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 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.