Q3 2025 Resideo Technologies Inc Earnings Call

Speaker #1: Ladies and gentlemen , thank you for joining us . And welcome to the residual 2025 third quarter earnings call . After today's prepared remarks , we will host a question and answer session .

Speaker #1: If you would like to ask a question , please raise your hand using the raise hand function . If you have dialed in to today's call , please press star nine to raise your hand .

Speaker #1: Star six to unmute . I will now hand the conference over to Chris Lee , Global Head of Strategic Finance . Chris , please go ahead .

Speaker #2: Thanks , and good afternoon , everyone , and thank you for joining us for third quarter 2020 Earnings call . On today's call , we'll be Jay Geldmacher Chief Executive Officer , Michael Carlet .

Speaker #2: Our chief Financial Officer , Robert Aarnes president of Residues , EDI Global Distribution Business . And Thomas Surran president of Residues Products and Solutions business .

Speaker #2: We would like to remind you that this afternoon's call contains forward looking statements , statements other than historical facts made during this call may constitute forward looking statements and are not guarantees of future performance or results .

Speaker #2: And involve a number of risks and uncertainties . Actual results may differ materially from those in the forward looking statements as a result of a number of factors , including those described from time to time in residues filings with the Securities and Exchange Commission .

Speaker #2: The company assumes no obligation to update any such forward looking statements . We identify the principal risks and uncertainties that affect our performance in our annual Report on Form 10-K and other SEC filings .

Speaker #2: In addition , we will discuss non-GAAP financial measures on today's call . These non-GAAP financial measures , which can sometimes be identified by the use of adjusted in the description of the measure , should be considered .

Speaker #2: In addition to not as a substitute for or in isolation from our GAAP results . A reconciliation of GAAP to non-GAAP financial measures is included in the financial data Workbook , which is accessible on the Investor Relations page of our website .

Speaker #2: At investor . Unless stated otherwise , all numbers and results discussed on today's call , other than revenue , are on a non-GAAP basis .

Speaker #2: With that , I will turn the call over to Jay . Thank you , Chris , and thanks to everyone for joining us today .

Speaker #2: Demonstrated solid execution in our third quarter adjusted EBITDA was a record high and approximately the midpoint of our outlook range . Net revenue was within our outlook range despite incremental macro and operational headwinds that we believe are transitory and record high adjusted EPs exceeded the high end of our outlook range due primarily to higher net income associated with terminating the Honeywell indemnification agreement .

Speaker #2: Our results continue to demonstrate the company's healthy operating fundamentals . We achieved low single digit organic revenue growth year over year at both our ADR and products and solution business segments .

Speaker #2: We increased year over year margin rate and profit dollars at both the gross margin and operating margin levels , leading to record high gross margin and record high EBITDA demand for our new products , including the First Alert combined smoke and Co connected detectors , continues to be strong .

Speaker #2: We are excited about our new products introduced in the third quarter , including our new premium Elite Pro , Honeywell Home Smart Thermostats that we believe will be one of our drivers of future growth .

Speaker #2: As been the case for several quarters , Adi's integration of Snap continues to progress well ahead of schedule . Tom , Rob , and Mike will speak more to our operating activities shortly on the macro environment , Resideo continues to execute well amidst an unpredictable economic landscape as further rate cuts remain uncertain .

Speaker #2: With concerns of inflation along with the ongoing volatility of the tariff landscape on tariffs are mitigation actions continue to be effective and are materially unchanged from what we shared with you last quarter in addition , we have not seen material tariff related impacts to customer demand at either Adi or GNS this quarter .

Speaker #2: We also have not seen any meaningful impacts to our business from the recent US government shutdown . Before I turn the call over to Tom , I'll touch upon the ongoing separation activities .

Speaker #2: We announced this past July . Our various work streams are proceeding with pace and discipline , and we are on track to complete the separation during the second half of 2026 .

Speaker #2: As previously communicated . Most importantly , our pens and Adi teams remain focused and are working diligently to advance their respective go forward strategies .

