ADI Global Distribution Inc.

Hello, everyone. Thank you for joining us and welcome to the ADI second 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, please press star one again. I will now hand the conference over to Hunter Blankenbaker, Senior Director of Investor Relations. Hunter, please go ahead.

Okay, thank you, Hillary, and good morning, everyone. Thank you for joining us for ADI's second quarter of 2026 earnings call. On the call today is Rob Arness, President and Chief Executive Officer, Mike Carlett, Chief Financial Officer, Allie Copeland, Chief Operating Officer, and Marco Cardazzi, Chief Merchandising Officer. Before reviewing the quarter, 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. as amended and other SEC filings. In addition, we will discuss non-GAAP financial measures in today's presentation. These non-GAAP financial measures The reconciliation of GAAP, the non-GAAP financial measures is included as an appendix to this presentation, which is accessible on the investor relation page of our website at investor.adi.com. Unless stated otherwise, all numbers and results discussed in today's presentation other than revenue and gross profit are on a non-GAAP basis. So with that, I'll now turn the call over to Rob.

Thank you, Hunter, and good morning, everyone. Welcome to ADI's first earnings call as a standalone public company. Today marks the beginning of an important new chapter for ADI. At Investor Day in July, we shared our strategy, market opportunity, and long-term financial framework. On August 4th, we celebrated our first day of trading by ringing the opening bell at the New York Stock Exchange. We enter this next phase as an established, scaled business with category leading positions, a differentiated omnichannel platform and multiple avenues for above market growth. As an independent company, we can move with greater speed and focus and allocate capital towards ADI's highest return opportunities. We believe this enables us to strengthen our leadership and create long term value for shareholders. I want to thank our 4,100 team members around the world. Their dedication to our customers and suppliers has built ADI into the company we are today and made this milestone possible. For more than 40 years, ADI has served professional installers and integrators who build the systems that make homes and businesses safer, smarter, and more connected. Our goal has always been simple. make ADI the easiest company to do business with and become our customer's indispensable partner of choice. We do that by listening to our customers, investing in the capabilities they tell us they need, and making the right products available where and when they need them. Before moving on to the results, I want to take a moment to thank Jay Geldmacher for his exceptional leadership and wish him well in retirement. I also want to thank Tom Saran, and our colleagues from P&S for their partnership over the years. We are grateful for everything we accomplished together and wish them continued success. Now onto our second quarter results and operating priorities. Mike will follow with a more detailed review of our financial performance at ADI's full year 2026 outlook. As a reminder, ADI operated under Resideo in the second quarter of 2026. So the results we will review today are presented on a carve-out basis. As you likely saw yesterday, Resideo reported ADI segment results. On that basis, ADI generated record quarterly revenue of $1.29 billion and segment-adjusted EBITDA of $103 million, both exceeding the high end of the segment guidance ranges provided by Resideo on June 4th. Average daily sales increased 2%, while reported revenue increased 1% year-over-year, reflecting one fewer selling day and a difficult comparison against 10% organic growth in the prior year quarter. Overall, demand across our commercial markets remained resilient, while residential audiovisual continued to reflect the soft U.S. housing environment. Approximately 70% of our 2025 revenue came from commercial and markets, where demand is driven largely by retrofit, replacement, and technology upgrades in addition to new construction. Growth was led by data communications up in the low teens, commercial security up in the mid single digits, and professional audio visual up in the low single digits. Those gains were primarily offset by continued weakness in the residential audiovisual, where we have yet to see signs of meaningful recovery. That said, we are not standing still. We are strengthening the portfolio, investing in new products, and positioning ADI to capitalize when housing activity improves. Adjusted EBITDA on a carve-out basis was $86 million, up $30 million sequentially and down $9 million year-over-year. Adjusted EBITDA margin was 6.7%. The year-over-year decline primarily reflected higher operating expenses, pressure from freight and tariff-related product costs, and business mix, partially offset by tariff refunds. I want to reinforce a few key points from Investor Day about the market opportunity and the capabilities that make ADI unique. Our core categories across