what investments do we want to make? What's our R&D levels? How do we think about all those trade-offs? How do we think about synergy realization from the Snap transaction, ADI? That's all sort of separate. Those are all the things that teams are working hard to plan for next year and that we could underwrite as we go forward.

But at the baseline as the teams are thinking about -- the baseline that we're growing off of we settled the IRA. And in this year's results, we got $70 million of benefit from that, right? It was $140 million headwind in our adjusted EBITDA because we settled it midyear, $70 million of positivity happened this year. We're going to get incremental $70 million. In the first half of this year, there was $70 million of cost that we deducted from our adjusted EBITDA. That's gone, right? That's easy. Everybody knows that, that's settled, that's done. That's an add back.

We then look at the impacts of this ERP system implementation, and we have a very strong conviction that we had a dip because of the implementation, but we're seeing our run rates go back to normal. And just because we had that dip, it doesn't change the run of the business, and we should grow over that. And so the EBITDA impact of that was about $30 million. It was about $15 million of gross margin impacts from revenue that we didn't see during that time frame from customers buying elsewhere or just foregoing purchases from us as we went through the training and the backlogs and closing stores for a day or 2 to go through that.

And then there's about $15 million of real cost related to the ERP system running through our SG&A, whether that's expedited freight, whether that's overtime at the warehouses to manage the -- through the transition, whether that's consulting fees to work with folks to get on top of this, a bunch of that's in there. So we think there's a $30 million impact from the ERP system implementation that's really onetime in nature. We think about it as a pro forma add back to our historical EBITDA. And I'm telling the teams, you don't get that as a deduction. That's got to add that back to the run rate of the business to start talking about where we grow. So those 2, I think, are pretty easy.

I think the third one that's out there really is this HVAC conversation. And there's lots of debates out there. And again, we'll have a lot more conversation about it, I'm sure. But as we look at the dip that we're seeing right now in the HVAC business, unlike others in the market, we didn't see a big buildup of inventory in the channel of our products. So if you saw a buildup of inventory, then you saw this dip coming down, it was sort of normalized. We didn't see that. And so as we think about our growth next year, we do think that both our sell-in and sell-through are artificially deflated right now.

As we look at the macro, we don't believe the macro drivers of HVAC are really changing. Now there's some questioning on that, and we'll be the first to agree there's some questioning, is the consumer deferring high-ticket purchases? Are there people doing repair instead of replacement? And how does that impact it? But overall, if you think about the housing market, the repair and replacement market, temperature and climate, those are really the 3 big drivers of this. You're always going to have some noise about what the temperature is in any given month or year.

But we think the underlying drivers of the HVAC market haven't really changed. And so despite this noise right here, that really shouldn't change our volumes of HVAC products sold next year. should grow. Now whether we get a recovery or not, that's a different conversation. And so again, if the HVAC pressure this year is costing us around $30 million of EBITDA between Q3 and Q4, and it's going to cost us something in Q1 as well. How much of that also becomes a onetime sort of temporary noise level. We think it's $30 million this year.

As we think about the Q1, Q2 impacts as we work through this as the industry works through it, maybe that's another $20 million next year. But if we have $30 million this year that we think is onetime and it's only $20 million next year, that really implies there's a $10 million upside to HVAC next year that we should be thinking about growing over. I think that's the one that we believe it, but I think there's more to that story to be written as we continue to look at the market, track the market, understand what's happening there. But we do believe there's some upside next year growing over what are going to be really easy comps in Q3 and Q4 next year.

Perfect. Mike, thank you for all that insight. It's been incredibly helpful. Tom, I do want to bring this back over to you. First, I want to say congratulations on being named CEO of P&S post spin. I think it's been pretty evident how much of a turnaround P&S has seen since you've taken over. And from our perspective and the due diligence we've done, you are undoubtedly the right person to run this business. So congratulations.

Thank you for that. I'm actually thrilled to be able to run the company going forward.

Yes. One of the questions we get from new investors who are just starting to look at the company is whether P&S products are more commoditized. Can you help us understand exactly what is special and differentiated about the portfolio? What is the moat here? And how sustainable is that going forward?

Okay. A couple. So remember, I said 2 of the things that I said are kind of key to our strategies and execution. One is the differentiated products; and two, is the scale. And so when you look at our products, and I understand if you're at fairly removed from the products, just a very -- does this product do some function, could something else be introduced that does this functionality? Sure. So thermostat just turns a furnace on or off. If that's all it did, then that could be commoditized. But there's a reason why we're an order of magnitude larger than everyone. So when you look at our product, the accuracy of that temperature control is unmatched.

If you look at how we think about a product, we don't think, oh, we just want to turn on and off a furnace. We want to think about, again, how that installer looks at the system. So when he goes in, how is it going to be more efficient for him? How is he going to be able to generate leads? How is he going to be able to understand that equipment? So when you buy a Honeywell Home thermostat, which is our product, and they go out there, for instance, in the Elite Pro. Normally, a technician goes out to the site and he has to configure everything on that device for the current installation. And most systems don't even do that complex installations, the competitors, but ours can do fairly complex. So they have to do a bunch of programming, not anymore.

So with our product, they can take their phone, have it preprogrammed all the configurations, walk up to the device and then basically just tap it with the Bluetooth and it's configured like that. That's a labor savings and accuracy, no callbacks. Our products also we look at doing diagnostics, how well is the system running. We support a breadth of configurations that's unmatched. So if you want to have multiple zonings and you want a remote ERM and you want to have a different humidification, dehumidification that operate in different manners and then you've got some other secondary filtration, we can handle anything an HVAC Pro throws at us. And I think that's completely unmatched. Then you've got just the device itself.

If you look at our device, 5-inch screen, that's a beautiful high-resolution screen. The competition in the same price category, if that's a premium product, they're about half the size. And if you look at what that screen does when you interact with it, how -- what kind of different mode you can send it to, how it can display information, it's just, I think, a different level than what you'll see from the competition. So someone distills it down. I could go through all our products. If you want to talk more, you're getting me excited. I can go through what we're going to be doing in safety and b. But if someone just says, does it turn on and off a furnace, yes, there are people who can do that.

But if you really want to think about having a comfortable home that provides us savings, I think our product is unmatched. And then thinking about the Pro. Our product also allows them to have lead generation. It also has their interface. It can provide their information so that when the homeowner has a thing, they get the information right there rather than digging through the kitchen miscellaneous drawer trying to find that business card that's maybe 3, 4 years old and it's probably covered with catch-up stains or whatever. [indiscernible] the device and know who to call and how to -- what to take care of. So we've got the leads. We've got the labor savings. We've got better functionality. We've got accuracy. I don't think that there's any way to really consider our product commoditized.