Speaker #2: I am very pleased to announce that Rob and Taub will lead separate companies as CEOs at the completion of the anticipated spin, and they have both started to work on their go-forward organizational design and structure.

Speaker #2: Let me now hand the call over to Tom .

Speaker #3: Thanks , Jay . On a year over year basis , the products and Solutions team delivered another quarter of organic net revenue growth , lapping a tough , tough comparison .

Speaker #3: And the 10th consecutive quarter of gross margin expansion. NZ's net revenue grew 2% year over year, which includes approximately 1% favorable impact from currency. Revenue grew due to both volume and price across the majority of our product families and sales channels, which more than offset the performance of our air products that were impacted by a softer residential HVAC channel.

Speaker #3: Let me walk through each of our primary sales channels . Let's start with the retail channel , which experienced strong point of sales .

Speaker #3: Volumes as demand for our products , led by the new First Alert SQ5 , connected Smoke and Co detector , continues . As a reminder , the SQ5 was developed and partnership with Google Nest and was specifically designed to seamlessly replace Google's discontinued Nest Protect alarms .

Speaker #3: The OEM channel was another highlight of the quarter , posting low double digit percentage revenue growth year over year . The OEM channel posted a fourth consecutive quarter of year over year revenue growth , driven by greater volumes of higher priced units in both the Americas and EMEA .

Speaker #3: The electrical distribution channel also had another quarter of year over year revenue growth . Greater volumes of our BRK branded safety products were sold to more residential home builders , increasing our dollar content per new home .

Speaker #3: We also saw volume strength in the MRO manufactured housing and commercial markets . As we look to diversify sales of our UL eighth edition safety products revenue in the security channel was up year over year , primarily due to volume increases , with several customers .

Speaker #3: This includes ADT , with whom we recently signed a new multi-year commercial agreement . Revenue in the HVAC channel was down by a low double digit percentage year over year due to the softer residential HVAC market , which impacted sales volume .

Speaker #3: Let me add some color here . The residential housing market continues to be soft and previously relatively unchanged throughout this year . Toward the end of the third quarter , we started to see stronger market headwinds relative to last quarter , primarily due to inventory of HVAC equipment subject to the regulatory change for new refrigerants .

Speaker #3: While a thermostats do not use any type of refrigerant , we still experienced a ripple effect from the market disruption related to the regulatory change .

Speaker #3: We believe these conditions in the HVAC market are transitory . The health of the broader industry appears better now than it did several years ago .

Speaker #3: Various market signals indicate those industry participants currently impacted are looking to normalize inventory over the next quarter or two . We believe we are well positioned to capitalize on the anticipated positive change in market conditions as our channel inventory levels in the third quarter are relatively healthy .

Speaker #3: We also have been experiencing continued demand for our focused pro thermostat , introduced in the third quarter of last year and have received strong interest in the recently introduced elite Pro product .

Speaker #3: Given our customer engagement , we believe demand has been building for our new products . Introduced this quarter , including the Elite Pro , Premium smart thermostats , which recently began shipping these modern and energy efficient premium thermostats have the largest touch screens in their class , interoperate with video doorbells , and offer precision sensing and control functionality around temperature and indoor air quality .

Speaker #3: These thermostats are powered by our Pro IQ services , which can help our professional customers by streamlining labor , increasing loyalty , and generating leads .

Speaker #3: We began taking orders for the elite Pro during the third quarter and commenced shipping recently . Moving on to profitability , gross margin was 43% , up 80 basis points year over year , driven primarily by continued efficient utilization of our factories .

Speaker #3: This is the 10th consecutive quarter of year over year gross margin expansion and gross margin has increased by approximately 500 basis points . Over that time span .

Speaker #3: Efficiency at the gross margin level , combined with operating leverage , drove our 5% growth in adjusted EBITDA year over year . Looking ahead , we have conviction in our strategy to continue introducing differentiated new products across our connected home product portfolio .

Speaker #3: We anticipate profitable growth opportunities that leverage our operational scale while establishing and expanding our leading position in key markets . With that , let's turn the call over to Rob .