security, fire and life safety, residential AV, pro AV and data comm represent an addressable industry of approximately $65 billion in North America as of 2025. Our leadership in several of these key categories provides a strong foundation and the market size and fragmentation creates substantial room to expand. Our ability to capture that opportunity starts with the breadth of capabilities we bring to our customers. We help them design systems and select products, staging kit orders, and coordinate inventory and logistics so the right products are where they need them, when they need them. That end-to-end support helps customers keep projects moving, operate more efficiently, and has become an important driver of our share gains. That model begins with a deep understanding of how professional installers and integrators operate. We combine that specialized knowledge with local inventory, technical expertise, value-added services, and a scaled omnichannel platform. What sets ADI apart is how we bring these capabilities together at scale, tailor our model to how customers operate, and leverage an enterprise-scale supply chain. Our sales team is also a big part of what makes that model work. I'm proud to say that Selling Power named ADI one of its 60 best companies to sell for in 2025 for the fifth consecutive year, reflecting the investments we continue to make in the people, tools, and training that help our team serve customers and drive growth. Finally, another important growth pathway is Exclusive Branch. which represented approximately 18% of revenue in 2025 and carries a meaningfully higher margin profile. We have an opportunity to improve the trajectory by increasing exclusive brands attachment across our customer base. We are also expanding selected solutions into light commercial applications using better data and pricing capabilities to identify additional penetration opportunities. Combined with our product development capabilities, We believe these actions can drive a higher and more resilient exclusive brands mix over time. Together, these growth vectors support our long-term target framework of 4% to 6% organic revenue growth. We believe we have a compelling strategy designed to translate that revenue growth into higher margins, stronger cash flow, and improve returns over the long term. We have also been intensely focused on lowering our cost structure, capturing additional synergies from the Snap-on integration, simplifying our footprint, and better aligning our operations. Three years ago, we kicked off a broad modernization of our technology stack to create a more efficient and scalable operating foundation. With the heavy lifting now largely behind us, we are bringing the next phase of that work together through one ADI. our company-wide roadmap to further enhance the customer experience and simplify how we operate. At the foundation of One ADI is the modern ERP platform we have now fully implemented, along with the enterprise data capabilities it enables. Together, they give us the visibility and operating backbone to consolidate systems and websites, standardized processes, optimize pricing, and modernize our distribution and store footprint, while building the trusted data foundation to use AI more effectively across the business. These initiatives support our expectation of delivering at least $80 million of annualized gross savings by the end of 2027. You'll hear us talk about 180i regularly, and we intend to keep you updated on our progress. At the same time, we will continue investing in the capabilities that drive long-term growth, including digital, our sales and technical teams, ProAV, Datacom, and exclusive branch. As we execute against these priorities, we are equally focused on disciplined capital allocation. Our near-term focus is to reduce leverage and invest in organic opportunities. Over time, we will pursue disciplined tuck-in acquisitions where the strategic rationale, integration compatibility, synergies, and returns are clear. Today, we are also initiating our full year outlook for 2026, which reflects the current demand environment, cost actions underway, and investments supporting our long-term growth. We expect revenue growth to accelerate in the second half with stronger average daily sales growth, and improved standalone adjusted EBITDA margins compared with the first half, despite difficult gross margin rate comparisons to prior year. Mike will walk through the guidance ranges and the key assumptions in greater detail. In closing, we believe ADI is well positioned for the opportunity ahead. Over the past two years, we completed the largest acquisition in ADI's history, modernized our technology platform, and prepared ADI to operate as an independent public company. Our focus now is converting those investments into a more efficient operating model, a lower cost structure, and stronger financial returns. We've built a differentiated business that can continue to gain share in a significant market, and as an independent company, we can pursue that growth with even greater focus. With that, I'll turn the call over to Mike.

