Q3 2024 Lennox International Inc Earnings Call
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Speaker Change: Please stand by your program is about to begin if you need audio assistance during todays program. Please press star zero.
Speaker Change: Welcome to the Lennox third quarter 'twenty 'twenty four earnings conference. All lines are currently in a listen only mode and there will be a question answer session. At the end of the presentation. You may enter the queue to ask a question by pressing star one on your phone to exit the Q Press Star two.
Speaker Change: As a reminder, this call is being recorded I would now like to turn the conference over to Chelsea poaching from Lennox Investor Relations team Chelsea. Please go ahead.
Chelsea Poaching: Thank you Margo and good morning, everyone. Thank you for joining us today as we share a remarkable 2024 third quarter results joining me as CEO, Hello, Mascara, and CFO, Michael Quinter equal share their prepared remarks before we move to the Q&A session.
Chelsea Poaching: Turning to slide two a reminder, that during today's call, we will be making certain forward looking statements, which are subject to numerous risks and uncertainties as outlined on this page. We may also refer to certain non-GAAP financial measures that management considers relevant indicators of underlying business performance.
Chelsea Poaching: Please refer to our SEC filings available on our Investor Relations website for additional details, including a reconciliation of all GAAP to non-GAAP measures.
Chelsea Poaching: The earnings release, today's presentation and the webcast archived link for today's call are available on our Investor Relations website at Investor Dot one dot com.
Speaker Change: Now please turn to slide three as I turn the call over to our CEO elope Mascara.
elope Mascara: Thank you Chelsea and.
elope Mascara: Good morning, everyone.
elope Mascara: <unk> delivered another record quarter highlighted by double digit revenue growth.
elope Mascara: Operating margin exceeding 20% and strong free cash flow.
We also made solid progress on multiple key initiatives.
Our ongoing transformation plan.
elope Mascara: I'm grateful for our talented team and the growth mindset of our customers who enabled these exceptionally strong results.
elope Mascara: Let's turn to slide three for the highlights of this quarter.
elope Mascara: Core revenue grew 15% and our adjusted segment margin expanded 90 basis points to a Q3 record of 22%.
elope Mascara: Resulting in adjusted earnings per share increase of 24% to $6.68.
elope Mascara: We generated an impressive.
elope Mascara: $452 million and operating cash flow this quarter, which is $139 million.
elope Mascara: Approximately 44% increase over the same quarter last year.
elope Mascara: Our industry, leading rois seats also grew to 47%.
Speaker Change: What kind of segments E C. S M D C S.
Speaker Change: 15% revenue growth in the quarter and both continued to deliver strong segment profit.
Speaker Change: Investments in manufacturing capacity and front end redesign has enabled us to gain share and meet customer demand for our fort any products.
Speaker Change: In addition investments in digital processes and distribution technologies led to improved order fill rates within home comfort solutions.
Speaker Change: The new commercial factory startup remains on track and the building climate solutions segment successfully integrated the Aes acquisition ahead of schedule.
Speaker Change: These results reflect the dedication of our 40000 employees.
Speaker Change: And the continued support of our dealers and customers.
Speaker Change: Therefore, I'm confident in raising our 2024 EPS guidance range to $20.75 to $21.
Speaker Change: Now please turn to slide four for more details on our CLO transition.
Speaker Change: As announced earlier this morning, John Torres Lennox as Chief legal officer has elected to retire.
Speaker Change: I wanted to take a moment to acknowledge John outstanding 16 years of leadership and is lasting impact on Linux.
Speaker Change: He led multiple acquisitions and divestitures to streamline our portfolio and ensure that we operate with the highest ethical standards by strengthening our ethics and compliance officer.
Speaker Change: As a result of a thoughtful succession planning we're excited for moneycard Brown as she takes on the role of Chief Legal Officer effective January 1st 2025.
Speaker Change: Monica has been with Linux for 12 years with a proven track record across our businesses and legal functions.
Before joining Linux she spent nearly 13 years with a leading outside law firm.
Speaker Change: Looking ahead, Monika is well positioned to continue John's legacy of success with a focus on advancing our digital capabilities.
Speaker Change: On accelerating future growth.
Speaker Change: Now, let me hand, the call over to Michael to take us through the details of our Q3 financial performance.
Michael Quinter: Thank you Hello, Good morning, everyone. Please turn to slide five.
Michael Quinter: We were pleased to report our seventh consecutive quarter of double digit year over year adjusted earnings per share growth. This quarter, we increased our adjusted segment margin by 90 basis points and achieved a remarkable 15% revenue growth, resulting in 24% adjusted EPS growth.
Michael Quinter: Now I will share more details on our third quarter financial results.
Michael Quinter: Core revenue was approximately $1 $5 billion up nearly $200 million from last year attributed mostly to volume gains in both segments.
Adjusted segment profit increased by $52 million or 21% driven by $86 million in volume as well as price and mix benefits. This was partially offset by regulatory transition costs and expenses related to our new commercial factory ramp up.
Michael Quinter: Ongoing investments also impacted profits as we are committed to strategic initiatives and sales and distribution to support consistent profitable growth.
Michael Quinter: Tax rate was 18, 7% and diluted shares outstanding were $35 8 million compared to $35 7 million in the prior year quarter.
Speaker Change: Let's now turn to slide six and review the third quarter financial performance of the home comfort solutions segment.
Speaker Change: The home comfort solutions segment had an exceptional quarter delivering 15% revenue growth, 25% segment profit growth and an impressive 170 basis point expansion in segment profit margin.
Speaker Change: Sales volumes increased by 11% fueled by over 30% growth in our two step distributor channel, primarily reflecting normal restocking after several quarters of industry wide destocking.
Speaker Change: One step con contractor channel saw modest volume growth supported by our 410, a product availability compared to the broader market.
Speaker Change: Towards the end of the quarter, we saw early signs of our 410 eight pretty by demand.
Speaker Change: Pricing execution has been a key focus for the HCS segment over the past year, driving 4% revenue growth in the quarter.
Speaker Change: We successfully met our 2020 for price improvement targets. We are now concentrating on pricing for the new are $4 54, B products and these initiatives are progressing well.
Speaker Change: Finally, our quarterly profit was impacted by anticipated product cost challenges during our transition to our new our 454 b products and for ongoing investments aimed at enhancing our distribution capabilities.
Speaker Change: And improving the overall customer experience.
Speaker Change: Moving on to slide seven.
Speaker Change: The building climate solutions segment also delivered an impressive 15% revenue growth in the third quarter, 6% of which can be attributed to inorganic growth from our Aes acquisition.