Speaker #2: Thanks , Tom . The A.D. team delivered another quarter of year over year organic net revenue growth , and the sixth consecutive quarter of year over year gross margin expansion .

Speaker #2: A.D. reported 2% net revenue growth and average daily sales growth of 3% both year over year . Both include an approximate 1% favorable impact from currency .

Speaker #2: From a product category perspective , A.D. saw most product categories growing a low single digit percentage year over year . Related pricing more than offset volume in the quarter .

Speaker #2: A.D. also achieved solid growth in our strategic focus areas . Both the Datacom and Proav businesses each grew revenue by low double digit percentage points year over year .

Speaker #2: Growth in residential AV was flat year over year amidst continued softness in the market . Exclusive brands revenue grew 3% year over year , driven by positive momentum from our new products such as Lux Lighting and the new X4 smart home user interface from Control4 e-commerce revenue also grew 3% year over year , highlighting the optionality that customers have with our omnichannel experience .

Speaker #2: While also mitigating some of the temporary impact on stores arising from our ERP implementation . In August , we implemented a modern ERP platform in our US business , replacing an over 40 year old system .

Speaker #2: This deployment sets A.D. up for future growth and margin expansion versus the market and our peers . Tech stack enhancements and corresponding capability building are expected to deliver even more cross-selling capabilities , optimized pricing management , and enhanced digital user experiences .

Speaker #2: We prepared for the known complexity of the transition. This included the planned closure of all U.S. stores for 1 to 2 days at a modest revenue impact.

Speaker #2: The expected impact was factored into the 2025 outlook , provided on last quarter's earnings call . Now , despite that preparedness , we experienced additional process headwinds to those initially expected , leading to a greater financial impact than planned .

Speaker #2: Specifically , while we had a strong sales month in July , the transition headwind amounted to a few points of Unachieved revenue growth in the quarter and lower cash collections .

Speaker #2: We believe the disruptions are temporary . The implementation is now nearly complete , and I can say that we see no material systems risk ahead operations on the new system are now running smoothly , and we are driving progressive improvement in our revenue run rate .

Speaker #2: In October , we saw increased customer engagement and pipeline size , resulting in our order rates approaching pre system implementation levels . Moving on to profitability .

Speaker #2: Adi reported 22.6% gross margin in the third quarter , up 130 basis points year over year and up 40 basis points sequentially . This is the sixth consecutive quarter of year over year gross margin , expansion and gross margin has increased by approximately 300 basis points over that time span .

Speaker #2: The year over year margin expansion was primarily driven by another quarter of high cross-sell volumes of exclusive brands across Adi's entire customer base and mix benefits from higher e-commerce sales .

Speaker #2: The increased margin dollars were offset by non-recurring costs associated with the system implementation, contributing to flat adjusted EBITDA growth year-over-year.

Speaker #2: The integration of Snap one continues to progress nicely . We remain ahead of our commitment of $75 million of run rate synergies exiting year three Post-acquisition .

Speaker #2: We have great confidence that we can overdeliver that amount in that time frame . If not sooner . Looking ahead , we look to build upon our scale and leading position in both the security and residential AV market , underpinned by our customer first ethos .

Speaker #2: A proof point of our ethos was a recent award from the B2B E-commerce Association , recognizing Adi as the enterprise B2B distributor of the year .

Speaker #2: This was a result of the company's organic e-commerce growth and implementation of leading technologies that improve the customer experience. We look to continue making investments that drive profitable growth opportunities in our areas of strategic focus.

Speaker #2: We also look to maintain our world class execution , capitalize on the revenue and cost benefits of our modern platform , and achieve greater fixed cost leverage to drive stronger profitability in the future .

Speaker #2: Now , let's turn the call over to Mike to discuss our third quarter financial results and outlook for the remainder of the year .

Speaker #2: Thank you . Rob . Good afternoon everyone .

Speaker #4: Let's get straight into the quarterly earnings for the total company , including record highs in gross margin , net income , adjusted earnings per share and adjusted EBITDA , modal net revenue was $1.86 billion , up 2% year over year , including a 1% favorable impact from currency .

