ADI Q3 2026 Earnings Call - Residential Weakness and Product Mix Crush Margins, EBITDA Falls 13%

Operator: Hello, everyone. Thank you for joining us, and welcome to the ADI third quarter 2026 earnings call. After today’s prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Hunter Blankenbaker, Senior Director of Investor Relations. Hunter, please go ahead.

Hunter Blankenbaker, Senior Director of Investor Relations, ADI: Okay. Thank you, Leah, and good morning, everyone. Thank you for joining us for ADI’s third quarter 2026 earnings call. Joining me on the call today are Rob Aarnes, President and Chief Executive Officer, Mike Carlet, Chief Financial Officer, Allie Copeland, Chief Operating Officer, and Marco Cardazzi, Chief Merchandising Officer. Before reviewing the quarter, I would like to draw your attention to forward-looking statements we will be making in today’s presentation. Statements other than historical facts made during this presentation may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in ADI’s filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements.

We identify the principal risks and uncertainties that affect our performance in our registration statement on Form 10, as amended, and other SEC filings. In addition, we will discuss non-GAAP financial measures in today’s presentation. These non-GAAP financial measures, which can sometimes be identified by the use of "adjusted" in the description of the measure, should be considered in addition to, not as a substitute for, in isolation from our GAAP results. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in our earnings release and the appendix to our earnings presentation, both available on our investor relations website. Where indicated, we will also discuss results on a pro forma standalone basis to provide a more comparable view of performance. With that, I will now turn the call over to Rob.

Rob Aarnes, President and Chief Executive Officer, ADI: Thanks, Hunter. Good morning, everyone, and thank you for joining us. As you saw in this morning’s press release, on a year-over-year basis, revenue grew 9% to $1.3 billion, with average daily sales up 5%, led by strength in some of our third-party categories. However, standalone adjusted EBITDA declined 13% to $66 million, driven primarily by lower gross profits in both third-party and Exclusive Brands categories. Despite the decline, we generated $64 million of operating cash flow and ended the quarter with more than $200 million of cash on the balance sheet, strengthening our liquidity position. While top-line revenue was in line with our expectations, third-quarter profitability fell short of expectations, primarily due to an accelerating decline in residential demand, which drove lower volumes and a shift toward lower-margin products within Exclusive Brands business.

Within our third-party products, a shift in customer and product mix also weighed on margins in the quarter. When we provided our outlook in August, we assumed no residential recovery and a market that would be consistent with the trends at the time. However, residential conditions deteriorated more than expected in August and September and weakened further in October. This caused volumes in Exclusive Brands to come in below expectations, and products mix pressures also intensified. In addition, in our third-party products business, lower-margin national accounts and project revenue represented a greater share of commercial sales than we anticipated, which lowered gross margin and profitability relative to our expectations. Finally, lower supplier rebates, higher freight costs, and inventory-related charges also weighed on profitability. As Mike Carlet will explain in more detail, our revised 2026 revenue and EBITDA guidance reflects both the third-quarter shortfall and a weaker outlook for the fourth quarter.

Our profitability is below our standards, and we are taking decisive actions to improve our performance. We are focused on reducing operating expenses and improving margins, including expanding Exclusive Brands into commercial end markets and executing One ADI to bring our operations together, leverage technology to strengthen execution and business visibility, and lower our cost structure. We expect to exit 2026 having achieved our previously announced goal of $60 million in annualized gross cost savings and remain on track to deliver the remaining $20 million of our $80 million program by the end of 2027 on a run rate basis. We are also developing additional cost reductions beyond the $80 million program, and we will share more details as those plans take shape. We are moving with urgency and clear priorities to accelerate growth, improve our operating leverage, and increase profitability.

Today, I’ll walk through what we are seeing across our Exclusive Brands and third-party products, the actions we are taking, and our progress on One ADI. Mike Carlet will then cover the financial results and revised outlook in more detail. As we highlighted at our investor day, Exclusive Brands primarily serves resi AV, automation, and connectivity. By our estimate, 70% of our Exclusive Brands products are installed in residential projects. Our guidance assumed residential market conditions would remain broadly consistent with Q2, but demand for our Exclusive Brands products weakened as the quarter progressed. Overall, Exclusive Brands’ average daily sales declined 2% year-over-year, which was below our forecast. Lower-than-expected volumes were the largest contributor to our adjusted EBITDA shortfall, given the business’s significantly higher margin profile.