Speaker Change: We are very pleased with this acquisition, which was completed in the fourth quarter of last year the.
Speaker Change: The integration was finished ahead of schedule and we have delivered better than expected aes profit margins driven by additional synergies.
Speaker Change: From there from an organic growth perspective sales volume was up 7% in the quarter, but was constrained by manufacturing challenges and new factory ramp up inefficiencies that limited production output.
Speaker Change: Segment profit increased by $9 million the profit margins declined due to anticipated manufacturing ramp up costs.
Speaker Change: Production startup at our new commercials factoring in Saltillo, Mexico remains on track. However, total manufacturing output for commercial HVAC continues to be below demand levels.
Speaker Change: For emergency replacement, we have started offering products and some pilot markets and early results are encouraging. Please turn to slide eight where I will review, our cash flow performance and capital deployment strategies.
Speaker Change: Operating cash flow for the quarter totaled $452 million compared to $313 million in the same period last year capital expenditures were $40 million, representing $1 million increase year over year.
Speaker Change: Our cash flow performance, it's been solid this year, reflecting ongoing efforts to drive revenue growth.
Speaker Change: Expand profit margins and optimize working capital.
Speaker Change: Earlier this year, we implemented working capital initiatives with a focus on accounts payable, which has been a driver of the $183 million increase year to date operating cash flow.
Speaker Change: In the coming years, we will unlock additional working capital by leveraging digital tools and efficient processes.
Speaker Change: Our return on invested capital ROIC stands at 47% and industry, leading figure that remains resilient across business cycles due to high non discretionary replacement demand.
Speaker Change: We continue to expand ROIC see year over year, while also making capital investments that are poised to deliver substantial benefits in the coming years.
Speaker Change: Finally, we maintain a healthy balance sheet with net debt to adjusted EBITDA at two eight times down from one eight times in the prior year.
Speaker Change: Free cash flow deployment strategy remains focused on driving annual dividend growth and executing bolt on acquisitions.
Speaker Change: We have re initiated buybacks in the third quarter, and we'll continue leveraging share repurchases to efficiently return excess cash to shareholders.
Speaker Change: If you will now turn to slide nine I will review, our revised 2024 financial guidance.
After the third quarter results and more visibility into the last quarter of the year. We have raised our full year revenue guidance. The table on the left summarizes our full year revenue growth factors.
Speaker Change: It'll company core revenue is now projected to increase by approximately 10%.
Speaker Change: We now expect mid single digit improvement in sales volumes combined price and mix to be up low single digits, and our aes acquisition to contribute low single digit growth.
Speaker Change: As a result of our strong third quarter profit performance, we are raising our full year earnings per share guidance to $20 75 to $21 from the previously guided range of $19 50.
Speaker Change: To $20 and 25.
Speaker Change: We're also raising our free cash flow guidance to $575 million to $650 million.
Speaker Change: As you can see most of our other guide points have not changed except for interest expense, which is now estimated to be approximately $45 million.
Speaker Change: Overall year to date performance combined with increased clarity on industry demand, that's given us the confidence to significantly raise our earnings per share guidance with that please turn to slide 10, and I'll turn it back over to Luke for an overview of the low GW P referred to the transition.
Luke: Thanks, Michael.
Luke: All necessary preparations for design engineering and manufacturing of the low GWB products were completed earlier in the year, ensuring a successful launch in the third quarter.
Luke: As part of this transition we are also excited to introduce our new Linux powered by Samsung Mini split and Brs heat pump systems.
Luke: We have invested heavily heavily in developing new low GWB products and minimizing disruptions during the transition.
Luke: We anticipate continued manufacturing cost headwinds into the first quarter of next year as we continue to convert production lines in our factories.
Luke: Our approach to Reconfiguring, our factories balances production flexibility with cost efficiency.
Luke: In 2025, we expect a gradual shift in demand for the new load DWP refrigerant products.
Luke: The first half of the year, specifically the fourth quarter, we'll see continued our fourth any sales from manufacturers distributors and dealers everyone depletes, the regular and pre bought Hartford any inventory.
Luke: We still estimate that for the full year approximately 65% of the end market demand will transition to low DWP burner, which will favorably impact mix.
Luke: Looking further ahead, we anticipate existing Fortinet ephedrine will face price increases.
Luke: <unk> tightened and demand moves towards low GWB products.
Luke: This will increase cost pressure underpass, leading to higher demand for system replacements.
Luke: This transition also opened more service opportunities for builders and contractors given additional safety features and components and the new <unk> hundred 54 B products.
Luke: We expect some of the new DWP price and mix benefits to extend into 2026 as the market fully transitions to the new law DWP prana.
Luke: With that please turn to slide 11 for our early thinking on the outlook for 2025.
Luke: We are pleased with the resilience of the North America <unk> industry growth.
Luke: We remain cautiously optimistic for 2025, given our sustained competitive momentum from our ongoing transformation journey.
On the left hand side of this slide you will see several factors that will likely impact revenue growth in 2025.
Luke: Mixed benefits from the low GWB transition with 10 plus percent price increases will accelerate growth.
Luke: Linux has historically executed extremely well during these regulatory transitions gaining share and confidence from our dealers and distributors.
Luke: We plan to do the same thing next year.
Speaker Change: We anticipate higher manufacturing output from our commercial HVAC factories within Rpc's segment.
In conjunction with the investment we made in our sales team. This year, we will be able to recapture some of the previously lost share in the emergency replacement market.
Speaker Change: Moreover, these improvements will instill greater confidence in our ability to serve national accounts with our full lifecycle value proposition.
Speaker Change: We are encouraged by the growth opportunities from partnering with Samsung for our Douglas heat pump offering.
Speaker Change: <unk> brand recognition and providing access to a broader customer base.
Increased incentives for energy efficient system.
They lead to higher replacement demand as well as higher tier mix.
Speaker Change: While we are generally optimistic about 2025 revenue growth. It is important to recognize our outlook can be impacted by several and Mac and market factors.
Speaker Change: Uncertain consumer confidence continues to pose challenges alongside a trend towards more value trio products, which may negatively impact mix.
Speaker Change: Higher costs for the new products May also create complexity and the ongoing repair versus replace dynamics.
Speaker Change: From an industry perspective, we expect destocking in the first half of 2025 as distributor sell through our fourth any pre buys this year.
Speaker Change: Additionally, comfort it has me gain some share as they overcome the current availability challenges.
Speaker Change: On the right hand side of the slide we have highlighted key drivers for margin expansion.
Speaker Change: We anticipate margin improvements from the new DWP product mix with 30% Incrementals.