Speaker #4: Both Tom and Rob spoke earlier about the drivers of organic net revenue growth in their respective businesses . Gross margin in the quarter was 29.8% , up 110 basis points year over year .

Speaker #4: The increase was primarily driven by the more margin accretive activities at Adi and the continued structural operating efficiencies at GNS . Adjusted earnings per share was $0.89 above the high end of our outlook range and up from $0.59 in the prior period .

Speaker #4: The primary reasons for the increase year over year were higher net income and a one time tax benefit from terminating the Honeywell Indemnification agreement .

Speaker #4: Adjusted EBITDA was 229 million in the quarter , up 21% year over year , and in line with the midpoint of our outlook range .

Speaker #4: The primary reasons for the increase year over year were the benefits associated with terminating the Honeywell Indemnification agreement and NZ's EBITDA outperformance year over year .

Speaker #4: Total reported cash used by operating activities was 1.571 billion , driven solely by the termination payment made to Honeywell in the quarter . After adjusting for the termination payment , adjusted cash provided by operating activities was 19 million .

Speaker #4: This amount was lower than anticipated , due primarily to the timing of payments and from lower cash collections . At Adi , we anticipate Adi's cash provided from operations to rebound in the fourth quarter .

Speaker #4: Now that the system implementation is substantially complete now , before I provide our financial outlook for the fourth quarter of 2025 and the full year , I'd like to make a couple of framing comments .

Speaker #4: First , Adi's ERP implementation is now nearly complete , but those activities crossed into the fourth quarter , and the related impact is included in our revised outlook .

Speaker #4: As Rob noted , we are achieving progressive improvement across various sales and operating metrics . Also , Adi continues to execute well against its strategy in a market where the mid-single digit market growth rate has not meaningfully changed during 2025 .

Speaker #4: Second , Paz is executing its strategy well against a challenging residential macro environment . We believe the benefit of continued new product introductions across diverse portfolio enables Paz to offset the recent incremental softness in residential HVAC .

Speaker #4: Our continued focus on driving margin and working capital efficiencies allows for greater contribution of segment cash flow . That is reflected in our increased outlook for total company cash from operations .

Speaker #4: Given some of the headwinds we are facing, we are adjusting our 2025 outlook as follows: total company net revenue is expected to be in the range of $7.43 billion to $7.47 billion.

Speaker #4: Total company adjusted EBITDA to be in the range of eight one 8 to 832 million . Total company fully diluted adjusted earnings per share be in the range of $2.57 to $2.67 , and on cash from operations excluding the Honeywell termination payment .

Speaker #4: We are raising our outlook to 410 to 450 million . Our outlook for the fourth quarter of 2025 is as follows . Total company net revenue to be in the range of 1.853 to 1.893 billion .

Speaker #4: Total company adjusted EBITDA to be in the range of 211 to 225 million , and total company fully diluted earnings per share to be in the range of $0.42 to $0.52 .

Speaker #4: Please go to our Investor Relations website to access our earnings presentation, which includes our outlook ranges along with key modeling assumptions for 2025.

Speaker #4: Now , before we open the call for questions , I'd like to share that we are in the midst of our 2026 financial planning process based upon what we know at this time , our 2026 outlook is positive and anticipates year over year growth in organic revenue and adjusted EBITDA that are both above current analyst estimates for 2026 .

Speaker #4: We will provide more details on 2026 . On the fourth quarter 2025 call . As usual . Operator . Let's now open the call up for questions .

Speaker #1: We will now begin the question and answer session . If you would like to ask a question , a reminder to please raise your hand .

Speaker #1: Now . Please stand by while we compile the Q&A roster . Your first question comes from the line of Ian Zaffino with Oppenheimer .

Speaker #1: Ian , your line is open . Please go ahead .

Speaker #5: Hey , thank you very much . Just kind of wanted to get my arms around some of the , I guess , headwinds here .

Speaker #5: Can you maybe quantify the impact of the HVAC ? Regulatory change , you know , I guess both maybe in the third quarter and then as we look at your , your guidance and can you maybe do the same thing on the ERP side .