Unfavorable product mix within Exclusive Brands added to that pressure, as lower-margin wire products grew in the double digits while higher-margin networking products declined. We remain optimistic about the medium and long-term prospects for our Exclusive Brands business, but our revised forecast reflects the current reality of the residential market with higher interest rates, weak consumer confidence, and economic uncertainty weighing on demand. We are planning for the softer demand and unfavorable product mix experienced in August, September, and October to persist through the remainder of 2026 and into 2027, limiting near-term margin improvement. The significant majority of our third-party products are installed in commercial projects. Growth in third-party sales was strong, supported by continued demand for technology upgrades and the value we provide customers, as well as easier comparisons with the prior year when revenue was impacted by our ERP implementation.

Our investments in products, sales, and marketing in Datacom and Pro AV continue to deliver impressive results. Those categories complement our core security and life safety products and help our customers win more of the job. As security, AV, and data systems come together on the same network, we are expanding our product assortment, strengthening our technical expertise, and deepening supplier relationships to support that opportunity. Third-party revenue was in line with our expectations, but unfavorable customer and product mix resulted in a lower gross margin rate than anticipated. Sales to our large multi-location customers or national accounts and project-based revenue, which have lower gross margin rates, grew in the low double digits. At the same time, some of our higher-margin commercial products like intrusion and hardware and tools declined in the low single digits.

We are encouraged by the growth in national accounts and large project business, which are important opportunities to increase revenue and gross profit dollars. We are working account by account to increase sales of Exclusive Brands and complementary products within these projects. As we deepen these customer relationships and broaden the product mix, we expect to improve margins and build on the growth we are seeing in this area. To improve performance and build on the growth we are seeing in commercial, we remain focused on three strategic priorities: product, pricing, and the customer experience. Let me walk through some of our actions in each. First, product. We are expanding our offerings in Datacom and Pro AV product categories, supported by deeper supplier relationships and technical expertise.

As security, AV, and data systems converge, we have the opportunity to supply more of what our customers need while improving the profitability of our faster-growing national account and project business. Within Exclusive Brands, we are strengthening our residential offering, expanding in commercial markets, and simplifying our portfolio. We are focused on our highest return opportunities and enhancing products to improve their competitiveness. We also continue to broaden Exclusive Brands’ product availability through ADI stores and incorporate more product alongside our supplier partners’ products to supplement project designs intended to meet a wider range of customer needs. Second, pricing. We are expanding our use of dynamic pricing technology to improve price realization and win additional business. Where we have implemented it, we are seeing measurable increases in sales and gross profit dollars.

Across ADI, better data and greater visibility are helping us make more targeted pricing decisions and respond faster to changes in costs and market conditions. Third, we are making it easier for customers to buy across ADI through a best-in-class omnichannel experience and lowering our cost to serve. We are bringing together our sales teams, customer data, and dealer programs so customers can access more of our portfolio through the relationships they already have with us. Our digital investments support that same objective. The redesigned mobile app introduced in September makes it easier to find products, check availability, and place orders. As more customers transact digitally, we can reduce manual order processing and give our sales teams more time to support complex projects and expand customer relationships. One ADI is central to advancing all three priorities. Let me turn to the progress we are making and the work ahead.

Under One ADI, we are making good progress building on the ERP platform we have established and the enterprise data capabilities we continue to develop. Over the past two years, we have acquired Snap One, completed a major ERP transition, and separated from Resideo. These transformational events have created a stronger foundation. We still have work to do to bring our systems and operations together and realize the full benefits of a combined business. That is what One ADI is designed to do. We are bringing our Americas business onto a common operating model with one go-to-market approach and a more consistent customer experience. One data is an important part of it. It is giving our teams a more complete view of customer purchases and product profitability across our systems.

That helps us identify where we can sell more of our portfolio, address pricing opportunities, and manage performance more effectively. That same visibility will improve our reporting and help us respond more quickly to changes in demand, manage inventory, and improve operating discipline. Our next major milestone is bringing the remaining Snap stores onto our ERP platform through a three-phased approach, which we expect to complete in the second half of 2027. This will put all Americas stores on a common system, making it easier to align customer programs, support our sales teams, and eliminate duplicate work. Then our last step will be to consolidate the ADI and Snap e-commerce platforms, which we expect to happen in early 2028. We also continue to consolidate and enhance our store and distribution networks in the Americas, including opening our new distribution center in Eastern Pennsylvania.