Thank you, Rob. Good morning, everyone. I'm excited to have joined ADI as CFO at this important point in the company's evolution, and I look forward to working with the team to continue its disciplined execution, capitalize on the opportunities ahead, and engage regularly with our investors and analysts. As we begin operating independently, our financial priorities are clear. Deliver above-market organic growth, expand adjusted EBITDA margins, increased cash generation and reduced leverage, while continuing to invest in ADI's highest return opportunities. Before reviewing the quarter and first half results, I want to provide some context on the basis of presentation. ADI operated as part of Resideo throughout the second quarter, before the spinoff was completed on August 3rd. Accordingly, the historical results I will discuss are presented on a carve-out basis, as described in our 10Q, and include allocations of certain residual corporate expenses. Those allocations may not reflect the expenses ADI would have occurred as a standalone public company. Beginning August 3rd, our results will reflect ADI as a standalone company, so the third quarter will include both carve-out and standalone results. Turning for our second quarter results, we continue to see resilient commercial demand, while residential AV has remained softer than we anticipated. Underlying profitability continued to be affected by freight, tariff-related benefits and costs, and business mix. Net revenue was $1.29 billion, an increase of 1% from the prior year quarter. Average daily sales increased 2% year over year, reflecting one fewer selling day in the current quarter. Compared to the prior year, gross profit increased by $9 million to $292 million, and gross margin expanded 50 basis points to 22.7%. The quarter included approximately $20 million of tariff-related refunds received from the U.S. government within cost of goods, which benefited gross margin by approximately 160 basis points. Excluding the impact of these refunds, the year-over-year decline in gross margin primarily reflected two factors. A more difficult comparison against the second quarter of twenty twenty five when tariff related pricing actions generated a temporary margin benefit. In second higher freight fuel and tariff related product costs in the current quarter. Exclusive brands revenue which today is currently focused in the challenged residential market was down nearly three percent compared to the prior year which limited the mixed benefit from this higher margin part of the business. As Rob discussed we have several initiatives underway to work to improve that trajectory, including increasing attachment across our customer base, expanding selected solutions into commercial applications, and using better data and pricing capabilities to identify additional penetration opportunities. Now moving on to operating expenses. Selling, general, and administrative expenses were $206 million, up $16 million from the prior year. The increase primarily reflected merit and inflation-related employee costs with headcount relatively flat, as well as temporary rent expense from overlapping facilities as we continue to consolidate and modernize our distribution footprint. Additionally, allocated residuo corporate costs increased $5 million to $18 million from $13 million in the prior year period. As discussed at Investor Day, We expect approximately $30 million of gross savings in 2026 from organizational alignment, continued Snap-on integration synergies, and optimization of our store, distribution, and technology footprint. We expect most of the benefit to occur in the second half of 2026. The actions taken to date are expected to generate approximately $60 million of annualized gross savings, and we continue to expect at least $80 million annualized gross savings by the end of 2027. These are gross savings, and the net benefit will be partially offset by continued investments in our digital and sales capabilities, including ProAV and Datacom, as well as normal inflation and annual compensation increases. Adjusted EBITDA was $86 million, or 6.7% of net revenue, compared with $95 million, or 7.4% of net revenue in the prior year quarter. The year-over-year decline primarily reflected higher SG&A and R&D expense, which more than offset the increase in gross profit. Interest expense was $16 million compared with $4 million in the prior year period. The increase primarily reflected a higher allocation of residual interest expense following additional borrowings related to the termination of the Honeywell Indemnification Agreement. Please keep in mind that these are carve-out results. So this interest expense reflects Resideo's historical capital structure and does not reflect ADI's standalone capital structure following the spinoff. We reported income before taxes of $8 million and net income of $6 million. This compares with a pre-tax loss of $274 million and a net loss of $283 million in the second quarter of 2025. The prior year period included $331 million of expense associated with the Honeywell Indemnification Agreement that was allocated to