00:00ADI is preparing to spin off from Resideo next month.
00:03The company distributes everything from security systems to network equipment for homes, commercial buildings, and data centers,
00:10giving it a front row seat to construction and technology spending.
00:13Joining us is President and CEO Rob Arnis.
00:16Rob, thank you so much for joining us.
00:18And early congratulations for the spin off coming up in about two weeks' time.
00:21Thank you very much.
00:22I would love to first just know the thinking behind that.
00:24Because I guess Resideo, they make some physical products that are very related to the home.
00:28So I think the stock and thus you has really been treated as something related to homes and home building,
00:34which obviously is kind of in the doldrums.
00:35So just get your full potential to show to the world you do more than just residential.
00:40That's exactly right.
00:40We're in a great opportunity here to unlock what I would call intrinsic value of the organization.
00:45We've always been, I've been here 15 years.
00:47And if you go back since time I got here, even well before that, we were always part of,
00:52we were always a segment in a part of a manufacturing company, right?
00:55With Honeywell for a long time, then we spent out, we're part of Resideo.
00:58We were never really able to unlock our full potential, set our own strategic priorities,
01:04invest capital the way we wanted to, to drive the highest return for a pure play distribution business.
01:09And now we finally get that opportunity.
01:11So security has been a huge part of an AI, in this AI world.
01:17AI has been a huge part of security rather, so I don't know why I switched that.
01:20Do you see that in the way your customers are buying your products?
01:23Absolutely.
01:24In fact, one of the beautiful things about the commercial security sector is demand is driven by technology
01:30and not necessarily need for construction, commercial construction.
01:34And so as AI has really proliferated a number of our products, like video surveillance,
01:40there is a need for institutions like banking, retail, the verticals that our integrators play in to protect their patrons,
01:48their patients.
01:49And so there's some really neat stuff out there that's raising the level of security for those folks.
01:54The other thing that we've seen for AI is just this huge demand for memory.
01:58And I mean, you see it in micron earnings when they're like, we have margins of 86%.
02:01Apple has had to raise the prices of some of their hardware.
02:04Microsoft's Xbox has.
02:06I know you kind of see both sides because you're both buying and selling.
02:09Are margins getting difficult for your products, too?
02:12Because I'm assuming they also contain a lot of chips and memory devices, too.
02:16About 75% of our products contain chips and memory, right?
02:20And look, the beautiful thing about being a distributor is when we have 1,000 suppliers,
02:25when we get price increases from them due to things like memory or the tariffs last year,
02:31we tend to pass those prices through.
02:33So from a margin perspective, we don't see a lot of issues.
02:37What has been more impactful, what you're seeing from AI or the tariffs in terms of rising prices?
02:41Without question, last year, the tariffs that came in the period following Liberation Day
02:47where thousands of our SKUs were affected day by day, and we had to really stay on top of it.
02:53Because if we didn't and we weren't able to pass those prices through,
02:57then it would have been a margin hit for us.
02:59But we were able to react really fast.
03:01Danny made a good enumeration of all the products you sell earlier.
03:04Do you notice that consumers are becoming more price sensitive?
03:06Because I imagine if your products are becoming more AI-driven, they're becoming more pricey, too.
03:11It is true.
03:13But I would tell you that most of the verticals where our integrators play,
03:18important to know, we sell it to professionals, installers, not to consumers or end users.
03:22And when it comes to safety, security being connected,
03:26in a lot of cases, price is the last issue on the list.
03:31Safety is paramount, and we need to make sure that they need to make sure,
03:34we need to make sure that we're delivering the right products at the right time
03:37so that everybody stays protected.
03:39So pricing really hasn't affected demand in this channel yet.
03:42Have your suppliers changed their supply chains a lot?
03:45I know we're also waiting for this Friday, the Section 122 tariffs expire,
03:49and everyone's saying, OK, Trump's going to be able to impose a lot more tariffs.
03:53Have they kind of navigated around that, or is the industry bracing for what happens on Friday?
03:57In all honesty, they've had a year to prepare, right?
03:59They had a little bit of the chaos from last year.
04:01They know what to expect.
04:02They've enhanced their supply chains.
04:04And from a demand perspective, we have great relationships with our suppliers.
04:09We're very integrated into their supply chains.
04:11So we have not seen a real threat in terms of not having inventory to this point.
04:17They're doing a great job.
04:18And when you look at the second half of the year, what gets you more excited?
04:21Is it commercial real estate, your infra spending?
04:23What is it in your part of the industry?
04:25I think it's just like I said earlier, it is this continuous advancement of technology
04:29which drives the end market demand for us.
04:31Our suppliers, I love them because they are feverish about introducing new technology
04:36every six months, multiple times a year.
04:38That actually drives demand.
04:40So if you think about it, our products are all over this building, this room right now.
04:44Not uncommon for all of this to have been installed two, three years ago
04:48because technology advances and now there's ways for a building like this
04:51to better protect its people, rip it out, and replace it
04:55regardless of any kind of need for a renovation or new commercial construction.
04:59I was just saying we had a full screen of the list of where your tech was being used
05:03in the World Cup.
05:04What were you doing for the world?
05:04I hope you weren't behind the VAR technology.
05:07If not, you and I need to have a conversation.
05:08No, no, no.
05:09That's funny you say that.
05:10But if you think about MetLife Stadium, rooms like this, MetLife Stadium, we are everywhere.
05:15Now, not ADI-branded product, but the 1,000 suppliers that we actually sell to our integrators.
05:21Think about that stadium.
05:22All the safety, the fire systems, the jumbo screens that people are watching the game on,
05:27the commercial audio, the acoustics, we sell all of that.
05:30So also for MSG for Taylor, so sweating.
05:34Yes, exactly.
05:34Yes, exactly right.
05:36I love that.
05:37So, okay, I know that this spinoff also unlocks value and you're not just about the home.
05:42Obviously, though, home products are something that ADI technology has been used in.
05:46How are you seeing that demand?
05:47Because less homes are being bought.
05:50After COVID, there was a lot of remodeling.
05:51I wonder if some of that has slowed down and how you see demand at this moment.
05:55That's a really good question.
05:55So we've been talking about the commercial side.
05:57We're 70% commercial, 30% residential.
06:00I talk commercial side and market demand is driven by technology advancements.
06:04Residential, exact flip-flop.
06:06So highly dependent on new and existing home sales, renovations.
06:10And when you think about our particular space in residential AV, you know, that's entertainment.
06:14And it's an experience buy.
06:17So disposable income is needed.
06:18So it moves and flows much more so with the residential housing market.
06:22But residential security, on the other hand, stays is a little better than that.
06:26Not as affected.
06:28But the AV space certainly is.
06:30So we've had to navigate around that.
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