Where stores are near each other, we remain focused on bringing our products and teams under one roof to give customers more of what they need while eliminating duplicative costs. On the distribution side, we are consolidating facilities and putting inventory closer to demand so we can serve our customers more efficiently, improve productivity, and lower freight costs. The same opportunity exists online. More than 30% of our revenue already comes through our digital platforms. Further consolidating our websites will give customers one place to buy across our portfolio and reduce the cost of maintaining separate platforms. As we advance One ADI, we are developing additional cost reduction actions beyond the $80 million of annualized gross savings previously discussed. Our focus is on eliminating duplication, simplifying processes, and aligning spending with current business conditions while preserving the customer experience and long-term growth opportunities.

We are moving forward with clear priorities and milestones, and we will keep you updated as we take out additional costs, bring stores onto a common platform, consolidate facilities, and retire legacy systems and websites. Before I close, I want to thank our teams across ADI for their commitment to our customers. I spend a lot of time in our stores and see firsthand the expertise, relationships, and service our people bring to the business. Their feedback helps us understand what is working and where we need to improve. We have built a leading position serving the professionals who protect and connect homes and businesses. Our local reach, broad product assortment, digital capabilities, and Exclusive Brands, supported by our people, give us a strong foundation. The work underway across ADI will help us turn those strengths into a more consistent performance, stronger profitability, and greater cash flow.

Delivering on our commitments to investors is a top priority for me and our leadership team, and our performance this quarter fell short of that standard. With the spin behind us, we are energized and focused on strengthening execution and improving performance as an independent company. The actions we outline today will take time, but we are moving with urgency and are accelerating what we can. We are confident in our ability to deliver on our outlook. With that, I’ll turn the call over to Mike to discuss our third quarter results and revised outlook in more detail.

Mike Carlet, Chief Financial Officer, ADI: Thanks, Rob. Before reviewing our third quarter results, I want to provide some context on the basis of presentation. This quarter includes both carve-out results before our August 3 separation from Resideo, as well as consolidated standalone results afterward. Prior year results are presented on a carve-out basis and include allocations of certain Resideo corporate expenses. Where indicated, I will also discuss results on a pro forma standalone basis to provide a more comparable view of performance. Our full year outlook continues to be presented on that pro forma basis. Net revenue was $1.31 billion, up 9% year-over-year, while average daily sales increased 5%. Average daily sales grew 7% in third-party products and declined 2% in Exclusive Brands. Additional selling days contributed approximately 4 percentage points to reported revenue growth. Growth also benefited from pricing and the comparison with prior year ERP disruptions.

In the Americas, third-party product volumes increased on an ADS basis, and Exclusive Brands volumes declined, while international volumes also increased. Gross profit was $273 million compared with $272 million a year ago. Gross margin was 20.9%, down 170 basis points from 22.6%. The quarter included approximately $4 million of tariff refunds and an $8 million benefit related to the accounting basis of inventory held at separation. Together, these items benefited gross margin by approximately 90 basis points. Excluding these two items, gross margin was 20.0%, down 260 basis points from the prior year. That decline reflects three factors. First, as we previously discussed, we were comparing against a temporary tariff-related pricing benefit last year when selling price increases took effect ahead of higher inventory costs. That comparison represented approximately 70 basis points of pressure, which we anticipated in our outlook.

Second, unfavorable customer and product mix represented approximately 140 basis points of pressure, reflecting the trends Rob described. In our third-party products, growth was concentrated in lower-margin national accounts and project business, video surveillance, and power. Additionally, Exclusive Brands, our higher gross margin products, represented a smaller share of total sales, and within its portfolio, lower-margin products, such as wire, outperformed higher-margin products. Third, higher freight costs and inventory-related charges collectively represented approximately 50 basis points of pressure. As Rob discussed, we are working to improve price realization and increase Exclusive Brands penetration across our customer base, including expanding our use of dynamic pricing, using better data to make more targeted pricing and discounting decisions, and bringing more Exclusive Brands into our customers’ projects. We are also addressing higher freight costs, improving order fulfillment efficiency, and strengthening inventory-related systems to improve profitability.

We are moving quickly to initiate these actions, but their full benefit will take time to materialize, and we do not expect a meaningful gross margin improvement in the near term. Selling, general, and administrative expenses were $202 million compared with $190 million a year ago, reflecting higher facility costs related to real estate and distribution center consolidation, merit increases and other inflationary pressures, investments in third-party spend of the business, and higher standalone costs compared to the carve-out basis. SG&A as a percentage of revenue improved 30 basis points to 15.5%. Our cost savings initiatives delivered approximately $11 million in savings during the quarter. These savings were more than offset by inflation and higher facility and distribution costs as we work through our distribution center consolidation that is part of One ADI.