ADI. Turning to cash flow, net cash used in operating activities was $76 million in the first half, compared with $32 million of cash provided in the prior year period. The year-over-year change primarily reflected working capital use, including approximately $54 million from the timing of supplier payments and $30 million from higher inventory levels to support the business, as well as the timing of several annual cash payments concentrated in the first half. We expect operating cash flow to improve during the second half, supported by higher EBITDA and improved working capital performance. While cash flow can vary from quarter to quarter, we believe ADI is a consistent and sustainable cash generation model over the medium and long term. Capital expenditures were $26 million compared with $21 million in the prior year period. consistent with the relatively capital-like nature of our business. Upon completion of the spinoff, ADI had approximately $1 billion of long-term debt and approximately $150 million of cash, resulting in net debt of approximately $850 million and net leverage of approximately 3.0 times adjusted EBITDA. Together with our undrawn $500 million revolving credit facility, We begin operating as an independent company with $650 million of liquidity. Our near-term capital allocation priority is to use our cash flow to reduce leverage for our long-term target of approximately 2.0 times total net leverage. At the same time, we intend to preserve the flexibility to invest in organic growth and pursue disciplined, value-accretive, tuck-in acquisitions if and when attractive opportunities arise. Turning to our outlook, we are initiating full year 2026 guidance on a pro forma standalone basis. The third quarter will include one month of carve-out results and two months of standalone results, while the fourth quarter will be our first full quarter operating as an independent company. On revenue, we expect second half revenue growth in the mid single digits, with average daily sales growth approximately two points higher than that. reflecting four fewer selling days. The acceleration is supported by continued strength in our commercial categories, as well as more normalized comparisons following the ERP-related disruption from the prior year period. On gross margin, we expect year-over-year pressure to continue through the second half, driven primarily by three factors. First, a difficult comparison to the tariff-related pricing and inventory benefits realized in the prior year period. This benefit was more pronounced in the second and third quarters of 2025 and tapered off in the fourth quarter. Second, our outlook does not assume a residential AV recovery in the second half. With a greater portion of our revenue growth coming from commercial categories, business mix will also continue to impact margins. Third, we are transitioning away from a significant supplier that no longer meets the needs of the market. We expect the transition to result in approximately $6 million of second half gross margin headwind compared to the prior year, including inventory related costs and slightly lower margin from alternative products as we shift that business to different providers. Overall, we expect our margin rates in each quarter in the second half of 2026 to be consistent with our first half margin rates, excluding the impact of the tariff rebates received in Q2. On operating costs, we expect the benefit of our cost actions to contribute more meaningfully in the second half. Despite normal merit and inflation, certain duplicate distribution center costs as previously mentioned, and moderate investments in our growth priorities, we expect the operating expense portion of adjusted EBITDA to decline slightly year over year during the second half. Taken together at the midpoint of our guidance, we expect second half standalone adjusted EBITDA to increase modestly year over year, supported by stronger revenue growth, slightly lower operating expenses, and partially offset by the year-over-year gross margin pressures I just discussed. Based on these assumptions, we expect full-year 2026 revenue of $4.95 to $5.0 billion and pro-form a standalone adjusted EBITDA of $275 to $295 million. In summary, our second quarter results reflect record revenue positive average daily sales growth and continued resilience across our commercial categories. We remain focused on disciplined pricing, executing our cost reduction actions, and improving operational performance through our One ADI initiative. We begin this next phase with substantial liquidity, a clear path to reduce leverage, and the financial flexibility to invest in the business. We remain focused on delivering against the commitments we outlined in Investor Day, and creating long-term value for our shareholders. With that, I will turn the call back over to the operator to initiate the Q&A session. 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, please press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. And 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 Ian Zafino from Oppenheimer. Your line is now open. Please go ahead.