And on the moat or one of your advantages, I think it's important for investors to understand exactly how your relationship with contractors is, right? Like it sounds like from our due diligence, contractors absolutely love Honeywell Home products, [indiscernible] products, a lot of the things that you guys have. I don't know that they can say the same about all the other competitors that you have out there. Can you just speak to the relationship that you guys have with the contractors and how you develop that because I think that's an important part of this.

I think the contractors and even more so recently are very appreciative of how we think about their role as we're designing products. I think that, that is unique. And when you have that focus, we said that earlier, it shows up in everything we do, how the product is configured, how it basically allows for capabilities. And we spend a lot of time. I think there was a reference to Connect, just which was kind of our gathering of all of our Pros and hearing them and understanding what issues they're facing, what problems. And we're going to continually improve our product. If we get feedback that, hey, this is a little bit problem.

We're not a one and done. We're going to make sure we address all of their concerns that they have the product they want to represent themselves in the field to integrate a much more complex. These are big ticket systems that we're controlling, right? So when you start thinking about these systems that could be $10,000, $20,000, $30,000. There, that Pro is basically installing a system and that end user is seeing a $30,000 and all that control is coming through our device. So we have to make sure that experience is superb and that we're optimizing that system for that end user. And the pros appreciate that, that's what we're doing.

And I think relatedly, can you just talk about your market share in your main product categories and your leadership position in those businesses?

Do we have a legal on the call because they'll get after me. We have...

Whatever you're allowed to say, how about that?

We have a very strong position in the markets we serve, especially in the U.S. So if you look at what we have, say, in the air market and say, let's just take thermostats, Again, it's an order of magnitude larger than the nearest competitor. So it's significant. And then if you -- there's some data that I will say is a little bit different also that the market used to slice it us up into smart and non-smart, right?

And I think that's kind of -- even when I first got here, I said that's problematic because what we've done is we've said smart is just a function. And we should be able to provide functionality throughout our product line ranges. And what we introduced when we introduced Focus Pro, we introduced one of the lowest, if not the lowest, depending on who's discounting, but a product at that entry price point product family called the S200 that is a matter-enabled smart device. So you have something that is at the entry price point that is now smart.

So some of the market data of where we have share, you have to look at the overall market because we're blurring the whole smart versus non-smart across all of our product range and our functionality. And we're making sure, hey, listen, we're going to configure a system, you want smart with limited capabilities or a simpler display or simpler processing, you don't want diagnostics, you don't want this. We can do that. You can choose a product from us that meet that need.

Perfect. So before we move forward, I do want to touch on the HVAC-related comments that Mike was talking about earlier. Tom, I'd love to get your perspective on what you're seeing in the market right now. He mentioned you were just at a conference. What are you hearing? And what gives you confidence that in the first quarter of '26 or early first half of next year that a lot of these issues should abate, at least from the destocking side?

Yes. So we've been speaking so everyone understood what was going on in the HVAC and maybe everyone does. But let me just kind of give a very brief recap. There was a refrigerant transition that occurred where you could no longer produce certain refrigerants, typically R410 subsequent to January 2005. As a result, the last refrigerant transition occurred 15 years ago, and it was from R22 to R410. That's free on to 410. And when that happened, it was a disaster. And everyone remembered that, that it's very different pressure levels, different types of lubrication, the systems when the people were trying to do the installations, they were problematic.

It was just crushing on the industry when that happened 15 years ago. So they said, well, we're going to be smarter. We're going to build up a whole bunch of the stock of the R410, and we're going to bring this R32 and R454 product in. And we're going to have all the stock. So when this is problematic and the producers can't produce R454 or the R-32, we're going to have the inventory of the R410 ready. The reality is the transition from R410 to 454 or R-32 went very seamlessly.

And there is a reason that really R410 is really R-32 with some R122 added to it. It's just not that different, the same kind of lubrication, the ESR oils. It's the same pressure levels, plus or minus. So it just wasn't that dramatic. And as a result, it went pretty smooth. So now they had a bunch of inventory related to the older technology, R410. Most people thought it would sell through fairly quickly. It just didn't sell through as quickly. And what's happened is that's impacted the balance sheet of the distributors who are making sure that they are correcting their balance sheet by controlling their inventory on anything they can control. And that's where we sell all our products through distribution.

We do sell directly to some OEMs in some cases. But primarily, we sell through distribution. And so we've made sure that we are highly reliable in our delivery to our distributors. They ask for a product. We make sure they get it in short order and consistently. And those inventories, so when they're looking to control inventory levels, they're going to look to who can they cut back a little bit with the confidence, and we're going to be impacted by that.

Now what happens in the end market? Is there an end market softness? We've always said there's the inventory thing. We said that -- we believe that's primary, but that just means greater than 50%. We don't believe it's 100%. There is some softness in the user end market. I've heard lots of pieces to it, but we looked at many things. We look at what happened for durable goods sales. We look at auto sales, which are high ticket. We look at all the other markets related to it. I can tell you that we sell into the boiler market, which is another means of heating a home, particularly in the Northeast. We're not seeing a decline in that.

So it's just -- here's a different type of delivery of HVAC, why would someone -- why would there be a distinction between a boiler system and a for air furnace system or a heat pump system. The difference is, again, the refrigerant versus a burning of an oil or a hydronic system. So we're seeing a lot of things that says to us, this seems to be very specific to this refrigerant. But there is a softness. They're talking about that they've got labor constraints. They're talking about some general softness, although some of our largest HVAC guys said, well, we're seeing things to be okay. We're not seeing that dip. But I would say the general tone was down. But the magnitude of the decline, I think, seems to be more related to what's actually happening with this transition.

Correct. Okay. Very helpful overview. Tom, I think a very, very big part of the story with T&S is the innovation and new product introduction. You touched on this a little bit through the course of this conversation so far. But can you just help us understand what's changed since you've taken over the last couple of years? What strategies have you implemented here and really give us a sense of what the road map is for NPI going the next couple of years out?

I think it's a focus is really the answer. I think the idea of really promoting and being willing to make the investments. So we've increased our R&D spend in the new product development area and then saying these are the areas that we want to develop, and this is exactly what we want to do. I think that's kind of what's been different. The clarity of this is exactly how we're going to execute.