As we consolidate our distribution network, we are temporarily operating facilities in parallel and incurring additional labor and overtime costs for facility moves and physical inventories. Through One ADI, we are reducing the cost of running separate networks and systems so we can serve our customers and support growth more efficiently. Completing these consolidations will eliminate duplicate expenses and allow us to make better use of our existing infrastructure. We expect these savings, together with the benefit of actions already taken, to more than offset inflation and allow us to reduce SG&A moving forward. As Rob discussed, identifying additional cost reductions beyond our existing $80 million annualized gross savings program will be a priority as we align our cost structure with current business conditions. We will provide further detail as those plans are developed.

On a pro forma standalone basis, adjusted EBITDA was approximately $66 million, or 5.1% of net revenue, compared with approximately $76 million, or 6.3% of net revenue in the prior year quarter. Interest expense in the third quarter of 2026 was $19 million, which we expect to approximate our quarterly run rate going forward. During the quarter, we recorded an approximately $660 million non-cash goodwill impairment charge following an interim assessment. The assessment reflected declines in our share price and market capitalization, together with lower projected earnings and cash flows resulting from continued residential weakness and unfavorable product and customer mix. Turning to cash flow, we generated $64 million in operating cash flow in the third quarter, consistent with our expectation for stronger second-half cash generation following higher inventory investment and the timing of supplier and annual payments in the first half.

We reduced inventory days by three days from the second quarter. Although inventory days may increase seasonally in the fourth quarter, we are building on that progress by making greater use of our demand planning technology to align inventory with customer demand and maintain product availability. Capital expenditures were $11 million in the third quarter and $37 million for the first nine months. We expect spending to increase in the fourth quarter as we advance planned store and distribution center projects. We ended the quarter with approximately $708 million of total liquidity, including $208 million of cash and cash equivalents, and our fully undrawn $500 million revolving credit facility. Total debt was $1 billion, and net debt was $792 million, representing net leverage of approximately 2.9 times trailing 12-month standalone adjusted EBITDA.

As a reminder, our debt consists of a $600 million term loan due in 2033 and $400 million of senior unsecured notes due in 2034. Given our third-quarter performance and the further weakness in Exclusive Brands in October, we are lowering our full-year 2026 outlook to revenue of $4.91 billion-$4.93 billion and pro forma standalone adjusted EBITDA of $230 million-$240 million. At the midpoint, this represents revenue growth of approximately 3% and a decline in adjusted EBITDA of approximately 20% compared with the prior year. While we do not provide quarterly guidance, our full-year outlook reflects the following fourth-quarter assumptions: average daily sales growth in the mid-single digits, with reported revenue down low single digits, reflecting four fewer selling days than the prior year period.

Within this, we expect Exclusive Brands average daily sales to decline in the mid-single digits, reflecting the weakness we experienced in October and continued uncertainty in residential demand. Gross margins broadly consistent with the third quarter, excluding tariff refunds and the separation-related inventory benefit. This reflects continued pressure from product and customer mix, higher freight costs, and lower vendor rebates. SG&A approximately flat year-over-year, with four fewer days in the period and cost savings offsetting inflationary pressures. Full-year capital expenditures are now expected to be $50 million-$55 million, a $20 million reduction from our previous guidance. This implies fourth-quarter spending of $13 million-$18 million, primarily supporting the consolidation of our distribution center and store footprint. Looking ahead to 2027, we are working through our annual planning process and will provide formal guidance on our fourth-quarter call.

In the meantime, our planning assumes a challenging and uncertain demand environment with continued weakness in residential end markets. We expect continued growth in third-party products to be largely offset by pressure in Exclusive Brands. We also expect the benefits of our current $80 million annualized cost savings program to be largely offset by inflation and the absence of the $24 million in tariff refunds recognized this year. However, identifying additional cost reductions beyond our existing $80 million annualized gross savings program will be a priority as we complete our planning. In closing, our focus is on actions within our control, improving the execution of our business, delivering on our existing cost savings, and identifying additional opportunities to lower expenses and improve cash generation through working capital management.

We are also using our enhanced systems and data capabilities to strengthen visibility across the business, support more informed decisions, and improve operating discipline, with the goal of delivering more consistent results and profitable growth. With that, I will turn the call back over to the operator to initiate the Q&A session. Operator?