Speaker Change: Quoted by our continued focus on price cost discipline.
We also foresee improvements in productivity from higher distribution fill rates as our focus on digital inventory planning and our investment in distribution technologies start to generate results.
Speaker Change: Greater factory efficiency will also contribute to our margin expansion, particularly in the second half of next year as we begin to lap the ramp up costs associated with the new commercial factory and low DWP transition.
However, these gains may be partially offset by several factors.
Speaker Change: Our investments in digital capabilities and distribution network improvements are essential for enhancing operational efficiency and improving customer experience.
While these investments are crucial for long term growth they may create some near term pressure on margins.
Speaker Change: Additionally, we anticipate inflationary pressures for both commodities and component cost.
Speaker Change: We also expect increases in healthcare and employee benefit costs.
Speaker Change: Ultimately our focus in 2025 remains on superior execution to drive differentiated growth and expand margins.
Speaker Change: We will provide further financial guidance when we report our Q4 earnings early next year.
Speaker Change: Now please turn to slide 12.
Speaker Change: As we wrap up today's call.
To emphasize our confidence in driving sustainable growth guided by five key elements of our strategic transformation plan.
Our first focus is on accelerating growth.
Speaker Change: Adding new customers as well as capturing a greater share of wallet from existing customers.
Speaker Change: Second we will expand our margins from price cost productivity and leveraging the strength of our direct to dealer network.
Speaker Change: Could the Linux unified management system remains key to our success, helping our streamline operations share best practices and execute our strategy.
Speaker Change: Next our ongoing investments in digital and heat pump technology keep us at the forefront of innovation to deliver cutting edge solutions for our customers.
Speaker Change: And finally, our strong culture rooted in core values and reinforce that pay for performance model drives our success.
Speaker Change: Our differentiated strategy.
Speaker Change: Can use to create sustained competitive advantages and will enable us to achieve our long term goals.
Speaker Change: I'm incredibly proud of what we've accomplished so far and I have no doubt that our best days are still ahead of us.
Speaker Change: Thank you will.
Speaker Change: We will be happy to take your questions now.
Speaker Change: Argo, let's go to Q&A.
Speaker Change: Thank you Sir at this time, if you'd like to ask a question. Please press the star one on your telephone keypad, you may remove yourself from the queue at any time by pressing star two and again that is star one for a question. We will take our first question from Tommy Moll from Stephens. Please go ahead.
Tommy Moll: Good morning, and thank you for taking my questions.
Speaker Change: Good morning, Tommy.
Tommy Moll: Hello, I want to start on the <unk> commentary that you've provided.
Tommy Moll: I hear you talk about the 10 plus percent pricing tailwind versus the <unk> product and then also about some early success with with.
Tommy Moll: With initiatives in recent weeks or months I guess, so if if we pull all this together am I correct in saying that number.
Tommy Moll: Number one the magnitude of the of the pricing mix tailwind is unchanged versus prior expectations and then number two that your conviction in successfully realizing that is higher now that you've introduced some product into the market, albeit at low volumes.
Speaker Change: I would say both are true Tommy the third thing I would add too is the competitive share gain that we get normally during any regulatory transition.
Speaker Change: The confidence in achieving that and this transition is also higher.
Tommy Moll: Thank you.
Speaker Change: Looking at the 2025 early thinking.
Tommy Moll: Slide you provided a look I wanted to unpack, what you're referencing here in terms of the trend for the value tier and then the repair versus replace.
Speaker Change: What have you seen to date.
Speaker Change: On those points and then what do you want to make sure to communicate about how that might evolve into next year. Thank you.
Speaker Change: Yeah, what we have seen so far is not a meaningful shift between repair and replace and but we continue to be cautious about it, especially given that the price of new equipment will rise. So we continue to monitor that and that's why I want to call it out.
Speaker Change: The value tier shift as we went from 13 seer to 14 seer and as we look at the overall state of the economy, we have seen a shift towards more people who are buying the minimums here. It already used to be about 60, 65% of the industry. So now it might be 65% to 70% of the industry. So that's what we're calling out in the value.
Speaker Change: Tier no surprises no changes from any of our previous conversation just wanted to leave.
Speaker Change: The <unk>.
Speaker Change: Was it gave them the potential watch out for 2025, but really no change in Q3 that we are calling out.
Speaker Change: Noted thank you Luke I'll turn it back.
Tommy Moll: Thanks Tommy.
Speaker Change: Well next go to Ryan Merkel with William Blair. Please go ahead.
Ryan Merkel: Hey, everyone. Thanks for taking the question. My first one is just on the 65% next year that'll be Hol can you just talk about some of the assumptions you're making there and then would you say the risk is to the upside there to the downside I know that's kind of a hard question, but.
Speaker Change: It is a hard question, but Ryan we are here to answer your questions.
Speaker Change: Listen I think the risk right now is fairly balanced around the number 65, if you remember earlier in the year, we were talking about 50% to 65%, but right now we feel more confident around the 65% number.
Speaker Change: <unk> it.
Speaker Change: If it's a little lower it could be because there's more pre buy in <unk>, which we will see in Q4.
Speaker Change: And if it's higher it'll be because a lot of the competition is already out of inventory right. Now so as we are selling for 10 and it could be used this quarter versus being leftover for next year to do that kind of the two dynamics on <unk>.
Speaker Change: Before turning away that'd be a selling today does that land up becoming pre buy which I think is.
Speaker Change: Some chances are is just because complicated a shot on that product. So those would be the pluses and minuses on that Ryan.
Ryan Merkel: Got it okay.
Speaker Change: And then just on the pre buy clearly that helped the quarter as we think about the first half of 'twenty five can you quantify the magnitude just we can set our models correctly.
Speaker Change: Sure so on the premium right.
Speaker Change: I'm not sure how much it helped Q3 I mean, if you think about Q3, what helped US was three different factors first of all the end of Destocking and beginning of restocking I mean, Douglas probably the largest contributor as you saw our.
Speaker Change: <unk> business was up over 30% around 30%. So I think that's the biggest factor for what happened in Q3.
Speaker Change: I would call out is just share gains.
Speaker Change: We've been gaining share just because of better execution and there was some impact of competitors running out of inventory I think share gains for the second factor could which may have happened a little bit towards the tail end of the quarter as pre buy.
Speaker Change: Remember most of our business goes through dealers and unless it goes towards renting our big Barnes I mean, they're not going to be able to do a lot of pre buy and.
Speaker Change: Distributor inventory levels are still pretty close to normal. So that's why I emphasize the point on the <unk>.