Hi, Grace. Thank you very much. I just wanted to go over the revenue guide and maybe to give us a sense of kind of confidence in the guide and the Excel in the back half of the year. Maybe you can help us understand some of the puts and takes there. You know, is high-end residential EV just kind of now facing easier comps and that's helping? I mean, how much of it is the ERP system? Kind of any other color you could give us there would be helpful kind of as it relates to your confidence. Thanks.

Yeah, Ian. Hey, this is Rob. You know, great question. First thing I would tell you is that if you go back to my repair marks, I talked about the fact that commercial security, which is the lion's share of the business, top line anyway, is returned to mid single digit growth. And we've seen continued momentum since Q4 of last year into Q1, into Q2. We expect that momentum to carry forward. We look at things like our backlog. We look at things like our daily sales across video surveillance, access control, fire and life safety. I feel really good, and I know Allie does too, that the majority of the share we might have lost last year is actually now back with us and we can kind of continue to capitalize on that. You know, you mentioned the ERP system. I mean, that just continues to, we just continue to mature in that. It's given our sales teams you know, a more efficient operating model, right? So those things give me a lot of confidence. And then, you know, there's the easier comparable also from last year, which, you know, we said was, I think we said $60 million was the, what we figured was the ERP impact last year, which was equated to maybe two or three points. So you take into consideration The growth we're seeing in our commercial security categories, the continued strength we see in Datacom and ProAV, combined with a bit of a softer comparable in the back half, that's what gives us confidence to be able to deliver that 68% growth in the back half.

Okay, thank you. And maybe as a follow-up, I just wanted to ask about the exclusive brands and some of the supplier changes. Maybe help us understand, is this a supplier change? What kind of drove that? Are we going to see more of that? Is this like a strategy to also grow exclusive brands? And when you think about growth in exclusive brands, is that going to come from Snap One or do you think we're going to see it elsewhere in the portfolio? Thanks.

Great question. The two things are actually independent of each other. This was just a supplier we've had for a while that, again, just is not meeting the demands of the market. And so we made that decision in July to separate. And then Mike already talked about the margin dollar headwinds that we're going to get from that in the back half. But it had nothing to do with exiting that supplier to replace that supplier's business with exclusive brands. So those two things were completely independent of each other. And look, on the exclusive brand side, we've hit this a few times, and I'll make a couple of points here. One, of the $800 million approximately of exclusive brands, the majority of that, roughly six and change, is on the residential AV side. And and so that is a depressed market right now. We've talked about that. We remain committed to it. We're we've got a great market share position there. But, you know, I think we all would have expected the residential space to have kind of come back a bit, certainly by now. You know, those are certainly kind of the projections when we bought Snap in 2024. That hasn't happened, but we're not standing still. We're to continue to strengthen our go to market. continue to produce meaningful MPI and continue to incent our dealers to actually buy those products. Marco's doing a great job continuing to launch new products this year and in the next year. But we've also got a grand opportunity from a total exclusive brands perspective to drive a higher penetration into the legacy ADI customer base where there's 100,000 customers there. And that's certainly a focus of Ali's going forward. What's that going to do? It's going to just make the entire exclusive brands portfolio, which is, you know, meaningfully higher margin, a bit more resilient against the effect that, you know, what's happening in the residential space.

Okay. Thank you very much.

Thank you for your question. Your next question comes from the line of Tomo Sano from JP Morgan. Your line is open. Please go ahead.

Hello, good morning, everyone, and congrats on the spin. Thanks, Tomo. Thank you. And I'd like to ask you about regarding the assumed average daily sales growth range in a back half. Could you share your underlying assumptions on demand conditions and pipeline Basically for four categories performance as you had in Q2 performance on page 12. I want to know about specifically in commercial, like how you look at the demand and initiatives in a back half. Thank you.