Operator: We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Keith Hughes with Truist Securities. Your line is open. Please go ahead. As a reminder, please unmute your device locally when asking a question.

Keith Hughes, Analyst, Truist Securities: I’m sorry. Can you all hear me now?

Mike Carlet, Chief Financial Officer, ADI: Yeah, we can hear you, Keith.

Keith Hughes, Analyst, Truist Securities: Hello? Okay, sorry. I’m having lots of problems on the call. Yeah, I’ve got you. I’ve had lots of problems. Anyway, let me Jeff my question again. I wanted to talk about pricing. Sounds like your cost saves, as you said, Mike, will be offset by inflation next year. Sounds like some of that’s happening in the fourth quarter. It doesn’t seem like there’s a lot of pricing. You can talk about what kind of pricing in action, what kind of pricing gains you expect, and are you struggling to get them through?

Mike Carlet, Chief Financial Officer, ADI: Thanks, Keith. We’re always looking at pricing. I think as we talked about, one of the really cool things that we’ve done recently is we brought together our One data concept, where we’ve been managing the business across the separate ERP platforms that we had from various M&A. Just recently, really through the beginning of October, we’re now able to view the customer and our products over every ERP system that we’re selling on one consistent basis. Without regard to where the customer’s buying, we can see our product activity. I think when we talk about pricing, there’s both pricing increases and decreases, right? We got to make sure we’re competitive in product lines. There’s areas where we’re underpriced, there’s areas we’re overpriced, as we think about holistically the entire platform.

We’ve got some really good data, we’ve got some really good tools, and now that we’ve got access to do that across the entire portfolio, we think we’re in really good shape to optimize our pricing activity going forward.

Keith Hughes, Analyst, Truist Securities: That’s something that’s in the future when you get the ability to really see what’s happening in the two pieces of the organization? Is that a 2027 issue?

Mike Carlet, Chief Financial Officer, ADI: We can see it now, Keith. Yeah, we can see it now. That really is new starting in October. We can do some of it now. To really fully implement it really takes us getting to the point where all the stores are on the One ADI platform. That’s a really big interim step that we’re going to get through the middle of next year, and then the last piece of it will be consolidating the websites will come after that. Each step is an incremental piece that allows us to do better than we’ve done historically. The first step was getting this One data view. The second step is getting all the stores on one platform. The third step will be getting the websites all together. Each one will provide incremental benefits, but we feel we’re in position today to start some of that work.

Keith Hughes, Analyst, Truist Securities: Okay, great. Thank you.

Mike Carlet, Chief Financial Officer, ADI: Thanks, Keith.

Operator: Your next question comes from the line of Ian Zaffino with Oppenheimer. Your line is open. Please go ahead.

Ian Zaffino, Analyst, Oppenheimer: Hi, Greg. Thank you very much. I wanted to just ask, you made comments on August, September, and October kind of being soft. You could put maybe numbers around that, and how are you doing versus just the market in general, as far as share? Are you taking share in kind of this weak environment, or is it going the other way? Thanks.

Mike Carlet, Chief Financial Officer, ADI: Hey, Ian. How you doing? Let me start with some numbers, and Rob, I will let you talk about some competitive positioning we have.

Rob Aarnes, President and Chief Executive Officer, ADI: Yeah.

Mike Carlet, Chief Financial Officer, ADI: From a numbers standpoint, as we exited the second quarter, as we were looking to give our guidance last quarter, we were expecting our Exclusive Brands sales to be up very low single digits in the second half of the year. That is what we were seeing. Those were the trends we were seeing coming out of Q2, really through July. We got to the middle of August, we saw that start weakening. It was progressively weaker throughout the quarter. In fact, when we got to October, it was down in the higher single digits. There are some different comps that happened in October, so you always got to be looking. It is not just the year-over-year trend. It really is both the year-over-year trend as well as the actual average daily sales at any given time that you need to look at.

Right now, what we are expecting is for the last part of the year, there are really only seven weeks left in the year now, we are looking at Exclusive Brands being down 5%-6%, which is very consistent with what we saw. It really was something we started seeing in the middle of August, and then it accelerated as we went through. It seems to have been a little bit more normalized over the last three or four weeks, which is why we are confident in the guide that we have. There is not a lot of time left in the year, but clearly it was something that started right when we were giving earnings, right after we gave earnings, and has gotten progressively worse as time has gone by. Rob, you want to talk about competition?

