Lennox International Inc. (LII) Earnings Call Transcript & Summary

Good afternoon, guys. Thanks for joining on the line for our 43rd annual conference here. We're very privileged to have with us Executive Vice President and Chief Financial Officer of Lennox International, Joe Reitmeier. Joe, welcome. Thanks for participating again.

Thank you for having us.

Of course, my pleasure. We -- I want to go right into Q&A. Folks on the line, if you have questions, feel free to shoot them over to me, and I'll do my best to ask Joe on your behalf.

But just to start it off, Joe, could you talk a little bit -- obviously, supply chain is sort of the pinch point of the day right now. Where are the pinch points greatest? What types of things are kind of showing the longest lead times? And are there -- is there any evidence of them improving? What are you doing to second source?

Yes. Broadly speaking, we've seen some relief in some of the challenges in the supply chain. Where we've seen the relief has been in controls to include microprocessors. Steel has freed up with some of the automotive manufacturers. Iron facilities are going back on production because they're having challenges with their supply chain, has freed up that. And then where we're seeing some constraint is in motors. And we have a diverse supply base there. So we're comfortable with what we have, but it's always a challenge. And then on compressors with somewhat of a limited capacity in there to a situation where that could be constrained in 2022. But we've got -- once again, we've got dual sources there and we're comfortable with what we have in place.

On compressors and motors, I mean so in compressors, you source from Emerson, Copeland and LG, is that right?

Yes, that's correct.

Is any one of them more able to supply in the near term? Or is it both are pretty full up on capacity constraints.

Once again, we have those 2 sources. LG remains very flexible. I think it's more of a challenge on the Emerson side of the equation.

From motor side?

Motors, once again, we've got multiple suppliers there. So we've got more than 7 suppliers from motors. And it's not isolated in 1 geography. So we feel comfortable there. But once again, it's one of the things that's been a challenge for us in the industry is on the motor side of things. But our sourcing team has been heroic in some of the things they have been able to do with navigating some of the complexities and challenges in the supply chain.

So speaking of inventory as a result then. If you're obviously going to have a little bit more WIP inventory as you move through the year by definition. How does that normalize? Like when do we -- what is sort of the right level looking out a year or 2 years from now, assuming supply chain abates? Is it going to be a big source of cash do you think? How should we think about it?

No, I think -- once again, we haven't had a normal year in a while. It started with the tornado that hit mid-2018. We've recovered from that in 2019 with all the things we had to do. And then 2.5 months later, the world tilted on its axis and COVID hit. So it was a situation where we came out of 2019 depleted with finished goods inventory with expectations that we will replenish it then. With the uncertainty around COVID in 2020, we didn't make a commitment to do that, but demand remained strong, further replenishing or depleting finished good inventory, particularly on the residential side of the house. And then we entered 2021 with expectations that we would make that replenishment, but demand remained strong. There were challenges in production and supply chain that prohibited that. That left us with a little bit of excess cash that we return to shareholders. We took our share repurchases from $400 million to $600 million in 2021. And the expectation is in 2022, hopefully, that presents the opportunity with some of the distractions or disruptions that we've experienced subsiding that will enable us to replenish that finished goods inventory such that we're better positioned to support end market demand, and that includes rolling out more distribution locations, 30 wholesale storefronts for us. So hopefully, in 2023 -- hopefully, everything works out well in 2022 as we expect. We can replenish that distribution channel that's been depleted. And then in 2023, we should be back in the cadence of being much closer to delivering free cash flow that approximates net income.

That's a great answer. I'm curious about, like you mentioned replenishing inventory and the like. You have the Lennox product, you also have the Allied brand, which goes to third parties, correct? How much in arrears are you on that side of the house on the Allied side? And as -- I mean, in terms of backlog, how much backlog have you developed in that basis quite a bit relative to history, I presume...

We've been able to keep pretty good -- in fact that business was up more than 20% in 2022 -- excuse me, 2021. And it remains strong. Demand remained strong on all fronts in commercial or -- excuse me residential. Where we've had some challenges, where we've had outbreaks in our commercial business and our manufacturing facility there along with some of the challenges with supply chain. It's a little bit different in commercial than it is the commercial-facing businesses that is versus residential. If you can't finish a unit, it doesn't hold up the whole order, for instance, there may be a national account customer out there that needs 30 units, but you can't really ship the order until that 30th unit is complete, maybe that 30th unit is missing a component that you need to finish the order. So we have to navigate those complexities. So that posed some challenges there. But -- with the Allied business, that business had a [ power ] year. We had a record year in revenue and earnings collectively. But there are different dynamics when you sort of look underneath the hood at the Lennox businesses.