Speaker Change: Pre buy on how we expect what we would expect I said is in Q1 next year, there clearly will be some depletion or destocking of pre buy.
Speaker Change: Maybe some carryover in Q2, but that gives us confidence in the 65% number saying majority of the sales next year will be 454 b.
Speaker Change: Got it thanks.
Speaker Change: Thank you and we'll next go to Joe O'dea with Wells Fargo go ahead.
Hi, good morning, Thanks for taking my question.
Joe O'dea: I wanted to start on the.
Joe O'dea: The market share comments that you've made I think that and going back to 2018 time period and tornado in a period of time, maybe two or three years of some share headwinds. It seems like over the past couple of years dose have reversed and you've been on a on a share gain trajectory.
Joe O'dea: But can you just level set in terms of through these periods of time, how much you may have given up how much of recaptured net net.
Where do you stand today, and how youre thinking about those the share gain opportunities moving forward.
Speaker Change: Sure I'll start by reaffirming what you said is that yes, we have reversed those share losses, and we are back on a positive trajectory.
Speaker Change: Because we do both one step two step shed is a little difficult as we look at AHRI are any of those data.
But today, where we stand because of all the moving pieces. We are confident that we have gained share and we continue to gain share.
Speaker Change: What we have to do next year is make sure that we can retain most of the captured share because as competitors.
Speaker Change: Inventory, which many of them told right now and for any product.
Speaker Change: Then there would be like a lot of our effort going to want to making sure our share gains are more permanent on.
Speaker Change: On the commercial side, we had also the share gain comment comes out we have not been able to recover the share so far.
Speaker Change: Part of our plan for 2025 on getting share back on the emergency replacement because we are still constrained by manufacturing capacity not demand in that segment sort of separate the share comments into.
Speaker Change: Commercial and residential.
Speaker Change: Got it and then.
Speaker Change: Just wanted to circle back on the $4 54, B pricing commentary and you've noted that the initiatives are progressing well.
Speaker Change: Any any color that you can provide on on what that means in terms of or with respect to the 10% plus price and I think there's there's still debate out there on how to think about that price and list versus realized.
Speaker Change: So any clarification there when you talk about 10% price and if that's a realized number.
Speaker Change: I think as we finished Q4, when we have greater clarity on market movements and acceptance we can get to talk about that in early Q1 right now the 10% is.
Speaker Change: What we are looking to gain out of our price realized will apply to only 65% of sales in only the product at a forum for.
Speaker Change: And we will also be raising price on for next year. So that 10% has to be taken in conjunction with <unk> pricing today.
Speaker Change: So there are a lot of moving pieces and we can provide greater clarity.
Speaker Change: Overall, where we are seeing in the marketplace is the higher cost products that we're introducing 400 people or b is being supported by our and competitive malls.
Speaker Change: 10, plus 10 price increase into 2025.
Speaker Change: Got it thank you.
Speaker Change: Thank you and next we're going to go to Jeff Hammond with Keybanc. Please go ahead.
Speaker Change: Hey, good morning, guys.
Speaker Change: Yes.
Speaker Change: Just.
Jeff Hammond: I appreciate all the color on the 25 moving pieces. If we just kind of looked at the market today, what what do you think that <unk> unit and commercial unit kind of market growth looks like as you snap a line.
Speaker Change: 25, I know.
Speaker Change: There's a number of moving pieces some noise with the pre buy but just just kind of underlying unit demand in each of the businesses.
Speaker Change: If you think about dress and we talked about this earlier in the year we expected.
Speaker Change: For a dealer the volume to be flat to down then halfway through the year, we upgraded to be flat and now you're going to see flat to maybe slightly up is where we are on their site and I'm talking about installed units, albeit from stocking destocking, but think of lot of the conservative flat to slightly up.
Speaker Change: Maybe a little bit more.
Speaker Change: Thank you and an aggressive number.
Speaker Change: <unk> to look at but it is hard to come to a doctor in a form number as you know all the different moving pieces.
I think what we need to do you see the Q4 pre buy play out and see kind of how that impacts the end market demand as well as share gain initiatives that we've talked about normal we've executed better than others. During this transition. So those are two I'd note that we need to see how they play out over the next quarter. So we'll wait for AHRI, but it'd be flat to slightly up would be.
A good way to look at end market nonresidential.
Speaker Change: On commercial it's since we remain supply constrained we just go with the industry figures. We I think the market has been growing slightly it's still not fully recovered from the COVID-19.
Speaker Change: Colgate decline that had happened because our markets remember that if you don't have offices, we don't have.
Speaker Change: As much multistory housing what we call commercial is typically retail single storey buildings. So from that perspective, we do see that market continuing to grow low single digits at the end market.
Speaker Change: Okay.
Crazy I'm more optimistic about lower interest rates better.
Market performance going into next year.
Speaker Change: Okay, and then just in commercial.
Speaker Change: Maybe levels remind us your mix in education and.
Speaker Change: There's been a lot of funding extra funding around K through 12, and I know that's been a hot market. If you if youre seeing any signs of that.
Is that sunsets.
Speaker Change: That market might see.
Speaker Change: A move back.
Speaker Change: We are not seeing any signs of that market going back our exposure in education is probably less than some of our competitors.
Speaker Change: Given historically, we have been so focused on retail, but we look at that as a good growth opportunity, but currently we don't see any of that slowing down as we see also schools issuing loans and other pieces. Because these are very necessary maintenance and many of these units remain we past their useful life.
Speaker Change: Okay. Thanks, so much.
Speaker Change: Thank you and next we'll go to Jeff Sprague with vertical research. Please go ahead.
Jeff Sprague: Hey, Thank you good morning, everyone.
Hey.
Jeff Sprague: Hello, I just want to come back to kind of the share gain dynamics, then we got to hop over and see what else watsco, saying this morning, but.
You're kind of pointing to share gain largely being a function of.
Jeff Sprague: Some competitors running out of <unk>, where.
Jeff Sprague: They sound like maybe there is actually some bigger problem with somebody and I'm not expecting you to kind of name names on competitors, but.
Jeff Sprague: Are you actually seeing somebody also struggle with the transition or Theres some other.
Kind of a systematic problem with someone in the channel other than just kind of running out of <unk>.
Speaker Change: Obviously, we don't know what's happening inside the hold with any of those cant predict is what we know as our availability right now and <unk> is better than.
Speaker Change: Many of the other players and Thats, giving us.
Speaker Change: Advantage. We also know that lot of the investments, we made last year and improving our sales team being a better distributor.
Speaker Change: Making sure we have higher fill rates and ensuring that we have a decentralized model that gets more aggressive and focused on our typical EUR dealer all that's being honest about it so I don't want to break out the share gains into two comments one is.