Rob Aarnes, President and Chief Executive Officer, ADI: Yeah. Ian, let me, if you have a follow-up, let me just jump in here, Ian, as well. Just start by saying that there are parts of the business I am very happy with in terms of performance. You have heard me talk about national accounts. That has continued to be a strength and point for us. I think we are doing very well against our competitors there. Pro AV and Datacom continue to contribute meaningfully. We are doing a really good job with that customer base as well. Obviously, our website experience continues to do well. Those big parts of the business, we are going to continue to reinforce going forward. Very happy with where we are. When I think about smaller regional accounts, look, this is still very much driving recovery from last year.

I’m happy with how far we’ve come, but I’m not happy yet in terms of where we need to be, especially in categories like fire, life safety. We still got some work to do there. I’m very confident with the team’s focus on account-by-account win-back programs, and we’re seeing nice gains there. What I wanted you to just take away from that is, this is not a business that will blame or continue to talk about the macro. I get it. It is what it is. We are focused, laser-focused on the levers, the opportunities we have to control. Reinforcing the areas of the business that I just talked about that are doing well for us, continuing to strengthen our Exclusive Brands product mix by launching meaningful NPI and light commercial pricing opportunities Mike talked about earlier.

I’m very confident in the plan to continue to move forward, especially now that you have a business that no longer has some of the distractions that we had the last, really, 18 months to two years. Every single person in the organization can now focus solely on the performance of the business, the One ADI initiative, and the actual commercial programs we have in place to continue to grow and drive profitability.

Ian Zaffino, Analyst, Oppenheimer: Okay, thank you. Would you be able to just quantify what the inflation impact is that you’re facing? This is a little bit of a follow-up on the last question. Just as far as pricing, I mean, why is there not pricing power that you have to get this through, right? Because I would imagine all your competitors are facing similarly inflationary pressures, which would allow them to do that as well. Is there some irrationality kind of going on? Is there just consumer fatigue? Maybe, is it by product line? Like, where fire and safety, you can’t get it, where the other leadership areas, you can? Maybe just put a little bit of meat on the bones there. Thanks.

Mike Carlet, Chief Financial Officer, ADI: Yes, thanks, Ian. On the inflationary side, listen, within SG&A, it’s normal inflation. There’s nothing abnormal there. Everybody gets a raise every year. It’s in line with sort of overall inflationary pressures. The rent goes up on our 140 stores in the U.S., on all of our DCs. There’s market rent adjustments every year and all that. There’s nothing abnormal about it, but it’s a 2%-3% sort of inflationary headwind that we have every year on the vast majority of our SG&A cost base that we need to action against. Given the gross margin pressures we have, we’ve got to offset that cost inflation with other actions to hold it in line with the margin pressure we’re feeling on the top line.

Some of the other things you are talking about in freight and whatnot that are in the COGS piece of it, I think we have all seen and heard some of the things around diesel prices, around some of the other commodity things, the input costs that go in that are out there. That inflationary pressure within COGS has been a little bit higher, driving a little bit of the margin pressure we are seeing. It is more mix-driven, but there is some of that in there as well that we talked about. Rob, you want to touch on the pricing power?

Rob Aarnes, President and Chief Executive Officer, ADI: Yeah. I think just to circle them back, Mike said it very eloquently with the first question around price. I would say that with pricing, as you know, Ian, you are never actually done. You are continuing to optimize, take advantage of pricing initiatives, as market dynamics change, new customer suppliers come on board, so you are never done. But the challenge we have had in the last couple of years is just disparate systems. It is not like we have not been executing really well in parts of the business based on the visibility we have had. But now with the combining of the One data program, we are able to actually look across multiple systems, even though they have not been fully integrated yet, and we have greater visibility into where we have further opportunities to drive pricing optimization. That is what we did not necessarily have in the past.

Some of it was manual, some of it was just the lack of visibility, but now we have those things to kind of continue us forward. As Mike said, that visibility and that execution, the ability to optimize only gets better as we continue to consolidate onto one common platform.

Ian Zaffino, Analyst, Oppenheimer: All right, great. Thank you very much for the color.

Mike Carlet, Chief Financial Officer, ADI: Thanks, Ian.

Operator: Your next question comes from the line of Brendan Shea with JP Morgan. Your line is open. Please go ahead.

Brendan Shea, Analyst, JP Morgan: Hi. Thanks for taking my question. You mentioned expanding Exclusive Brands into commercial markets. Just curious if you could discuss which product categories you’re targeting, how long until it becomes a meaningful revenue contribution, and then discussions around how do commercial margins for those products compare to your residential portfolio, please?