Speaker #5: So we kind of understand what the different moving parts are of , you know , what hit in the third quarter . And then what's driving the Delta in the guidance now versus what it was previously .

Speaker #5: Thanks .

Speaker #4: Hey , Ian . Yeah , thanks . Thanks for the question . We don't want to get into the specific impacts of each one of those .

Speaker #4: They're roughly , you know , overall similar type of impacts on the business . As we look at the headwinds that we're seeing , you know , we're very , very focused on the fact that that we believe they're transitory .

Speaker #4: They both caught us a little bit by surprise in the quarter . As we said , you know , we we had said our guidance based upon what we saw , you know , three months ago .

Speaker #4: And as we went through the quarter , as the HVAC market changed at the end of the quarter , as Rob and his team went through the ERP implementation , that took a bit more than we thought .

Speaker #4: But , you know , it's mostly behind us now . We're about six weeks through the current quarter , and we feel really good about the guidance that we're putting out there .

Speaker #5: Okay , so so I guess to be clear , both of these headwinds are going to end in this quarter or have ended .

Speaker #5: And there'd be no bleed into 2026 .

Speaker #4: Yeah . Everything we see right now says they're definitely the ERP will be behind us by the end of the year . On the HVAC market .

Speaker #4: You know , we see it bleeding slightly into next year . We see what other folks are talking about in the market out there .

Speaker #4: I'll let Tom speak to it specifically , but we do believe it is transitory in nature and won't bleed much into 2026 . Tom , anything you'd add to that ?

Speaker #3: No , there's people have estimates that whether it's at the end of this year or the end of Q1 , but by mid-year , almost everyone says expects it to be over .

Speaker #3: We expect it to be over by the end of the first quarter .

Speaker #5: Okay . And then on Paz , I'm just trying to understand this . If you back out , you know , the HVAC side of it on the NS , can you maybe talk about , you know , what the growth would have been or maybe just talk about different areas of NS that , that grew and did particularly well ?

Speaker #5: Thanks . maybe

Speaker #3: You want me to do it ? Yeah , sure . I don't think we want to give what the growth would be had we not had the headwinds in the HVAC market , but I do want to emphasize that we're really excited about how we're positioned in that market .

Speaker #3: Right ? So we introduced that Focus Pro as our low end product . That product is been very successful in the market in terms of its acceptance .

Speaker #3: We just introduced a premium product . We had previously not participated in the premium market . So here's a market . We're adding a product .

Speaker #3: We're going to . Our goal is to create the best product you can buy at all price points entry mid and premium . And we're very excited about the Elite Pro .

Speaker #3: So long term our position in HVAC , we're very , very enthusiastic about now in terms of the other markets , it was pretty much everything was doing great .

Speaker #3: Retail did great . Our OEM business did great , the safety products did well . I everything seemed to do quite well , but we did have those headwinds , which again , I think long term , when you look at how we're going to be positioned in HVAC , it's a very positive picture .

Speaker #5: Okay . Thank you very much .

Speaker #4: Thanks , Ian .

Speaker #1: Thank .

Speaker #6: You .

Speaker #1: Your next question comes from the line of Eric Woodring with Morgan Stanley . Your line is open . Please go ahead .

Speaker #7: Great . Thank you guys for for taking my questions . Maybe if we just touch on Re-ask , the HVAC question , I'm just trying to get a little bit better understanding of why we think these headwinds are transitory .

Speaker #7: And then I guess if the issue is in inventory glut for purchase , for products that you don't have exposure to , why does that why does that impact just trying to maybe just a little bit more color , just maybe that last question is really the key there .

Speaker #7: If it's if it's not a residual issue , why's residual being impacted . And then a quick follow up , please . Thank you .

Speaker #3: Okay . So Eric great question . All right . So what's going on is because of this you had a lot of inventory that was brought in in order to protect all the distributors from the transition and the regulatory change .

Speaker #3: That inventory still sitting in there . It's impacting the balance sheet of all the distributors and their cash and their ability to fund .

Speaker #3: It's also creating a little bit of disturbance in chaos, kind of in the marketplace, because now you have discounts going, trying to liquidate this.