Speaker Change: Totally consistent with everything we've been trying to do and second maybe some current advantage because of competition stumbles. It's part of the transition we made a bet that.
Speaker Change: Throughout this year for Dana demand would be higher and the shift to $4 54, B would only happen next year I believe some other competitors may have made a different Matt.
Speaker Change: They may have done on our products.
Speaker Change: And then thinking about the.
Speaker Change: The after effects of whatever pre buy we have in the next year right I mean.
Speaker Change: The 35% of the market, that's not $4 54 b.
Speaker Change: Almost by definition has to be sitting in distribution by the end of the year right.
Speaker Change: Manufacturers are running low on it now so.
Speaker Change: And that.
Speaker Change: I mean that feels like a really a potentially bigger air pocket early in the year.
Speaker Change: Then I don't know maybe people think maybe just kind of comment on that.
Speaker Change: You see the state of distribution at the end of the year and how this kind of give back on the pre buy might play out.
Speaker Change: Yeah sure first of all we will get greater clarity next year, because Q4 is that still just starting and we got to work through that.
Speaker Change: 35 number was based on deck, even manufacturers will have some <unk> inventory.
Speaker Change: We'll have four turning inventory at the end of the year that we will be selling.
Speaker Change: So as.
As we look at our own distribution and I think other manufacturers will likely also have fortinet inventory at the end of the year. So it's not just inventory at distributors.
Speaker Change: Inventory at manufacturers and distributors.
Q1 is where we would see the most impact I think the.
Speaker Change: Thanks, Todd So weaning away in Q2, and Thats why the 65 35, but you know Jeff I wish there was an exact science behind that or if we had full visibility and compete transparency.
Speaker Change: So this is just us looking at what we know and coming up with an educated guess we are going to be wrong. We just don't know where that's going to be wrong on the outside of the downside.
Speaker Change: Understood. Thanks for the color appreciate it thanks guys.
Speaker Change: Thank you. Your next we're going to go to Stephen Volkmann with Jefferies. Please go ahead.
Stephen Volkmann: Thank you very much actually I am just kind of build rate off of that alone wouldn't you rather be wrong by having more <unk>. So that you are price competitive further into 2025.
Speaker Change: For the whole industry.
Speaker Change: Which is what we care about deeply is gone.
Speaker Change: That everybody runs out of <unk> might.
Speaker Change: By the end of the year, so we get the better mix and the transition is more seamless for our dealers for the dealers dealing with two different product lines and training their crews and all of that is just very difficult. So we want to support our dealers and I hope the entire industry runs out which is quite likely given that some competitors already earning out of <unk>, but for.
Speaker Change: Our perspective, yes, we would like.
Speaker Change: Manufacturing transition to be clean.
Speaker Change: And for us to move to 454 B at the same time, we don't want to be price disadvantage in the first quarter when others may have fortinet. So that's a daily balance we got to drive.
Speaker Change: Okay, and maybe just switching to commercial any words of wisdom as we think about how the new facility kind of ramps up through 2025, and we sort of try to model that and when the startup costs kind of go away.
Speaker Change: Yes, the startup cost will go away to definitely by Q2, a large part will go away in Q1, right now where we are as we are on track from the timeline perspective.
Speaker Change: I would say the startup inefficiency, maybe a shade higher than what we thought originally just because we are putting extra focus on quality and sometimes you are paying more for freight to move products back and forth.
Speaker Change: And we want to make sure. It's a really good quality product and we take care of our customers through their transition.
Speaker Change: So I would say you should expect by mid next year to be kind of running up to as we talked to capacity of the factory would be.
Speaker Change: Think of another three quarters will ramp up associated with inefficiencies fading away in Q1.
Speaker Change: Michael Yeah, I'll, just add a lot of these costs. We're experiencing right now we believe are temporary obviously were trying to launch a factor. So in the second half of next year when that factory is fully operational these temporary transition costs.
Great.
Speaker Change: Great and then just finally on that you mentioned earlier that that demand is outstripping supply on commercial when this thing is up mid year to normal run rates as that then in better balance.
Speaker Change: Okay.
Speaker Change: We will be in better balance we may still be below capacity because remember we are only getting.
Speaker Change: 20% of the potential capacity installed to you up and running and if demand continues to outstrip supply we will put up another 20% factories large enough for us to be able to double our current capacity when we're doing at 20% at a time.
Speaker Change: But yes, we're definitely better balance and better be able to serve our customers currently our customer satisfaction and that is very low because we just got to meet the amount of demand and orders we have.
Speaker Change: Okay.
Helpful. Thank you guys. Good luck.
Speaker Change: Thank you next we are going to go to Joe Ritchie with Goldman Sachs. Please go ahead.
Joe Ritchie: Hi, Thanks, Good morning, guys.
Joe Ritchie: So look no.
Joe Ritchie: Know that you can.
Joe Ritchie: Clearly you don't have the crystal ball here, but just to square the comments on your own inventory levels exiting the year is the way we should think about it that you expect to carry.
Joe Ritchie: Inventory levels at <unk> products at least meet demand for the first quarter and Thats really kind of like the balance that you're that you're trying to make sure you get right.
Joe Ritchie:
Joe Ritchie: Approximately the reason I say that.
Speaker Change: Remember, we had also a distributor and 70% of our sales just like a distributor sand.
We feel dawn inventory five times, a year, but generally we do around that much I will have fortinet inventory just from fees and fees out perspective.
Speaker Change: That we will sell through in Q1, so I think some of it just practical constraints.
Speaker Change: Transition and there is of course, we do wanted to meet competition. So when he started golar I think that just largely how it will play out.
Speaker Change: Because we will continue manufacturing over time, we can.
Speaker Change: Okay Fair enough and then just maybe just thinking on pricing for <unk> in a.
Speaker Change: Given that the products.
Speaker Change: We're gonna be continued going.
Speaker Change: Going into next year does that change the pricing dynamics that you are able to put through in the early part of next year as you typically quite your annual price increases or how should we kind of think about that.
Speaker Change: For 10, a pricing even for the portion of the year.
Speaker Change: In Q2.
Speaker Change: In the network in early 2025.
Speaker Change: First of all if you want to take care of our customers and be fair, but second from a demand and supply perspective, a fortinet is short in supply, which is what we're experiencing right now.
We fully expect to capture the incremental pricing in 2025.
Speaker Change: And for any for DNA products sold in 2025 and.
Speaker Change: And we do annual price increases I mean, Costco benefits are growing constantly none of the commodities continue to be around <unk>.