We're going to -- again, if we're going to do scale, that means one platform. If you're going to do that, what are the functions that you want and being focused on the Pro, pretty much you can start understanding exactly what you need to build. And the cadence that we want to do. We don't want to be out there trailing someone. We want the market chasing us. We want to be so far ahead that everyone understands, well, yes, that's Resideo. They're a different class. We're over here playing this niche. That's what we want. And that means consistent investment all the way through and developing the products that we think are going to be special to the market.

In terms of where we are, we're still in earlier stages before the -- we're not in the fifth inning. We're in the maybe third, fourth inning of what we want to do with products. And the reality is this is going to be a go forward. It's not a one and done. This is -- we are going to be a company that's always going to be focused on making special products. And we haven't even introduced our mid-tier for our thermostat line. We have a new smoke line that I'm really excited about. And we just introduced the SC5, which is our connected product that we worked with Google to replace the Nest Protect. We just introduced that. I know what's coming up.

It's going to -- we've got something coming next year that's spectacular. I can't pre-introduce a whole bunch of stuff. We have redirected what we wanted to do in security, again, from that just pure-play intrusion, so the old kind of door window contact to a modern security and looking at surveillance, looking at the integration of video, looking at advanced analytics, looking at new forms of sensing, looking at access control, presenting that information in different ways to give more configuration to both the end user and the installer, just a new way of thinking about security.

So it's going to take us just for the products we know that we want to bring to market. There are several years right now where we've got a road map of what we want to do.

Great. Perfect. That brings me to one of the last broader topics I want to talk through with you, Tom. Over the last couple of years, specifically since you've joined, we can look back and see that the margins for the segment are up like, I don't know, something like 400 bps over that time period. It's a pretty big step up. Can you help us understand what the drivers of that increase have been? I know there's some manufacturing efficiencies that you're continuing to work through. I know, obviously, NPI is helping with getting pricing and better margins. Can you just touch on each one of those topics and anything else that is pertinent?

Yes. It's similar to the NPI, we're probably in the third inning here, maybe fourth. We still have -- so we have a global footprint, which has really served us well. And we have in those operations, we want to make sure our utilization is very, very high because that's basically how you most efficiently. And when I talked about NPI, I talked about using scale. And so let's just take that to the efficiency of utilization. When you have a single platform and a single shape or a single configuration, the ability to get the discounts on the products because you're just buying more volume, right, of anything you're doing, it's repetitive, hey, we're using this plastic.

We're using this screen. We're using this. And you're not distributing it over 117 different platforms. You've got basically 1 universal with 3 tiers. That's a lot of leverage in terms of pricing power. And then you take that product and you don't have to have all forms of different handling and tooling and testing, you streamline that down to say, listen, this is how this product is going to go through the line is the most efficient. You're able to set that facility up to be highly efficient. And then you can say we're going through and we're making sure there's some of the global footprint is not appropriate. So we're going to make sure that every factory we run is going to be able to run at very high utilization levels.

And then the reality, as you said, the products, when we can deliver superior value, you're right, you get paid and rewarded for providing superior value. The other piece is that there are some products that we will no longer produce. And we've made some choices that we're saying, look, this is not a product category that we think is appropriate. It really doesn't directly relate to the control and sensing or the comfort savings and protection. This is not something we should be doing, and we're going to discontinue those things because typically, they're lower margin, and we're not going to make the investment. So we'll be getting out of those. So really creating products that deliver more value, doing it efficiently and making sure you're focused on those 2 things.

And if I'm hearing this correctly, all those levers are predominantly within your control, meaning you don't really require or need any kind of market recovery to achieve them.

No, I mean a tailwind is nice. I'm not going to complain if all of a sudden picked up. But it's not required for the execution that we're talking about.

Perfect. So I do actually have one more one for you, Tom. As we approach the separation date in the back half of the year at '26, I think it's important for investors to get an understanding of how you view the outlook for the business. So if we look back 3 years from now, how do you expect the business is going to evolve? And what do you think is actually going to stay the same?

I think the things that we've talked about, I think that we will be taking what you maybe you've seen over the last 2 years and magnifying that. So in terms of product areas, we want to deliver even more value in the control and sensing in the air market. So there's areas that we think we can do more. There's building science technologies that allow us to deliver a better product. We want to get more into the analytics of how the systems.

So let's put it this way. A home is a system of systems, right? And I know in building science, you always hear people talk about this, but one system can impact the other system. There are a few companies that have the footprint across the home where they are able to control multiple systems to optimize the overall comfort and savings and protection in the home. Really almost, there's no one. We have this unique opportunity because of our participation across all of those subsystems to be able to truly optimize the home. And what does that mean? Well, this means you've got the systems need to be able to be aware of each of the other systems. They have to understand the counterbalances, it's advanced analytics, it's radio technology, it's processing.

There are a number of things that are working in the background that really drive this view. And I don't like the idea of this whole home thing because it's really more about how these systems optimize that. And it should be a passive optimization. This is not something where someone -- a homeowner should have to be pushing a button, so have a lot of interface. That's more of an entertainment thing. This is about a home knowing how to take care of its residents. That's where we're going.

And can you also just provide us with a sense of the cadence of new products and whether that's going to provide above-trend growth?

So what we'll see is in the first part of the year, there will be a few products introduced. In the next half of the year, we're going to see -- we're working on a new platform that's kind of our foundational platform for what we want to do, some of the things I just described to you about having that ability for the systems to be able to exchange information to have advanced analytics of the optimization. And in order to do that, we'll be bringing that out in middle of '26 to the end of '26, and we'll be bringing more and more products on to that.

I would say the cadence that we are seeing right now, we've kind of had some citation as we do our NPI, right? So we started this, we made the investments. We started to see the output. We're seeing shortened development time frames. We're going to continue to push that. So you should see an acceleration of NPI. I don't want to get crazy about the level of expectations.

So in line, but an improvement over what we've done over the past year. And then towards the second half of the year, maybe another level, another gear being hit for NPI after that.

Neil, let me just add on top. From a financial modeling standpoint, as we work with Tom's team and think about this, most of the NPI we're doing right now into next year is in our existing categories. I view it as protecting and enhancing the categories we're already in. It's getting things to where they should be, as Tom said, leading the market as opposed to in some instances showing the market because we've been focused on other areas. So I think while they can drive above trend growth rates in the short to midterm, I don't think that's a substantial number.

