Resideo Technologies, Inc. (REZI) Earnings Call Transcript & Summary

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 copy of Jefferies third parties. You may not externally record, transcript, publish or otherwise publicly disclose any portion of this call. Please note this call is being recorded. [indiscernible]. 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.