Rob Aarnes, President and Chief Executive Officer, ADI: Yeah, I’ll take that one. Thanks, Brendan. Great question. This is a key priority for us going forward, so I’m glad you brought it up. Right now, Marco’s team has been engaged, I’d say for about a little over a year now, looking across every single category in Exclusive Brands where there is light commercial relevance. The reason we want to do that is we’ve got 100,000 customers at ADI, and Snap had about 15,000 to 20,000, give or take. So the opportunity to drive higher mix of Exclusive Brands across 100,000 customers versus 15,000 is pretty significant. We don’t have quite the product line to do that today, but in the back half, we are starting to see NPI and light commercial. As you would expect, and we’ll continue to talk about this, more of that as every quarter passes in 2027.

We believe that is a significant, will be a significant driver for us as we look to better optimize our entire Exclusive Brands line. In terms of the margin, we still expect roughly the same margin profile with the new light commercial products that we are launching. So significant upside there.

Brendan Shea, Analyst, JP Morgan: Great. Thank you. You noted lower supplier rebates. Curious if those rebates are lower because volumes fell, or are suppliers changing program terms now that you are operating as a standalone company? How would you expect those rebates to trend into next year?

Mike Carlet, Chief Financial Officer, ADI: No one is changing any terms because we are a standalone company. I think there is a couple things going on. One, we exited a relationship with a supplier that was a significant rebate provider. It is just a change in the relationship that we had. So, it changes the nature. Some of that rebate will move right into margin with other products that are moving on as you flow through it. Some of it is just as we are managing our inventory. We are making sure that we are making good decisions with our inventory levels, and there is always a trade-off between when you bring in inventory, when do you drive rebates, how do you manage the inventory levels? So there is some trade-off there. Nothing specific. There is no specific change in the supplier relationships. The spin had nothing to do with it.

It is really just a little bit volume-related, as you said, a little bit tied to exiting relationships with supplier, a little bit our own decisions on how we manage our balance sheet and working capital.

Brendan Shea, Analyst, JP Morgan: Great. Thank you.

Operator: Your next question comes from the line of Gustavo Gonzalez with Evercore ISI. Your line is open. Please go ahead.

Gustavo Gonzalez, Analyst, Evercore ISI: Hi. Good morning, guys. Thanks for taking my question. Maybe just thinking about the fourth quarter guidance sort of implies low single-digit margin on EBITDA. I guess, how much of that is normal seasonality versus October’s deterioration, and maybe dig a little bit deeper into the drivers there and perhaps what we should consider carrying into 2027?

Mike Carlet, Chief Financial Officer, ADI: So a few things. One, first, there are four fewer selling days in the fourth quarter year-over-year. That is obviously an effect we have to think about. If you recall, back in Q1, we talked about the impact of having four extra selling days in Q1. It is just the timing of how the calendar fell this year. So on a year-over-year basis, that does complicate Q4. Obviously, on an LTM basis, it does not really change anything, but it does impact the quarter itself. So make sure you are correct for that in anything that you are thinking about as you look at the quarterly performance. Second, there clearly is seasonality in the business. Q2 and Q3 are our higher profitability quarters. Q4 and Q1 are lower profitability. From a cash flow standpoint, it is actually Q1 is the lowest. Q2 is not the best.

Q3 and Q4 actually are the best cash flow quarters. It’s a little bit different on the seasonality, but there is seasonality. I think, listen, we think our margin run rates are very much in line with our expectations. We’re not expecting significant changes to our margin run rates. We’re looking to drive, as we talked about, pricing opportunities, things going forward. As we said, in the short term, we don’t expect any meaningful change on our run rates of margins, excluding tariff rebates, excluding spin-related inventory adjustments. We said in our call script that we expect our cost savings initiatives to pretty much offset inflation and merit going forward.

Really, you’re talking about the top-line growth, which we think we’ve got good commercial opportunities, and we’re continuing to look at a challenging residential market that we’re going to assume is not going to get better and manage the business that way. If housing turns in our favor at some point in our lives, then I think that’s going to provide upside to where we’re at. But we’re not trying to call when that’s going to happen.

Gustavo Gonzalez, Analyst, Evercore ISI: Got it. Thank you. Just as a follow-up, if I could, on the goodwill impairment. You noted sort of reflect lower earnings and a couple of other items for the outlook. Just want to touch on the assumption, what’s changed most? Has it been the Exclusive Brands recovery, margins growth, and how did it sort of impact the sort of longer-term targets and capital allocation priorities from here?