I think then as what Tom is talking about as we lean in more and more in the future and talk about product initiatives that expand our market that are in adjacent categories, not just in the existing categories that go into some new categories, that's where we're really going to see some things that could drive above-trend growth and get us as above that mid-single-digit growth rate. We're really excited about them, but I think that's more of the longer-term play.

In the short to midterm, as you can tell, Tom gets giddy when he talks about the NPI, there's great stuff going on. But to the extent it's already in categories where we have a really strong market presence and a really strong market share. We view it more as enhancing and protecting what we already have and driving that for the next 20 years as we go forward. And while there will be some opportunities for share gain and growth in there, it's really about what's coming in the future NPI is going to be the bigger driver of that.

Got it. The reason we're asking is because your recent growth has seemed to outpace peers. We kind of thought that maybe part of that was you guys getting share back through the NPI and that kind of just speaks to the quality of the brand and how much folks want to work with you, especially as you're putting out new products that are high quality in nature.

It is, that's true. 100%.

Great. So Mike, I do want to ask you, CD&R obviously has a stake in the business. What's the relationship with them like? What do you think that they bring to the table here?

Yes. And by the way, I don't know if you saw, but we just -- like we literally just saw yesterday a 13D filing from them. So they have reached their maximum level of investment with us, which is 19.9% under their agreement with us. That's the most that they can own. And since they made their initial investment back at the Snap transaction, the way CDR got involved with the company, they provided a pipe into the company that was a little bit over 11% on an as-converted basis ownership. And since that time, last June, when they made that initial investment, they've been buying just common equity in the market either through forward agreements or in the open market. So they're at 19.9%.

There are 2 individuals from CD&R that sit on our Board. Nate Sleeper, who's the CEO of CD&R; and John Stroup, who was the ex-CEO of Belden, a networking company. They're both great in the boardroom. Like I call Nate sometimes EF Hutton. Like he doesn't speak a lot, but when he speaks, everybody listens like he is just a great voice in the room, providing great guidance. And John clearly knows our space. So of our Board, they're 2 members, and they serve in Board roles that are really productive.

We've got other relationships with CD&R. They're great sounding boards. They do a lot of transactions, so things are out there. I'll give somebody their call and say, Hey, what do you think about X or Y sometimes just using a sounding board. But other than that, they are just an investor. They're our largest investor. Obviously, we listen to them. There are great voices in the boardroom, and we have a very healthy relationship with them.

Excellent. I think we have time for a couple of quick questions from the audience that we've gotten. So first one is, how should we think about your business as it relates to leverage you have to housing market improvement?

Well, the reality is that would be a nice tailwind to have. I think that our products long term, we believe that there is a secular tailwind for housing because of the underbuild that's occurred because of what's happened in terms of the -- just the level of construction relative to the demand. So there's the formation of new homes, households, 2 million per year.

We're building something like 800,000 single-family residents per year, was down to 600,000. Long term, we expect to see a strength in housing that will benefit us because we participate again across most of the subsystems of the home. So it will be impactful to us.

And Tom, on top of that, let me just say one thing real quick on top of that. We have the capacity in our manufacturing base to handle that. Like we're looking forward to that. So it's not like we would be capacity constrained if that happened. We've set our supply chain, our systems up to allow for that growth.

Great. We actually are coming up close to the time here. So I want to give you each an opportunity to close with any final thoughts.

Mike, I'll let you go first.

Yes. Listen, I think we spent a lot of time talking about P&S today. We're thrilled that Tom is going to run the company going forward. We all internally very much aligned the right guy for the job, the right person for the job to be driving this forward. We've got 2 good businesses. For those of you on the call, we'll be talking with Rob, who's going to be the CEO of ADI next week. I joined this company 15 months ago out of the Snap transaction. And I can tell you, it's been a consistent positive surprise about how good the business is.

I think coming in, I had a little bit of the same perspective as the market about Resideo and what's happened since the spin. And it's a really strong, fundamentally sound company with 2 really strong businesses. Those 2 businesses will be owned by somebody. In ways, I'm disappointed we're separating them because I just really enjoy working with both Tom and Rob and what's there and look at all the positive outcomes and the opportunities that both businesses have.

So we'll talk about ADI. I'm thrilled to be part of this and looking forward to both companies really performing in the future.

From my side, I think the future of P&S is very bright. If you couldn't tell, I'm thrilled to be able to lead this team. The people that I have joined in 2 years ago, the depth of the expertise, their commitment to the business has been spectacular. I couldn't have been thrilled more with the resources and the talent that have been at the organization. I think now with the direction that we've established, we're going to be able to just do some fantastic things in the next couple of years.

Excellent. Well, thank you both for all the insight and perspective you provided. I think this has been incredibly helpful, especially for a lot of investors on the call that are new to the story. And thanks to everyone on the call for joining and listening in.

As a reminder, we are hosting a second webinar to dig into Resideo's ADI Global Distribution business on November 18 at 2:00 p.m. The link for that webcast can be found on REZI's Investor Relations website or you can reach out to your Jefferies contact, and they can send it over to you. And with that, I hope everyone has a great weekend. Talk next week, Mike.

Thank you.

Take care. Thanks, Neil.

Bye. Thank you.

Bye-bye.

Ladies and gentlemen, thank you for joining us, and welcome to the Resideo 2025 Third Quarter Earnings Call. [Operator Instructions]

I will now hand the conference over to Chris Lee, Global Head of Strategic Finance. Chris, please go ahead.

Thanks, and good afternoon, everyone, and thank you for joining us for Resideo's third quarter 2025 earnings call.

On today's call will be Jay Geldmacher, Resideo's Chief Executive Officer; Mike Carlet, our Chief Financial Officer; Rob Aarnes, President of Resideo's ADI Global Distribution business; and Tom Surran, President of Resideo's Products and Solutions business.

We would like to remind you that this afternoon's call contains forward-looking statements. Statements other than historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Resideo's filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. We identify the principal risks and uncertainties that affect our performance in our annual report on Form 10-K and other SEC filings.

In addition, we will discuss non-GAAP financial measures on today's call. These non-GAAP financial measures, which can sometimes be identified by the use of adjusted and the description of the measure should be considered in addition to, not as a substitute for or in isolation from our GAAP results. A reconciliation of GAAP to non-GAAP financial measures is included in the financial data workbook which is accessible on the Investor Relations page of our website at investor.resideo.com. Unless stated otherwise, all numbers and results discussed on today's call other than revenue are on a non-GAAP basis.

With that, I will turn the call over to Jay.