I guess what I'm trying to get at is we have typically -- again, in a prior typical year, so maybe 4 years ago, we would have -- the weather mattered a lot on the resi side, drive replacement. But this time around, we have unfulfilled orders. I'm curious like how much visibility if you had product, if you have all the components, what have you, how far out can you see relative to a normal year when you're sitting at the beginning of February. You already have a lot of [indiscernible] spoken for or not?

Once again, it depends on the customer or the dealer on that side of -- or distributor on that side of the business. Lead times are 5 days. So it can get whipsawed quite a bit. Weather impacts it, it could be plus or minus 10%, given the severity, whether it's a warm summer or hot summer, or a cold winter. You don't have a lot of long visibility on the residential side of the house other than understanding the dynamics around the homeowner, the economics around the homeowner. And that seems to be most impactful when it comes time for replacement. It's emergency replacement on the residential side, primarily, it's 80% of the business roughly. So those things are tough to predict. What I will tell you is demand remains strong really on that side of the business. And then on the commercial-facing businesses, we continue to see strong order rates, and we have much longer visibility into those businesses given the planned replacement nature or more discretion around replacing commercial and refrigeration products.

Yes. And before we get to commercial, but just to be clear that on resi, it's still going to be a Q2 with 5-day lead times where the weather is going to matter, right? Underlying, it's going to make a difference.

It always makes a difference.

It's still a stream.

How impactful is that. Like I said, when it gets severe, it could be plus or minus 10%. But what I'll tell you, in your early stages in 2022, demand remains very strong.

Yes. And I'm curious also just what's your perspective on the competitive landscape in resi and how it's changed. Obviously, Carrier is now independent and Trane spun off of Ingersoll a couple of years back. Any change, Goodman's has been in and out of COVID protocol for a couple of years. What do you -- are you seeing anything that's different competitively?

No, those were well-run businesses, even though they were part of larger conglomerates. So they didn't come out of that or those larger businesses and have some revelation about the HVAC side of the house. I mean they were well run before they became independent and that hasn't changed.

Let's talk about commercial real quick because you did mention that's been an area of strong demand but tougher ability to actually execute on the demand.

Yes.

A, just can you talk a little bit about where we are? Are you still seeing a deferred replacement catch-up from 2020? And how long do you think that might -- that wave might last?

Yes. The dynamics behind what happened in really the end of the first quarter of 2020, all of our businesses were down roughly 40% in the month of April of 2020. Residential bounced back real quick. For the full year, our commercial facing businesses were down roughly 20%, and that's both refrigeration and commercial HVAC. And we knew from historical experience, around these economic shocks that we experienced that the recovery in the commercial facing business is due to the discretionary nature of the replacement market was probably going to be about a 2-year, 24-month horizon, and that remains to be the case. So once again, we're still clawing back to where we were at the end of 2019. And not just us but the industry. And we once again continue to see strong demand there. We made a conscious effort because of limited availability of components and what products we are going to produce that we shifted our focus to national account customers in the commercial-facing businesses to make sure that we can preserve those relationships and protect that business. I don't want to say we abandoned, but we didn't give emergency replacement the attention that we normally would. As we course correct here in 2022, our expectation is we'll get healthy in the factory and then supply chain issues will continue to resolve and we'll once again reengage -- in gaining share in the emergency replacement side of the business.

And just to be clear on that, as the business shifted more to national account, is that slightly less profitable than the non-national account commercial customers for emergency replacement?

Yes. It tends to come with higher margins. And the reason for that is typically, it's more sophisticated equipment. So it's more configure to order type product versus purely stock units, with typically more bells and whistles, whether it's more sophisticated controls, higher efficiency, indoor air quality attachments, all of those things lend themselves to, once again, a more sophisticated offering to those national account customers. And that was the reason why we want to check that business.

That makes a lot of sense. And just to be clear, when we think about the 24-month catch-up period of that deferred replacement. Is that off of -- like off of what time period? Is that off of April 2000, and therefore, we're going to be caught up in the next 6 months, call it? Or is it the year of and therefore, we have a full year of it?

Actually, I think it will probably take us until the end of 2022, probably -- or probably in the middle of 2022 get back to where we should have been 2 years ago. So that's what it is with that. And national account demand remains strong. Once again, the discretion there affords them the opportunity to time things differently, and they've done that. And we saw some of the implications of that in 2021. But the backlog in order rates remain very strong in both commercial HVAC and Refrigeration.

Can you talk a little bit about pricing last year and what you ultimately kind of yielded relative to what you announced? And what you're expecting this year, again, just to refresh us on that?