Yeah, thanks, Domo. I think we touched on some of this. Let me just reiterate a couple of things and maybe highlight a little bit more detail on a couple of them. Listen, I think at the end of the day, our commercial momentum remains strong, as Rob has said. We feel really good about what's happening in the commercial markets. We see strength there. We are recovering against, you know, last year the ERP disruption. And so strong commercial underlying demand against easier comps in the commercial market, given the ERP disruption last year, is a very significant driver. The residential market, we are still not expecting to recover. You know, we expect that to continue to be down slightly in the second half of this year. And we are looking forward to the times when that market begins to recover. Specifically, as Rob just mentioned, the ERP disruption last year was about two to three points of headwinds on the top line. And that makes for an easier comp. On top of that, we talked last year about the fact that when tariffs were being implemented, we saw a big pull ahead into Q2 from Q3. So Rob mentioned in his prepared remarks that last year we had a 10% organic growth increase in Q2. That was driven somewhat by that pull ahead, which then also created an easier comp in Q3. So as we talked about a DSA growth of 6% to 8% in the back half of this year, we think that is underneath it in line with our long-term growth algorithm, about 4% to 6%. But then with the easier comps because of last year provides another couple of points of growth on top of it. So we feel really good about it. We feel we're well positioned. We don't think that's a change from the current momentum we're on. You know, we're seeing that performance in the business today, even in Q2, when we think about the 2% DSA growth underneath it, you know, partly that was because of the more difficult comp against last year. And so we're not expecting a significant change in how we're performing right now. We think it's a continuation of the things we're doing with incremental growth and incremental improvement based upon all the activities that we have going on in the business.

Thank you, Mike. And on follow up, On the supplier transition EBITDA 6 million impact impact I have, could you break down the components such as gross margin headwinds versus transition cost, potential lost sales, and if you could explain how you plan to minimize any customer service impact? Thank you.

Yeah, absolutely. So it's about 50-50. Half of it is really one-time costs related to the transition, transitioning inventory. The other half is really just as we think about transitioning that product to alternative suppliers. Those suppliers and products don't have the exact same margin or margin is slightly not as good on those. So that's the other half of it. So it's those two things. The first one being sort of one time in nature, the second one being more of a permanent change. Listen, we feel really good about replacement products. This was a supplier while they were significant. There's lots of alternatives in the market. It's not a supplier we would say that we think has a lot of brand loyalty. We think that the ability to move this product to other suppliers is very high. In fact, we've already seen that. We've already made most of this transition. So it's not really a revenue issue. It's more just a margin rate issue on products that have a slightly different margin rate to us, which has some negative headwinds, and then the inventory transition. It's a very amicable split. We're working well with the supplier. There's not a lot of noise around it. So it's just a sort of course of action, but it does have some of those headwinds that we discussed.

Thank you.

Thank you for your question. Your next question comes from the line of Dan Stratemeyer from Jefferies. Your line is open. Please go ahead.

Thank you. Hey, gentlemen, I appreciate you taking my question and congrats on your first call as a public standalone company. It seems like there's just a lot going on this year, obviously, with the separation Seems like it's more headwinds, especially on the cost side, while revenue is probably better going forward here than what people were thinking. Can you just help us sort of understand as we head into 2027 and we think about modeling, like could some of these headwinds this year turn into tailwinds? And specifically on the gross margin side, you talk about freight, you talk about fuel, Are you taking price mitigation actions that take a little bit longer to take effect, and will that flow through to next year? And I guess it's like, is the second quarter the bottom for gross margins as we think going forward here?