Thank you, Chris, and thanks to everyone for joining us today.

Resideo demonstrated solid execution in our third quarter. Adjusted EBITDA was a record high and approximately the midpoint of our outlook range. Net revenue was within our outlook range despite incremental macro and operational headwinds that we believe are transitory. And record high adjusted EPS exceeded the high end of our outlook range, due primarily to higher net income associated with terminating the Honeywell Indemnification agreement.

Our results continue to demonstrate the company's healthy operating fundamentals. We achieved low single-digit organic revenue growth year-over-year at both our ADI and Products & Solutions business segments. We increased year-over-year margin rate and profit dollars at both the gross margin and operating margin levels, leading to record high gross margin and record high EBITDA.

Demand for our new products, including the first alert combined smoke and CO connected detectors continues to be strong. We are excited about our new products introduced in the third quarter, including our new premium Elite Pro Honeywell Home smart thermostats that we believe will be one of our drivers of future growth.

As been the case for several quarters, ADI's integration of Snap-On continues to progress well ahead of schedule. Tom, Rob and Mike will speak more to our operating activity shortly. On the macro environment, Resideo continues to execute well amidst an unpredictable economic landscape as further rate cuts remain uncertain with concerns of inflation, along with the ongoing volatility of the tariff landscape.

On tariffs, our mitigation actions continue to be effective and are materially unchanged from what we shared with you last quarter. In addition, we have not seen material tariff-related impacts to customer demand at either ADI or P&S this quarter. We also have not seen any meaningful impacts to our business from the recent U.S. government shutdown.

Before I turn the call over to Tom, I'll touch upon the ongoing separation activities we announced this past July. Our various work streams are proceeding with pace and discipline, and we are on track to complete the separation during the second half of 2026 as previously communicated.

Most importantly, our P&S and ADI teams remain focused and are working diligently to advance their respective go-forward strategies.

I'm very pleased to announce that Rob and Tom will lead separate companies and CEOs at the completion of the anticipated spin and they have both started to work on their go-forward organizational design and structure.

Let me now hand the call over to Tom.

Thanks, Jay. On a year-over-year basis, the Products & Solutions team delivered another quarter of organic net revenue growth, lapping a tough comparison and the tenth consecutive quarter of gross margin expansion. P&S's net revenue grew 2% year-over-year, which includes approximate 1% favorable impact from currency. Revenue grew due to both volume and price across the majority of our product families and sales channels, which more than offset the performance of our air products that were impacted by a softer residential HVAC channel.

Let me walk through each of our primary sales channels. Let's start with the retail channel, which experienced strong point-of-sale volumes as demand for our products led by the new First Alert SC5 connected smoke and CO detector continues. As a reminder, the SC5 was developed in partnership with Google Nest and was specifically designed to seamlessly replace Google's discontinued Nest Protect alarms.

The OEM channel was another highlight of the quarter, posting low double-digit percentage revenue growth year-over-year. The OEM channel posted a fourth consecutive quarter of year-over-year revenue growth driven by greater volumes of higher-priced units in both the Americas and EMEA.

The electrical distribution channel also had another quarter of year-over-year revenue growth. Greater volumes of our BRK branded safety products were sold to more residential homebuilders, increasing our dollar content per new home. We also saw volume strength in the MRO, manufactured housing and commercial markets as we look to diversify sales of our UL Eight Edition safety products.

Revenue in the security channel was up year-over-year, primarily due to volume increases with several customers, -- this includes ADT with whom we recently signed a new multiyear commercial agreement. Revenue in the HVAC channel was down by a low double-digit percentage year-over-year, due to the softer residential HVAC market, which impacted sales volume.

Let me add some color here. The residential housing market continues to be soft and previously relatively unchanged throughout this year. Toward the end of the third quarter, we started to see stronger market headwinds relative to last quarter, primarily due to inventory of HVAC equipment subject to the regulatory change for new refrigerants. While our thermostats do not use any type of refrigerant, we still experienced a ripple effect from the market disruption related to the regulatory change.

We believe these conditions in the HVAC market are transitory. The health of the broader industry appears better now than it did several years ago. Various market signals indicate those industry participants currently impacted are looking to normalize inventory over the next quarter or 2.

We believe we are well positioned to capitalize on the anticipated positive change in market conditions as our channel inventory levels in the third quarter are relatively healthy. We also have been experiencing continued demand for our Focused Pro thermostat introduced in the third quarter of last year and have received strong interest in the recently introduced ALLETE Pro product.

Given our customer engagement, we believe demand has been building for our new products introduced this quarter, including the Elite Pro premium smart thermostats, which recently began shipping. These modern and energy-efficient premium thermostats have the largest touchscreens in their class, interoperate with video doorbells and offer precision sensing and control functionality around temperature and indoor air quality.

These thermostats are powered by our Pro IQ services, which can help our professional customers by streamlining labor increasing loyalty and generating leads. We began taking orders for the ElitePRO during the third quarter and commenced shipping recently.

Moving on to profitability. Gross margin was 43%, up 80 basis points year-over-year, driven primarily by continued efficient utilization of our factories. This is the tenth consecutive quarter of year-over-year gross margin expansion and gross margin has increased by approximately 500 basis points over that time span. Efficiency at the gross margin level, combined with operating leverage drove our 5% growth in adjusted EBITDA year-over-year.

Looking ahead, we have conviction in our strategy to continue introducing differentiated new products across our connected home product portfolio. We anticipate profitable growth opportunities that leverage our operational scale while establishing and expanding our leading position in key markets.

With that, let's turn the call over to Rob.

Thanks, Tom. The ADI team delivered another quarter of year-over-year organic net revenue growth and the sixth consecutive quarter of year-over-year gross margin expansion. ADI reported 2% net revenue growth and average daily sales growth of 3%, both year-over-year, both include an approximate 1% favorable impact from currency.

From a product category perspective, ADI saw most product categories growing a low single-digit percentage year-over-year. Tariff-related pricing more than offset volume in the quarter. ADI also achieved solid growth in our strategic focus areas. Both the Datacom and Pro AV businesses each grew revenue by low double-digit percentage points year-over-year.

Growth in residential AV was flat year-over-year amidst continued softness in the market. Exclusive Brands revenue grew 3% year-over-year, driven by positive momentum from our new products such as Lux Lighting and the new X4 smart home user interface from Control4. E-commerce revenue also grew 3% year-over-year, highlighting the optionality that customers have with our omnichannel experience, while also mitigating some of the temporary impact on stores arising from our ERP implementation.