Speaker #3: And whether people hold to see if there's further discounts , there's just a lot of things that are kind of in a very dynamic situation .

Speaker #3: The amount of the impact people are saying , and you can look at all a lot of the HVAC equipment , guys , you know , the carriers , the trains , the Linux , what have you .

Speaker #3: You can look at the distributors , the Watsco , you can look at the data . It's having a material impact , but there's also then the fact of what's actually happening in the residential housing market .

Speaker #3: There's a little bit of instability there as well . That's why we look at it long term . Why is transitory . Because every home is going to need an HVAC system .

Speaker #3: Every these systems have a certain life . So you know , there's going to be a replacement . We know how well we're positioned and what we've introduced with the products and what share we're capturing .

Speaker #3: So long term . That's why we see this as transitory , okay .

Speaker #7: And and and Tom , maybe just a very quick follow up on their you mentioned discounts in the marketplace . Is it is it safe to then say your peons gross and operating margins were negatively impacted by by HVAC as well ?

Speaker #3: No , that's not what I was saying . So I'm just talking about that because of this disturbance . That's occurred in the market .

Speaker #3: Other parties , especially people with the equipment , especially this inventory , that's the older generation , the older gases that uses the older refrigerants that product in terms of the discounting , I wouldn't overplay that .

Speaker #3: Right. So just in looking at it, I'm just saying there's a number of things that happen when you have excess inventory in the channel and how people behave.

Speaker #3: Now , our products , there no discounting of our products , but the ability of distributor to stock our product at a certain level because they have cash tied up , the ability of what's happening within customers , all of those things have some ripple to this .

Speaker #7: Okay , okay . Super clear , very .

Speaker #3: We have very strong . Yeah , we do have very strong margins in the HVAC market .

Speaker #7: Okay . That is that's super helpful . And then , you know , I , I don't know who wants to field this one .

Speaker #7: But I'll leave it up to to you guys is , you know , one of the most important factors that you know , can drive a rerating for residual is this of continued margin expansion and granted , on a year over year basis , you showed nice gross margin expansion , but in three Q we saw operating margins compressed for both companies sequentially .

Speaker #7: I guess , you know , how do you think about operating margins for each business into into four ? Q and then , like as we look out , 1 to 2 years and think about investors that that are looking at residual today for the long term opportunity , you know , what type of margin should they be looking for from operating margin ?

Speaker #7: Should they be looking for from each one of these businesses ? Again , looking out , call it one , two , three years .

Speaker #7: Just would love some framing of that please . Thank you so much .

Speaker #4: Sure , sure , I'll kick it off and I'll let Rob and Tom join in . If if they want to correct anything or want to add on to it , you know , clearly in the quarter when we talk about margin expansion , there's both gross margin and the operating margin .

Speaker #4: So really pleased with continued gross margin expansion despite the fact that the headwinds at NS and the HVAC market , you know , as Tom said , our HVAC margins are very robust .

Speaker #4: So as we think about that , having a headwind , it flows through to bottom line at a different rate than the overall blended rates a bit higher .

Speaker #4: So that does compress it . So that transitory nature does compress the bottom line , despite which we still saw margin improvement at Adi .

Speaker #4: You know , as Rob talked about the impacts of the ERP implementation as we work through that , there was incremental costs , whether that was overtime and the warehouses , whether that was , you know , work with consultants to , you know , implement the system .

Speaker #4: There's incremental SG&A in both Q3 and Q4 . That , again , is one time in nature as we work through those those two things , I think overall at a high level , you know , as we go through the separation of these businesses , I want to make sure we're careful about talking about what the margins are today as segments without the allocation of of overhead and what they might be in the future .

Speaker #4: But as we sit here today and look at the Adi business , Rob continues to target a double digit operating margin , as his goal .

Speaker #4: We've got long term plans that that get us there again . That's going to change a little bit once the business is standalone and we allocate all the costs out .

Speaker #4: But as it exists today , we would think that we have the ability to drive the business towards double digit operating margins over the next 3 to 5 years , similarly to Paz , as we continue to see the operating efficiency in our factories , which , you know , that race is not yet run , we're well into the game , but the race is not yet over at all .