Yeah, all fair and good questions, Dan. I think if you look at the numbers, you know, as you said, revenue growth we feel really good about was 6% to 8% DSA growth in the back half. And even the second quarter, I think we felt really good about our 2% growth given the difficult comp. So I think revenue is there and we think next year, you know, we're not going to guide next year, but we've talked about our long-term growth algorithm and no reason to think that's not the right way to think about the business as we go forward. On gross margin, you know, if you exclude the impact of tariffs, that tariff refund, that big $20 million we got in Q2, you can see that our gross margin rates in Q1 and Q2 were very consistent around 21.3, 21.4% in both quarters. We think that really is the run rate of the business. You know, there's a little bit of headwind from the supplier change. There's always a little bit of timing issues that go on with, excuse me, how we receive some rebates from suppliers. But we think right now, as you've seen over the last few quarters, that the gross margin rates are pretty much sustainable in run rate. We do think there's a little bit of upside opportunity, again, as we think about some of that, you know, one time supplier transition. But we think we're in good shape. Obviously, the mix will continue to be a topic there. We have chosen, if you look into our queue, We are disclosing in our queue revenue disaggregation between our third party and our exclusive brands products so that we can give you clarity about what's exactly happening with those both. And you can see those relative movements. And we've talked about the difference in margin rate that sits there. So we feel good about the run rate of margin. We understand last year there was a lot of noise, making the comps very difficult, which has made it difficult. But we think we're on the right trajectory. And as we've talked about, we think OpEx in the second half of the year is going to be down a couple points. based upon all the actions we're taking. As we look to next year, we're continuing to drive cost actions. While we talk about it on a gross basis, we will have inflation. We will have merit increases. We'll make decisions as we go into next year as to what level of investments we want to make or not make. But I would not be expecting our optics to grow significantly, if at all, going into next year as we think about our long-term model.

Thanks. Your next question comes from the line of Jay Goldberg from Seaport. Your line is open. Please go ahead.

Good morning. Thank you for taking my question. I just want to look at the balance sheet a little bit, both in terms of how should we be thinking about your working capital needs over the next few quarters, and then sort of longer term, how should we think about debt?

Yeah, thanks, Jay. We think our working capital, there's always a little bit of inventory variability and timing, but we think overall right now we probably have a little bit too much inventory just given some timing. And so our AR, our AP, very much normalized. Inventory may be slightly inflated as we think about supporting some of the business through the separation. Excuse me. But I would say that working capital is in decent shape. We expect to get inventory, a little bit of reduction, and we think we're in a good run rate. On a go-forward basis, as we said, we think our cash flow models Our free cash flow is very predictable, very sustainable over the long term. There's always a little bit of choppiness and noise in any given month or quarter, but the long-term model is very, very predictable. Just from a modeling standpoint, again, first quarter is always going to be a pretty significant use of cash. We'll walk through this more in some of our modeling, but there's a lot of one-time annual costs, if you think about You know, whether it's your insurance bill, whether it's, you know, we make our annual 401k payment in the first quarter is a bunch of things that that are just a cash pressure in the first quarter. So generally we look at Q1 as a use of cash and then generation cash throughout the year. But it's pretty predictable, sustainable, and we don't think there should be significant fluctuations in working capital going forward.

And on the debt side,

The debt side. So, you know, our new capital structure, if you look, we have a deck that we posted for our earnings. It has the new capital structure there. The new capital structure is $400 million of unsecured bonds that do not have any amortization on them. And then $600 million of term loan B that's got a very, very small amount of amortization. You can look at that schedule and it has the interest rates and Everything on there. So I think, again, it's not it's nothing unusual to feel really good about the the cash flow generation and our ability to to use that cash to pay down debt and capex, as we've talked about, is pretty moderate over, as we've mentioned many times over the next 12 to 18 months as we continue our consolidation of our distribution centers and our stores, we'll continue to see a little bit of slightly elevated capex as we get through that. But underneath it all, we still expect capex to be running at or below 1% of our revenue.

Thank you.

Thank you.

There are no further questions at this time. I will now turn the call back to Rob Arness, President and Chief Executive Officer, for closing remarks.

Let me first just start out by saying thank you for joining our first earnings call as a publicly traded company. We're very excited about the long-term financial opportunity of ADI and look forward to engaging with you, all of you, in the months and years to come. Thanks again for joining.

This concludes today's call. Thank you for attending. You may now disconnect.