In August, we implemented a modern ERP platform in our U.S. business, replacing an over 40-year-old system. This deployment sets ADI up for future growth and margin expansion versus the market and our peers. Tech stack enhancements and corresponding capability building are expected to deliver even more cross-selling capabilities, optimize pricing management and enhanced digital user experiences.

We're prepared for the known complexity of the transition. This included the planned closure of all U.S. stores for 1 to 2 days and a modest revenue impact. The expected impact was factored into the 2025 outlook provided on last quarter's earnings call. Now despite that preparedness, we experienced additional process headwinds to those initially expected leading to a greater financial impact than planned.

Specifically, while we had a strong sales month in July, the transition headwind amounted to a few points of unachieved revenue growth in the quarter and lower cash collections. We believe the disruptions are temporary. The implementation is now nearly complete, and I can say that we see no material systems risk ahead. Operations on the new system are now running smoothly, and we are driving progressive improvement in our revenue run rate. In October, we saw increased customer engagement and pipeline size resulting in our order rates approaching pre-system implementation levels.

Moving on to profitability. ADI reported 22.6% gross margin in the third quarter, up 130 basis points year-over-year and up 40 basis points sequentially. This is the sixth consecutive quarter of year-over-year gross margin expansion and gross margin has increased by approximately 300 basis points over that time span.

The year-over-year margin expansion was primarily driven by another quarter of high cross-sell volumes of exclusive brands across ADI's entire customer base and mix benefits from higher e-commerce sales. The increased margin dollars were offset by nonrecurring costs associated with the system implementation, contributing to flat adjusted EBITDA growth year-over-year.

The integration of Snap One continues to progress nicely. We remain ahead of our commitment of $75 million of run rate synergies exiting year 3 post acquisition. We have great confidence that we can over-deliver that amount in that time frame, if not sooner.

Looking ahead, we look to build upon our scale and leading position in both the security and residential AV market, underpinned by our customer-first ethos. A proof point of our ethos was a recent award from the B2B E-commerce Association recognizing ADI as the Enterprise B2B Distributor of the Year. This was a result of the company's organic e-commerce growth and implementation of leading technologies that improve the customer experience.

We look to continue meeting investments that drive profitable growth opportunities in our areas of strategic focus. We also look to maintain our world-class execution, capitalize on the revenue and cost benefits of our modern platform and achieve greater fixed cost levers to drive stronger profitability in the future.

Now let's turn the call over to Mike to discuss our third quarter financial results and outlook for the remainder of the year.

Thank you, Rob, and good afternoon, everyone. Let's get straight into the quarterly earnings for the total company including record highs in gross margin, net income, adjusted earnings per share and adjusted EBITDA.

Total net revenue was $1.86 billion, up 2% year-over-year including a 1% favorable impact from currency. Both Tom and Rob spoke earlier about the drivers of organic net revenue growth in their respective businesses.

Gross margin in the quarter was 29.8%, up 110 basis points year-over-year. The increase was primarily driven by the more margin-accretive activities at ADI and the continued structural operating efficiencies at P&S.

Adjusted earnings per share was $0.89, above the high end of our outlook range and up from $0.59 in the prior period. The primary reasons for the increase year-over-year were higher net income and a onetime tax benefit from terminating the Honeywell Indemnification agreement.

Adjusted EBITDA was $229 million in the quarter, up 21% year-over-year and in line with the midpoint of our outlook range. The primary reasons for the increase year-over-year were the benefits associated with terminating the Honeywell Indemnification agreement and PNS EBITDA outperformance year-over-year.

Total reported cash used by operating activities was $1.57 billion, driven solely by the termination payment made to Honeywell in the quarter. After adjusting for the termination payment, adjusted cash provided by operating activities was $19 million. This amount was lower than anticipated due primarily to the timing of payments and from lower cash collections at ADI. We anticipate ADI's cash provided from operations to rebound in the fourth quarter now that the system implementation is substantially complete.

Now before I provide our financial outlook for the fourth quarter of 2025 and the full year, I'd like to make a couple of framing comments. First, ADI's ERP implementation is now nearly complete. But those activities crossed into the fourth quarter and the related impact is included in our revised outlook. As Rob noted, we are achieving progressive improvement across various sales and operating metrics.

Also, ADI continues to execute well against its strategy in a market where the mid-single-digit market growth rate has not meaningfully changed during 2025. Second, P&S is executing its strategy well against a challenging residential macro environment. We believe the benefit of continued new product introductions across a diverse portfolio enables P&S to offset the recent incremental softness in residential HVAC.

Our continued focus on driving margin and working capital efficiencies allows for greater contribution of segment cash flow that is reflected in our increased outlook for total company cash from operations.

Given some of the headwinds we are facing, we are adjusting our 2025 outlook as follows: total company net revenue to be in the range of $7.43 billion to $7.47 billion. Total company adjusted EBITDA to be in the range of $818 million to $832 million. Total company fully diluted adjusted earnings per share to be in the range of $2.57 to $2.67, and on cash from operations, excluding the Honeywell termination payment, we are raising our outlook to $410 million to $450 million.

Our outlook for the fourth quarter of 2025 is as follows: total company net revenue to be in the range of $1.853 billion to $1.893 billion. Total company adjusted EBITDA to be in the range of $211 million to $225 million, and total company fully diluted earnings per share to be in the range of $0.42 to $0.52. Please go to our Investor Relations website to access our earnings presentation, which includes our outlook ranges along with key modeling assumptions for 2025.

Now before we open the call for questions, I'd like to share that we are in the midst of our 2026 financial planning process. Based upon what we know at this time, our 2026 outlook is positive and anticipates year-over-year growth in organic revenue and adjusted EBITDA that are both above current analyst estimates for 2026. We will provide more details on 2026 on the fourth quarter 2025 call as usual.

Operator, let's now open the call up for questions.

[Operator Instructions] Your first question comes from the line of Ian Zaffino with Oppenheimer.

Just kind of want to get my arms around some of the -- I guess, headwinds here. Can you maybe quantify the impact of the HVAC regulatory change. I guess both maybe in the third quarter and then as we look at your guidance. And can you maybe do the same thing on the ERP side, so we kind of understand what the different moving parts are of -- what hit in the third quarter? And then what's driving the delta in the guidance now versus what it was previously?