Speaker #4: And then the incremental margin that we think we drive with the ongoing product development and the incremental margin we can demand from that , we think that will continue to be operating margin expansion .

Speaker #4: You know , 3 to 500 basis points over the next 3 to 5 years , probably makes a lot of sense . But again , as we work through our modeling for each business on a standalone basis , we'll update that and get those numbers out to the market at the appropriate time .

Speaker #7: Thank you . That was super helpful , Mike . And then maybe just last question , just a clarification . You know , I'm going to pick on that last comment you made in your prepared remarks about 2026 numbers .

Speaker #7: So just to clarification , as I see consensus at 7.76 billion of revs , $3 of earnings and your comment is , you know , despite the ERP , despite the HVAC kind of leakage into 2026 , you know , those estimates are on , let's call it the lower end of what how you're planning for 2026 .

Speaker #4: That's right Eric , you know , we're early in our detailed planning . But as we sit here today , you know , we want to be clear that that these headwinds are very transitory .

Speaker #4: Now , you know , we can't guarantee what else is going to happen next year . We'll guide 2026 when we usually do in February .

Speaker #4: But just as we're sitting there today , we want to be clear that we are we remain very comfortable with those numbers that are out there .

Speaker #4: And we would say there at the low end of what our initial , you know , budgeting process for next year looks like .

Speaker #7: Okay , awesome . Thank you guys . Good luck .

Speaker #2: Thanks , Eric .

Speaker #1: And your next question comes from the line of Neil Mattila with Jefferies . Your line is open . Please go ahead .

Speaker #8: Hey guys . Thank you for taking my questions . I want to ask again on the ERP impact because I think this is a really important point , especially to understand , you know , some of the fourth quarter dynamics relative to what the implied fourth quarter guidance previously was .

Speaker #8: It'd be helpful to understand how much of a quantitative impact is this having on the fourth quarter and in the press release , you mentioned that there's nearly 15 million of higher costs year over year on G&A and R&D related to the ERP .

Speaker #8: What level of impact are you seeing in the fourth quarter ?

Speaker #4: I think at a high level , it's roughly half in the third quarter and half in the fourth quarter . Of those , impacts as they flow through .

Speaker #4: So you think that 15 is sort of split it between the two . You're in the ballpark . And you know we think the impact on the revenue will be greater in Q3 than Q4 .

Speaker #4: But not significantly greater . You know , we do think we're most of the way through it right now . I think , Rob , I'll let you comment , but we're really confident with the metrics and KPIs we're seeing right now that we're we're getting our feet back under us .

Speaker #4: The system's running well . We're through most of the growing pains that you go through with something like this . They were higher than we expected .

Speaker #4: But , you know , at the end of the day , they didn't take much longer than we thought . They were just more than we expected .

Speaker #4: Rob , I think , you .

Speaker #2: Know , no , actually . Well , yeah , actually , Mike , you nailed it . But I'd be remiss . First of all , I didn't say that this is really exciting time for us .

Speaker #2: Despite the despite the fact that the results were disappointing . This represents a major step towards modernizing and digitizing our tech stack , which which is basically a two and a half three year project finally coming to fruition , which will net a number of benefits , a lot of those I actually talked about in the in the prepared remarks , but , you know , we are we are seeing two real good indicators that , you know , make me feel optimistic about the go forward recovery .

Speaker #2: One , as I mentioned earlier in the remarks , we're seeing our average daily sales rate approach pre priego live levels . The deeper we get into Q4 , that's one even more , even more positive is what's going on with our project pipeline .

Speaker #2: Normally the biggest , the biggest month of the year where our pipeline would , would , would be at its peak is kind of mid year , July time frame .

Speaker #2: And we ended October with a higher pipeline volume amount than we had even in July . It was a record number for us .

Speaker #2: And so that is the really the the most I guess , prudent indicator of the future health of the business . And we expect to convert that pipeline at the same conversion rates .

Speaker #2: We've seen in quarters and years past . And so those two things make me optimistic that the impact of the ERP is truly transitory .