Speaker Change: Inflation in wages. So yes, we fully expect to have for Denny sold in 2025 to be at higher price than <unk> sold in 2024.
Okay, great to hear thank you.
Speaker Change: Thank you next we'll go to Julian Mitchell with Barclays. Please go ahead.
Thanks, very much Hello, maybe first off.
Julian Mitchell: Sort of interesting bits and pieces on the margins I suppose on slide 11, maybe trying to wrap it together. So I think your margins. Your operating margin. This year is guided up about a point for the year as a whole just total Linux.
So it's sort of 30 ish percent incremental margin.
Julian Mitchell: We look at the bits and pieces on slide 11 is the main takeaway that it said.
Julian Mitchell: Similar incremental.
Julian Mitchell: Next year.
Julian Mitchell: Or is there something I'm missing on some of the moving parts on slide 11.
Speaker Change: I think overall, we expect our margins expanded bolsa.
Speaker Change: Next year predominantly led by the mixed benefits that we'll see an offsetting some of that will be some of the investments we're making.
Speaker Change: Have at least a 30% incremental on the mix and then we will get some more volume tailwind telephone shale and share which is also a 30% incremental.
Speaker Change: We'll have to go through all the puts and takes and some of the investments, we're making but 25% to 30% incremental in the range, but we've got to get through all the details still yes, Julian remember our long term targets for <unk> margins.
Speaker Change: That were published I mean, we are still not there. So we obviously want to keep making progress towards that over the next year year and a half to get there. So I don't want to get give you exact number because Q4 still has to play out depending on how that goes but we do expect margin expansion next year for sure.
Speaker Change: That's helpful. Thank you and then just my follow up.
Speaker Change: Revisiting sadly the pre buy stuff again.
Speaker Change: Yes.
Speaker Change: It sounds like if were trying to quantify it we should not be.
Speaker Change: Too concerned if that's right for a couple of reasons about the extent of the destock I think one is if I look at your.
Speaker Change: Residential volume guide for this year it has gone up about three points.
Speaker Change: I think for the year versus what you said in July but a lot of that is share gain.
Speaker Change: So you've got maybe a point of effect from pre buy this year.
Speaker Change: And then also if the effect is mostly in Q1 of next year Q1 is typically a very small seasonal quarter any way for you and particularly so for cooling products, which presumably is what the refrigerant change affects rather than.
Speaker Change: Hot product. So maybe just clarify for me if im misunderstanding anything with those points. Please.
Speaker Change: First of all Johann misunderstanding Julianna. This is your classic court, if I can call back to you.
Speaker Change: Analyzing storm in a teacup right I mean, our industry overanalyze sometimes.
Speaker Change: I think companies that execute well have a strong strategy do better but yes. Your math is about correct.
Speaker Change: 70% of US there are kind of immune to this whole pre buy discussion and that's going to work as planned. The other 30%. We believe majority of the effect right now as stocking destocking not pre buy.
Speaker Change: And you said all of that Q4 is still out there I mean, if Q4 has a very heavy Q.
Speaker Change: Quarter and a lot of that is driven by a pre buy then all our answers could change and we will have to talk about that then.
Speaker Change: Q1, but I think so far we are assuming there'll be some pre buy but not a heavy pre buy.
Speaker Change: That impact us this year.
Speaker Change: Great. Thank you.
Speaker Change: Thank you. Your next we're going to go to Noah Kaye with Oppenheimer. Please go ahead.
Noah Kaye: Thanks for taking the questions.
Noah Kaye: Really great quarter for cash generation and.
We look towards 25 and lapping some of the investments you've made in the Capex side I think in the past you've talked about getting back to 100% free cash flow generation.
Speaker Change: Eric for 100% free cash flow conversion, how do we think about <unk>.
Speaker Change: Share repurchases I mean that picking up here in <unk> levels for 25.
Speaker Change: <unk> been a couple of years, but going back you used to be pretty active.
Speaker Change: On the repo front.
Speaker Change: I'll start by just saying that our new CFO is really helping to drive the free cash is bringing a new level of discipline, a new level of accountability and a new level of focus on working capital management with that I will hand, it over to Michael to actually answer that question and I'll just add on that that's one of the initiatives I've started is trying to.
Michael Quinter: Aligning the organization on working capital management, especially as we look to get 90% or even close to a 100% of free cash to net income. So it's something we're focused on over the next couple of years, but yes, we are generating a lot of cash in our deployment strategy is going to be basically consistent where every year, we're going to increase our dividend, we're going to look at our dividend yield compared to <unk>.
Michael Quinter: Growth companies in the S&P 500, So we'll do that and then we're also evaluating bolt on acquisitions that have to have the right fit with the right returns on it. So we are being very disciplined in that but we're definitely focused there and then thereafter, it's going to be about share repurchases. When we started getting back into share repurchases. This quarter. We will continue to do those but it will be kind of a tool.
Michael Quinter: All that efficiently deployed that capital if we don't do acquisitions.
Okay and can you talk a little bit about that acquisition pipeline and what what are your needs might be at this moment.
Michael Quinter: Yes, I think what we've looked at as different technologies kind of bolt on technologies in the commercial space like just give us a better product offering with our with our commercial customers we've looked at.
Just distribution opportunities to have a full assortment of products that we can sell through our residential distribution network. Those are two big ones and then there's just different technologies to make our products smarter yet either on the thermostats IQ.
Michael Quinter: So it's a host of things that we're looking at but again, they've got to add the right fit and the right price.
Speaker Change: Add to that remember I mean, we are also trying to be more of a distributor or is it just a manufacturer and is a big opportunity for products that our dealers by our key accounts by that we don't Saturday. So if we could look at appropriate products and technologies as Michael said and bring them into our network that could be significantly value enhancing to our shadow.
Speaker Change: So we are very disciplined in capital allocation and as Michael said, we will look at all those opportunities and balance those appropriately, but it starts with strong cash flow, which I think Michael and the team are doing a great job at.
Speaker Change: Great I'll have some follow ups offline, thanks very much.
Speaker Change: Thank you next we're going to go to Deane Dray with RBC capital markets. Please go ahead.
Deane Dray: Thank you good morning, everyone.
Speaker Change: Morning, David.
Deane Dray: Hey, I saw that the plan to build share in emergency replacement is highlighted on the outlook for 'twenty five you've talked about this before can you just.
Deane Dray: Share some color on what it means to <unk>.
Deane Dray: Refocus on that business. My understanding is you will need to boost inventory in the field.