Ian, yes, thanks for the question. We don't want to get into the specific impacts of each one of those. They're roughly overall similar type of impacts on the business. As we look at the headwinds that we're seeing, we're very, very focused on the fact that we believe they're transitory. They both caught us a little bit by surprise in the quarter, as we said, we had set our guidance based upon what we saw 3 months ago.

And as we went through the quarter as the HVAC market changed at the end of the quarter, as Rob and his team went through the ERP implementation, that took a bit more than we thought, but it's mostly behind us now. We're about 6 weeks through the current quarter, and we feel really good about the guidance that we're putting out there.

Okay. So I guess, to be clear, both of these headwinds are going to end in this quarter or have ended and there would be no bleed into 2026?

Yes. Everything we see right now says the -- definitely, the ERP will be behind us by the end of the year. On the HVAC market, we see it bleeding slightly into next year. We see what other folks are talking about in the market out there. I'll let Tom speak to it specifically, but we do believe it is transitory in nature and won't lead much into 2026.

Tom, anything you'd add to that?

No. The people have estimates that whether it's at the end of this year or the end of Q1, but by midyear, almost everyone expected to be over, we expect it to be over by the end of the first quarter.

Okay. And then maybe on P&S, I'm just trying to understand this. If you back out the HVAC side and on the P&S, can you maybe talk about what the growth would have been? Or maybe just talk about different areas of P&S that grow and it particularly well.

Do you want me do it? Sure. I don't think we want to give what the growth would be had. We not had the headwinds in the HVAC market. But I do want to emphasize that we're really excited about how we're positioned in that market. right? So we introduced that Focus Pro as our low-end product. That product has been very successful in the market in terms of its acceptance. We just introduced a premium product.

We had previously not participated in the premium market. So here's a market we're adding a product. We're going to -- our goal is to create the best product you can buy at all price points entry mid and premium, and we're very excited about the LeAPPro. So long-term, our position in HVAC, we're very, very enthusiastic about.

Now in terms of the other markets, it was pretty much everything was doing great. Retail did great. Our OEM business did great. The safety products did well. everything seemed to do quite well, but we did have those headwinds, which again I think long term, when you look at how we're going to be positioned in HVAC, it's a very positive picture.

Your next question comes from the line of Erik Woodring with Morgan Stanley.

Great. Maybe if we just touch on -- reask the HVAC question. I'm just trying to get a little bit better understanding of why we think these headwinds are transitory. And then I guess if the issue is an inventory glut for products that you don't have exposure to, why does that impact residual? Just trying to maybe just a little bit more color, just maybe that last question is really the key there. If it's not a residual issue-wise, Resideo being impacted? And then a quick follow-up, please.

Okay. So Eric, great question. All right. So what's going on is because of this, you had a lot of inventory that was brought in, in order to protect all the distributors from the transition and the regulatory change. that inventory is still sitting in there. It's impacting the balance sheet of all the distributors and their cash and the ability to fund. It's also creating a little bit of disturbance in chaos kind of in the marketplace because now you have discounts going trying to liquidate this and whether people hold to see if there's further discounts.

There's just a lot of things that are kind of in a very dynamic situation. The amount of the impact people are saying, and you can look at a lot of the HVAC equipment guys, the carriers, the trains, the Linux, what have you. You can look at the distributors [indiscernible], you can look at the AHRI data it's having a material impact. But there's also then the fact of what's actually happening in the residential housing market. There's a little bit of instability there as well.

That's why we look at it long term. Why is this transitory because every home is going to need an HVAC system. Every -- these systems have a certain life -- so you know there's going to be a replacement. We know how well we're positioned and what we've introduced with the product and then what share we're capturing. So long-term, that's why we see this as transitory.

Okay. And Tom, maybe just a very quick follow-up on there. You mentioned discounts in the marketplace. Is it safe to then say, your P&S gross and operating margins were negatively impacted by HVAC as well?

No. That's not what I was saying. So I'm just talking about that because of this disturbance that's occurred in the market, other parties, especially people with the equipment, especially this inventory that's the older generation, the older gases that uses the older refrigerants that product in terms of the discounting. I wouldn't overplay that, right?

So just in looking at it, I'm just saying there's a number of things that happen when you have excess inventory in the channel and how people behave. Now our products, there is no discounting of our products. But the ability of distributors to stock our product at a certain level because they have cash tied up. The ability of what's happening within customers, all of those things have some ripple to this.

Okay. Super clear.

We have very strong -- yes, we do have very strong margins in the HVAC market.

Okay. That is super helpful. And then I don't know who wants to field this one, but I'll leave it up to you guys as one of the most important factors that can drive a re-rating for Resideo. Is this kind of continued margin expansion? And granted on a year-over-year basis. You showed nice gross margin expansion.

But in 3Q, we saw operating margins compressed for both companies sequentially. I guess how to think about operating margins for each business into 4Q? And then like as we look out 1 to 2 years and think about investors that are looking at Resideo today for the long-term opportunity, what type of margin should they be looking for from -- operating margin should they be looking for from each one of these businesses, again, looking out, call it, 1, 2, 3 years? Just would love some framing of that, please.

Sure. Sure, Eric. I'll kick it off, and I'll let Rob and Tom join in if they want to correct anything or want to add on to it.

Clearly, in the quarter, when we fall about margin expansion, there's both gross margin and the operating margin. So really pleased with continued gross margin expansion despite the fact that the headwinds at P&S and the HVAC market, as Tom said, our HVAC margins are very robust.

So as we think about that having a headwind, it flows through the bottom line at a different rate than the overall blended rate is a bit higher. So that does compress it. So that transitory nature does compress the bottom line despite which we still saw margin improvement.

At ADI, as Rob talked about the impacts of the ERP implementation, as we work through that, there was incremental cost, whether that was overtime in the warehouses, whether that was work with consultants to implement the system. There's incremental SG&A in both Q3 and Q4 that, again, is onetime in nature as we work through those 2 things.

I think overall, at a high level, as we go through the separation of these businesses I want to make sure we're careful about talking about what the margins are today as segments without the allocation of overhead and what they might be in the future. But as we sit here today and look at the ADI business, Rob continues to target a double-digit operating margin, as is called. We've got long-term plans that get us there. Again, that's going to change a little bit once the business is standalone and we allocate all the costs out. But as it exists today, we would think that we have the ability to drive the business towards double-digit operating margins over the next 3 to 5 years.

Similarly at P&S as we continue to see the operating efficiency in our factories, which that race is not yet run, we're well into the game, but the rate is not yet over at all. And then the incremental margin that we think we drive would be ongoing product development and the incremental margin we can demand from that. We think there will continue to be operating margin expansion 300 to 500 basis points over the next 3 to 5 years probably makes a lot of sense.