Speaker #8: Okay . That's helpful . Maybe just then to clarify , make sure we're 100% clear on this fourth quarter issue . The EBITDA guide down relative to the implied guidance previously is call it 40 million or so .

Speaker #8: Have , you know , part of that is the higher cost from the from the European impact . Part of it is the HVAC .

Speaker #8: Can you give like a numerical breakdown relative to that 40 million of how much is coming from each , including the revenue impact for the ERP related issues that you're facing ?

Speaker #4: I think , yeah , at a high level , if you're modeling it , I think , you know , as we said , it's roughly , you know , high single digits , millions of the cost side of ERP side .

Speaker #4: The rest of it is driven by the revenue , and it's roughly equal across both . Both businesses .

Speaker #6: Okay .

Speaker #8: Got it . Okay . And then on 2026 , again , very helpful to hear the guidance . This is very much in line with the way we've been thinking about it .

Speaker #8: We just felt the outlook was quite strong for 26 relative to what consensus had been modeling specifically though , you know , I know without giving any numbers given , you're going to wait to the fourth quarter to give that , would you at least address qualitatively what the different factors are that we should be considering from an idiosyncratic perspective ?

Speaker #8: For example , there's a $70 million step up in EBITDA just from the Honeywell related indemnity . Are there other factors that we need to be taking into account where it's just , hey , we can look at the full year guidance for EBITDA of 865 or sorry , of 25 , and then say , all right , at least $70 million higher is the bare minimum .

Speaker #8: And then from there , what other factors are .

Speaker #4: I think that's a good way to frame it . I think the , you know , you take this year , you add that $70 million , you add back these transitory impacts on top of that , which gets you , you know , somewhere a little bit above what that consensus number is .

Speaker #4: And then everything else is the initiatives that we're working on , the things that we're building . Again , we're going through our plans .

Speaker #4: We'll guide what we do . But I don't think there's anything significant . But Tom talks about his new product launches that are out there .

Speaker #4: They'll continue to drive performance . As Rob talks about the benefits of the ERP system . Right . Right now , it's all about the short term pain .

Speaker #4: But the reason we're doing it is for the longer term , mid-term and long term benefit . Those will start coming through our continued investments in the omnichannel experience at Adi , the Snap synergy that we continue to realize from bringing those together .

Speaker #4: So all those things go together again . There's lots of work still to go in building this specific models , but when we look at all that today , as we said , we're very comfortable that that the numbers that are out there are definitely achievable .

Speaker #8: Okay . And then lastly , for me on the project pipeline , you just mentioned earlier , you said October's was higher than where you ended July , which is not normal .

Speaker #8: What exactly are you hearing from your customers in their part of what we've heard in our research and background check here , is that security never goes into recession .

Speaker #8: And obviously there's a number of incidents that have happened recently that we're just wondering if there's like some kind of multi-year secular upcycle that might be happening .

Speaker #8: The security market , that kind of underlies a lot of these , you know , is there more proactive versus reactive customers now ?

Speaker #2: I would say not a whole lot has changed in that in that space this year . You know , going forward , we're we're still expecting the , you know , the commercial security market to grow at low to mid single digits .

Speaker #2: I mean , it has during my entire tenure here at Adi and and you know , in terms of Adi , we've always been able to grow kind of mid to high single digits .

Speaker #2: And we fully expect that going forward . And I always look at our pipeline to be able to give me the an indicator of what we can expect .

Speaker #2: You know , 3 to 6 months out . And I think some of it is just our execution and others other parts of it is , you know , we had customers that were patient with us as we navigated the , you know , the disruption of vrrp .

Speaker #2: And we're bringing those now , those customers back in . And that's actually , you know , increased our pipeline as well . So I would say those are those are the biggest factors in terms of why I think the pipeline is growing and why we're in that position this late in the year versus we normally see these peak levels in the middle of the year , when most of our big installations happen , you know , kind of that June through July , June , July , August time frame for our large integrators .

Speaker #6: Okay .

Speaker #8: Great . Thank you very much .