Deane Dray: As you need 24 hour turnaround and the customers have to know that it's either you're ready for that order or you Miss it entirely so what kind of working capital burden increase are you looking at to fill emergency replacement and can you size that.
Speaker Change: Tim that's a very good question. Thanks, I agree with you that the going back to emergency replacement requires a lot of effort starts with us having more manufacturing capacity then it goes into making sure we have appropriate inventory within 24 hours in some cases urban market the same day.
Speaker Change: And then finally it also comes down to having the right feet on the street and getting all the contractors, who may have gone to some.
Speaker Change: Something else or someone else to come back and look at that forward and we're doing all of it back.
Speaker Change: Most of that working capital impact will be in 2025, and we'll be happy to come back and look at it but I can also tell you it wont be as material because today, we have excess working capital, but it is on the raw product side as we are starting factories and transitioning factories I will look to redeploy none of that working capital from raw.
All materials more into finished goods and closer to the customer.
Speaker Change: It's a pretty heavy moves but from a financial perspective, I would expect a lot of that come from the additional draw inventory via carrying as part of startup.
Speaker Change: That's really helpful. Thanks.
Speaker Change: And then second question for Michael.
Speaker Change: On ROIC.
Speaker Change: Linux is so far ahead of anyone else and industrials.
Speaker Change: I think from our Carrbridge Youre, probably nearly two times bigger.
Speaker Change: Versus the next closest competitor so just kind of talk us through as you make decisions investment decisions Capex decisions are you looking at the ROIC impact.
Speaker Change: Do you hesitate at all on investments in all its a rhetorical question that youre going not just now but just the idea that you will at times pressure on ROIC.
Speaker Change: Is this more of an outcome or a target the way you think about it in the company.
Speaker Change: Yes, what I'll say is that our industry, leading ROIC, it's mostly driven by our organic disciplined approach to investments. So we've not done a lot of inorganic acquisitions, obviously when you do those they will be dilutive, but when we look at acquisitions like we did with a yes. It was.
Speaker Change: Good ROIC, well above 20%, but still below the 47% that we're tracking so well continue to look at bolt on acquisitions that are above our cost of capital and then from a capital expenditure perspective, we do the same thing so we're not necessarily targeted on growing above 47%, but we want to stay at 40% and have.
Speaker Change: Good ROI projects on these capex and so we're looking at both on the organic capital expenditures and the inorganic acquisitions to have healthy ROIC above our cost of capital.
Speaker Change #100: That's really helpful. Thank you.
Speaker Change: Yep.
Speaker Change #101: Thank you next we're going to go to Brett Linzey with Mizuho. Please go ahead.
Brett Linzey: Hi, good morning, congrats on the quarter.
Thanks, Yeah.
Brett Linzey: I wanted to come back to the early thinking on 2025, and the 30% incremental comment on low GW P.
Brett Linzey: Is that all volume incremental comment and then price mix should drop through at something above that similar to this year, just hoping you could maybe parse those pieces out.
Speaker Change #103: Yes, yes, what we're expecting it's more of a kind of a price cost. So it will come through we'll have mix up.
Speaker Change #103: For the pricing that we just talked about and then the drop through on that mix will be at least 30% to maintain our gross margins and reflect the additional costs that we're having to put into the product investments that we're making are.
Speaker Change #103: Our volume Incrementals are also similar to 30%. So we have both kind of dropping through at 30%.
Speaker Change #103: The mix next year and our normal volume gains.
Got it and then just thinking about new versus replacement in residential obviously, new housing has been a drag how much was that down so far this year and then you noted some of the value tier growth for next year thinking about better housing environment and some of the investments should you maybe pick.
Speaker Change #103: Some share in new housing next year or grow in line with the market any any thoughts there.
Speaker Change #104: Yes, I think we are starting to see some green shoots in new housing. So we are.
Speaker Change #105: Bouncing along the bottom or we are coming off from the trough from new housing. So that's positive and remember we are kind of.
Speaker Change #105: Six months behind the new housing starts number that you might see our share position and there remains very strong and.
Speaker Change #105: And on the replacement side again, if you believe even the recent Wall Street Journal article about homeowners are starting to do more.
Speaker Change #105: Repairs and renovations, we think higher.
Speaker Change #105: Demand there would probably result from lower interest rates and consumer confidence, but all that said theres just a lot of uncertainty on the value tier our comment was driven by because of the Seo changes.
Speaker Change #105: The pricing levels and because of the higher interest rates that are prevailing versus a few years ago. So we just want to watch out for that going forward. It's a lot more for us to analyze and.
Speaker Change #105: Evaluate before we come to you in 2025 and give you more firm guidance on those things.
Speaker Change #106: Thanks, I appreciate the insight.
Speaker Change #106: Okay.
Speaker Change #107: Thank you next we are going to go to Steve Tusa with Jpmorgan. Please go ahead.
Steve Tusa: Hey, good morning.
Steve Tusa: Honestly.
Steve Tusa: What do you think is driving.
Steve Tusa: Distributors to stock up.
Speaker Change #109: The last couple of months of the of the summer when.
Speaker Change #109: The demand is effectively like maybe flat to up a little bit.
Speaker Change #109: And you have this transition coming what whats kind of the what's the driver there.
Speaker Change #110: Yes, and I think Steve depends on which type of distributors I mean, we can talk about our distributor's, we haven't seen our distributor stocking up we are seeing our distributors.
Speaker Change #110: Going away from Destocking, so they're going back to normal inventory levels that existed pre COVID-19.
Speaker Change #110: And we haven't seen them.
Speaker Change #110: Taking extraordinary measures to stock comp no I think in Q4, they might do some <unk>.
Speaker Change #110: Pre buy to get some price advantage versus 454 b.
Speaker Change #110: I have not seen any at least from our distributors that we work with.
Speaker Change #111: And a big push to stock up and I'll just add on top of that the cost. If you go back to Q3 last year that channel was down 20% due to destocking definitely favorable comps year over year as they restock as Lode mentioned.
Speaker Change #111: Got it.
Speaker Change #111: And then when it comes to the.
Speaker Change #113: The pricing for next year, so youre, saying, 10% plus on 70% of your revenue I think 65% penetration.
Speaker Change #114: So that kind of get to your window firmly in the mid single digit plus range for price for next year kind of capture for the segment is that is that like the right math that you are talking about.
Speaker Change #115: Yes, let me get you a greater clarity in 2025, because we'll have more clarity both on <unk>.
Speaker Change #115: $535 450, <unk>, but I think that's roughly the right Martin.
Speaker Change #115: The way you look at it right now.
Speaker Change #115: Okay, and then lastly, I just want to look at mix. Most is going to look at mix versus price right. Because you got brand new products.