But again, as we work through our modeling for each business on a stand-alone basis, we'll update that and get those numbers out to the market at the appropriate time.

That was super helpful, Mike. And then maybe just last question, just a clarification. I'm going to pick on that last comment you made in your prepared remarks about 2026 number. So just a clarification as ICE consensus at $7.76 billion of revs, $3 of earnings. And your comment is despite the ERP, despite the HVAC kind of leakage into 2026, those estimates are on, let's call it, the lower end of what -- how you're planning for 2026?

That's right, Eric. We're early in our detailed planning. But as we sit here today, we want to be clear that these headwinds are very transitory. Now we can't guarantee what else is going to happen next year. We'll guide 2026 when we usually do in February. But just as we're sitting there today, we want to be clear that we are -- we remain very comfortable with those numbers that are out there, and we would say they're at the low end of what our initial budgeting process for next year looks like.

And your next question comes from the line of Neil Malawi Jefferies.

I want to ask on the ERP impact because I think this is a really important point, especially to understand some of the fourth quarter dynamics relative to what the implied fourth quarter guidance previously was it'd be helpful to understand how much of a quantitative impact this is having on the fourth quarter. In the press release, you mentioned that there was nearly $15 million of higher costs year-over-year on SG&A and R&D related to the ERP. What level of impact are you seeing in the fourth quarter?

I think at a high level, it's roughly half in the third quarter and half in the fourth quarter of those SG&A impacts as they flow through. So if you take that $15 million you sort of split it between the 2, you're in the ballpark.

And we think the impact on the revenue will be greater in Q3 than Q4, but not significantly greater. We do think we're most of the way through it right now. I think Rob, I'll let you comment, but we're really confident with the metrics and KPIs we're seeing right now that we're getting our feedback under risk. The system is running well. We're through most of the growing pains that you go through with something like this. They were higher than we expected. But at the end of the day, they didn't take much longer than we thought they were just more than we expected.

Rob, anything you'd add?

No, no. Actually -- yes, actually, Mike, you nailed it, but I'd be remiss first all, I didn't say that this is a really exciting time for us despite the fact that the results were disappointing. This represents a major step towards modernizing and digitizing our tech stack, which is basically a 2.5, 3-year project finally coming to fruition, which will net a number of benefits, a lot of those, I actually talked about in the prepared remarks.

But we are seeing 2 real good indicators that magnify optimistic about the go-forward recovery. One, as I mentioned earlier in the remarks, we're seeing our average daily sales rate approach pre-go-live levels, the deeper we get into Q4. That's one. Even more positive is what's going on with our project pipeline.

Normally, the biggest month of the year where our pipeline would be at its peak is kind of midyear July time frame. And we ended October with a higher pipeline volume amount than we had even in July. It was a record number for us. And so that is the -- really the most I guess, prudent indicator of the future health of the business, and we expect to convert that pipeline at the same conversion rates we've seen in quarters and years past.

And so those 2 things make me optimistic that the impact of the ERP is truly transitory.

Okay. That's helpful. Maybe just then to clarify and make sure we're 100% clear on this fourth quarter issue. The EBITDA guide down relative to the implied guidance previously is, call it, $40 million or so. Part of that is the higher cost from the ERP impact. Part of it is the HVAC, can you give like a numerical breakdown relative to that $40 million of how much is coming from each, including the revenue impact for the ERP-related issues that you're facing?

I think Yes. At a high level, if you're modeling it, I think as we said, it's roughly high single digits millions of the cost side of ERP side. The rest of it is driven by the revenue, and it's roughly equal across both businesses.

Okay. Got it. Okay. And then on 2026, again, very helpful to hear the guidance. This is very much in line with the way we've been thinking about it. We just felt that the outlook was quite strong for '26 relative to what consensus had been modeling.

Specifically though, I know without giving any numbers, given you're going to wait to the fourth quarter to give that. Could you at least address qualitatively what the different factors that we should be considering from an ADI idiosyncratic perspective. For example, there's a $70 million step-up in EBITDA just from the Honeywell-related indemnity.

Are there other factors that we need to be taking into account where it's just, hey, we can look at the full year guidance for EBITDA of 865 -- or sorry, $825 million and then say, all right, at least $70 million higher is a bare minimum? And then from there, what other factors there are?

I think it's a good way to frame it. I think the -- you take this year, you add that $70 million, you add back these transitory impacts on top of that, which gets you somewhere a little bit above what that consensus number is. And then everything else is the initiatives that we're working on, the things that we're building.

Again, we're going through our plans, we'll guide what we do. But I don't think there's anything significant, what Tom talked about is new product launches that are out there, they'll continue to drive performance. As Rob talked about the benefits of the ERP system, right? Right now, it's all about the short-term pain. But the reason we're doing it is for the longer term, midterm and long-term benefit, those will start coming through, our continued investments in the omnichannel experience at ADI, the Snap synergy that we continue to realize from bringing those together.

So all those things go together. Again, there's lots of work to go in building the specific models. But when we look at all that today, as we said, we're very comfortable that the numbers that are out there are definitely achievable.

Okay. And then lastly for me, on the project pipeline you just mentioned earlier, you said October is was higher than where you ended July, which is not normal. What exactly are you hearing from your customers in there. Part of what we've heard in our research and background check here is that security never goes into recession. And obviously, there's a number -- since that happened recently that we're just wondering if there's like some kind of multiyear secular upcycle that may be happening in the security market that kind of underlies a lot of these. Is there more proactive versus reactive customers now?

I would say not a whole lot has changed in that space this year going forward. We're still expecting the commercial security market to grow at low to mid-single digits. I mean it has during my entire tenure here at ADI. And in terms of ADI, we've always been able to grow kind of mid- to high single digits, and we fully expect that going forward.

And I always look at our pipeline to be able to give me the -- an indicator of what we can expect 3 to 6 months out. And I think some of it is just our execution and other parts of it is we had customers that were patient with us as we navigated the disruption of ERP, and we're bringing now those customers back in and that's actually increased our pipeline as well.

So I would say those are the biggest factors in terms of why I think the pipeline is growing and why we're in that position this late in the year versus we normally see these peak levels in the middle of the year when most of our big installations happen, kind of that June through July -- June, July, August time frame for our large integrators.

There are no further questions at this time. This concludes today's call. Thank you for attending.