Mike Carlet, Chief Financial Officer, ADI: Sure. Listen, for goodwill impairment, you do your impairment testing, you’re looking at a number of factors. Some of it’s driven by your stock price and the market capitalization. That’s what triggers some of this. You’ve got to look at that. Clearly, our stock’s lower today than it was at the spin, so that was part of the driver. We’ve taken down our guidance. That’s in the model as well. We still feel very good about our long-term growth algorithm for this business, but in the near term, we see a step down. We think over time we’ll see that continue to grow, but in the near term, we expect that to come down. So, those are the things that have driven it. No change in our capital allocation priorities.

De-leveraging is still our biggest priority, and we’re going to continue to focus on de-leveraging the business till we reach leverage levels that we think are right for our size company and what the market is expecting.

Gustavo Gonzalez, Analyst, Evercore ISI: Got it. Thank you, guys.

Mike Carlet, Chief Financial Officer, ADI: All right, thank you.

Operator: Your last question comes from the line of Jay Goldberg with Seaport. Your line is open. Please go ahead.

Jay Goldberg, Analyst, Seaport: Hi, thanks for taking my question. At your analyst day, I think you made Exclusive Brands something of a focus point. This is going to be an important driver. Is that still how we should be thinking about them? We are just going through a rough patch, or is there something more fundamental we should be considering here?

Rob Aarnes, President and Chief Executive Officer, ADI: I will take that one. Thanks, Jay. The short answer to your question is yes. We continue to be bullish on what our Exclusive Brands product line can deliver for us in the medium and the short term. Right now, if you think about the total breadth of that product, 70% is actual residential, resi AV to be specific. We have an opportunity in the coming quarters to better transition in two ways. One, transition an NPI focus to deliver light commercial products across all of our categories, all of our core categories, by the way, not just AV, commercial security, Pro AV, Datacom categories, where again, as I said earlier, we have 100,000 customers. That is the opportunity. We do not want to move away from our strong go-to-market position in Exclusive Brands and resi AV.

At some point, that actual macro will recover, and we are going to be in the best possible position to take advantage of that. Today, we are still very bullish, as I mentioned, on what Exclusive Brands can deliver, especially when you consider our medium and long-term margin and EBITDA margin goals. I think you used the term blip in the road. I think that is just what we are dealing with right now in all the resi macros.

Jay Goldberg, Analyst, Seaport: Okay, thank you. Just a quick follow-up. Could you just clarify what your cost-saving targets are for this year? I saw some conflicting numbers, so I just wanted to get the exact figure.

Mike Carlet, Chief Financial Officer, ADI: Yeah. What we’ve said is that we’ve identified $80 million of cost opportunity. We’ve actioned $60 million of that this year, and that’s an annualized number. Okay? So, $60 million annualized, $80 million annualized. We’ve actioned 60 of it this year. in Q3, we benefited from $11 million of that on a year-over-year basis, right? Q4 will be a little bit higher. We did some of it towards the end of Q2. Most of these cost actions, they started at the end of Q1, a little bit more as we got towards the end of Q2. Most of it done by early in Q3, a little bit more as we’ve gone through Q3. So, $60 million annualized number, probably 35-ish will be in our numbers this year. So, the full-year impact next year will be about $25 million bucks, roughly. So, that’s already done.

That’s in the numbers. We’ll get that benefit next year. We’ll get that benefit in Q4. There’s another $20 million of cost that we’ve identified, tied a bit to the 1ADI program, but we know as we consolidate DCs, other things, there’s $20 million out there we will get next year. The timing is probably mid-next year. Think about it as a mid-year convention on that. There’ll be some that happens sooner, some that happens later, but we’ll probably get $10 million of in-year benefit next year, and then $10 million of benefit the following year, so that in 2028, we’ll have the full $80 million. So, $35 million about this year, somewhere about $70 million in next year, and then $80 million in 2028. That’s what we’ve committed to. That’s what we’ve done.

That’s what we’ve got line of sight to and visibility. Now we’re looking really hard, given the margin pressures we have, what else are we going to do? We know there’s more that we can do out there. We’ve always thought as we complete 1ADI, there’s more opportunity. It’s a little bit harder to put a pin in it today, but we are moving and accelerating our points on how we’re going to go do that, given the top line’s pressure and margin pressure that we’re seeing.

Jay Goldberg, Analyst, Seaport: Thank you.

Mike Carlet, Chief Financial Officer, ADI: Thanks, Jay.

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