Speaker Change #115: Right. So this is mix versus like just pure price paid but that is the right math right now.
Speaker Change #116: Around five 6%.
Speaker Change #117: And the state is mid single digit is a good range and I'll just add the stick rate, we normally see in regulatory transitions as high this will make it a lot of cost investment we need a ticket.
Speaker Change #118: Got it and then just lastly, I guess with the with the combination of.
Speaker Change #119: The pre buy for the industry at least maybe perhaps more than some of the things you talked about as being uncertain as far as consumer confidence repair versus replace all of that do you expect like the industry volumes next year at this stage.
Speaker Change #119: To be down industry volumes, you've talked about your share gains but.
Is is the industry volume down next year do you think.
Speaker Change #120: Listen from my perspective, I would say the industry volume and this is installed underground so away from any.
Speaker Change #120: Distribute our stock in our stockholder and all of that I would think it's going to be flat to slightly up next year and a lot of that's just driven by.
Speaker Change #120: They can ongoing trends age of units and the cost of repair versus replace but.
I wish I could predict that more accurately Steve everybody is going to have a different view on interest rates are going to have a heavy influence in that as well.
Speaker Change #121: And then sorry, one more question about new home construction is picking up so right.
Speaker Change #122: Yes, sorry, one more question from maybe the guy that over analyses as you said whatever the comment was.
Speaker Change #123: The share gains this year with Europe with your competitors that are that have been like out of the market.
Speaker Change #123: Why are those sustainable why isn't that like a tough comp in the next year or are they is this kind of structural share gain do you think you've taken because of that.
Speaker Change #124: Whenever somebody stumbles some of that becomes more money when we stumbled with the tornado it took us years.
Speaker Change #124: Years to get that share back so I mean, I look at our past <unk> some dealers with switchback some won't so I mean.
Speaker Change #124: That's why our comment is our goal is to make them ask for money as possible.
Speaker Change #124: Execution comes down and see what works.
Speaker Change #125: Got it okay. Thanks a lot.
Speaker Change #126: Thank you next we'll go to Nigel Coe with Wolfe Research. Please go ahead.
Thanks, Good morning.
Speaker Change #126: A lot of ground.
Speaker Change #126: Let's not overanalyze this situation, but Tim.
Speaker Change #127: What is what is the feedback from your end customers the contract as the dealers on <unk> I mean, how did they come to terms with the technology the training requirements et cetera.
Speaker Change #127: Do they actually want to have a 12 or do they want to take as much as they can and I'm. Just wondering you know this dynamic of <unk> are you going to increase prices effective train five is there an incentive for them to stock up in <unk>.
Speaker Change #128: Yes, we're talking about and contractors and the good news is we're belly to belly with 10000 of them and I can tell you our 10000 <unk> <unk> they can.
Speaker Change #128: The individual views so depending on whom you ask you will get that view in general I would say most contract.
Speaker Change #128: Ward.
Speaker Change #128: Referred to continue doing what they're doing they're change resistant, but they also realize that they don't have a choice and they have to move to $4 54 B.
It only comes down to some of them, especially the high end one will want to move sooner versus later, because they are selling a high end product and theyre not at the bottom end of the range or those who are more on a Chuck in a truck and at the bottom end of the range. They will want to keep doing for as long as possible on the positive side, it's been well accepted.
Speaker Change #128: People have gone through training people understand how to install it we're spending a lot of time doing training. Other distributors are doing a lot of time doing training.
Speaker Change #129: That'll happen is there a risk that some of them will stock up more on <unk> at the end of the quarter.
Speaker Change #129: But they do have garages in Barnes they may not have warehouses.
Speaker Change #130: It is a risk to that I mean, that's the risk we deal with every year.
Speaker Change #131: Yep Okay.
Speaker Change #130: Vision of bonds being used to stock up.
Speaker Change #131: H Vac units would have to do some pharma that's.
And then just I wasn't going to Barton answer and actually you saw that.
Speaker Change #131: Yeah side by side with the cheese.
Speaker Change #131: Then just thinking of that but just conceptually you know the the repair versus replace dynamic.
Speaker Change #131: You know if if we're in a four or five will be worlds and you know you've got a full 10, a system or <unk> system.
Speaker Change #131: You're going to have to replace the whole system as opposed to you know if you're going to replace Sims and instead of just a component replacement et cetera. So why wouldn't there be more kind of compressive replacements automotive replacement, so or whatever.
Speaker Change #131: And in a world, where we put them through another 10% price I'm just I'm just trying to figure out here, whether we will see kind of more of a Pam mix.
Speaker Change #131: As we transition through this eight well.
No I think you did do that.
Speaker Change #132: I still think it comes down to the age of the unit. So if the unit is five year old and it's got a compressor broken the deal is likely to come and change the compressor. If it's a 12 to 14 year old unit with the compressors broken in the motor is making noises theyre likely to replace the whole system.
Speaker Change #132: In the 12 to 15 year old unit, because the extra cost of <unk> once it spiked and it does not spiked yet.
Becomes an additional factor that comes into play so I don't think it's just that the R 22 to four.
Speaker Change #132: Pieces in the beginning year or is it didn't change the repair to replace but in the future years. It did move it more towards replacement versus Japan.
Speaker Change #132: I think the same thing is going to happen probably no impact in 2025 for repair versus replace but in future years as well.
Speaker Change #133: Great and then just a quick one I'm probably the last question here.
Have you sized the.
Speaker Change #134: The the dollar Tam for the emergency replacement market for commercial what what sort of share do you think you can get at that time.
Speaker Change #135: We haven't sized our broadcast that yet, but we know what we used to have and we also know that the.
Speaker Change #136: Industry broadly has a healthy mix between emergency replacement and key account and we're essentially almost all key accounts. So the industry is.
60, 40, we are probably 90 10 and back in terms of 90% key account and 10% emergency replacement. So we do know we have a significant opportunity for us to take that forward you can take that and multiply it by AHRI industry data.
Speaker Change #136: The industry is a lot more weighted towards the emergency replacement than we are.
Speaker Change #137: Maybe I.
Speaker Change #137: I can give you some sizing on that.
Speaker Change #138: Alright, that's great. Thanks.
Speaker Change #137: Yeah.
Speaker Change #137: Yes.
Speaker Change #139: Thank you for joining us today since there are no further questions. This will conclude <unk> 2024 third quarter Conference call. You may disconnect your lines at this time.
We just couldn't get to Qualcomm.
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Speaker Change #139: Hello, Matt.
Speaker Change #139: Yes.
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