Yes. So we instituted 3 new price increases over the course of 2021. We yielded roughly, double check here, coming around $130 million price last year. We're targeting $230 million in this year, and that's really a couple of pieces. It's the carryover pricing from 2021 instituted increases. And then we have a rather significant price increase that became effective in January of 2022, that will get us to $235 million, which is roughly a 5.5% yield, which is about 1 point more than what we realized last year.

And a typical year is what, like 2%, something like that?

Yes. Once again, it's all predicated on how costs, product costs, namely commodities will be behaving. So when commodities are escalating, typically, we'll get more, typically 1.5% to 2% in an inflationary environment, probably closer to about 0.5 point to 1 point when commodities are flat to down.

Okay. But it's always a net pricing business, if you will, right?

Yes. Absolutely. And quite frankly, 2022 will be -- I've been roaming the halls here at Lennox for 15 years. And this will be the most significant price yield that we've had since I've been here and probably quite frankly ever.

Is there any evidence of commodity cost easing in your forecast for 2022 and '23?

Yes. We're -- I don't know how long it will last. When we look at steel, we're seeing that subside a little bit, but I think there's some underlying reasons for that. One is there's more -- because demand was high, more capacity is coming online with the skilled steel processors. In addition to that, some of the automotive manufacturers are pulling back on production because they can't get electrical components. So they've idled some production that's freed up some of the new product that's available and has resulted in price dipping a little bit. And we'll see how long that lasts.

And can you remind us on steel, you're not -- you're on spot terms, right? It's at 3 to 6 months.

Yes, we had arrangements with some of the steel suppliers. But when times got tough, those arrangements got [indiscernible] and thrown in the trash. So it was a situation where they raised prices more quickly than they contracted -- could have, but it was whether you want steel or not, if you agree to the price [ against ] steel. So it's a situation where, historically, what we've done is we bought steel and it was priced off of the trailing 3-month CRU index, changed quite frankly in 2020 -- 2021.

Okay. Interesting. When we -- can you talk a little bit about the battles you've had in some of the commercial facilities with labor absenteeism, productivity, and the like and how you're mitigating those now?

Yes. It's a situation where turning back the clock a couple of years ago, we had difficulty attracting and retaining talent there. So we had to revisit the wage scale and the structure and because we have a single facility that manufactures our commercial product in Stuttgart, Arkansas. So we have resolved some of the issues around availability of labor. But then COVID came along and created another dynamic where at certain points, particularly in the last part of 2021 as much as 25% of the workforce was off due to COVID infection there. So that was very disruptive to the operations, created significant inefficiencies. And that was one of the things that we had battled throughout the year, but became more of an issue later in the year.

And has that -- are we on the mend now, has it come way down? I'm just curious.

Yes, it's come down and hopefully we'll stay there. But one of the things that we've learned is things can change quickly. So once again, we've got more flexibility on the residential manufacturing with most of the locations. We don't have that luxury on the commercial side.

What are the longer-term plans in terms of the resi facility in Saltillo. I remember when Davenport got hit with the tornado, there was talk at the time about maybe shuffling some of the higher-end products over time down to Saltillo or to South Carolina. Where are you? Are all 3 facilities now resi facilities able to make the Lennox -- the Tom Lennox brand high-end stuff?

Yes, we've created significant flexibility because when Marshalltown got hit, we actually did move some of the higher end production to Mexico. We did move back once we reconstructed that facility. But we technically have 3 facilities on a campus in Saltillo. And we've -- since the tornado hit, we have stood up a third facility, migrated more production there. We still have excess capacity that we can absorb another unfortunate event at one of those facilities, whether it be COVID or something else. But it's a situation where we have certain more optionality in manufacturing in the residential side of the house than we do in the other 2 businesses.

I'm sorry, I meant to say Marshalltown, I don't know why...

That's all right. Davenport, I think, is close.

Right. Can we talk a little bit also about the SEER mandate in '23 and sort of what you expect from the Allied channel and let alone in the direct channel in terms of margin, price, buy ahead, what have you?

Yes. It's a situation where -- and I'll start with talking about the regulatory change. So in those states south of the Mason-Dixon line, minimum efficiency is changing from 14% to 15%. And for those states north of the Mason-Dixon line, roughly, minimum efficiency is going from 13 to 14 SEER. The transition requirements are a little bit different. So for the South and the Southwest, the transition is predicated on the installation date. So if you want a 14 SEER product, you have to have it installed before December 31, 2022. It's on the manufacturing date up North. So as long as the product was manufactured before December 31, 2022, then they can install it in time. We've been through this many times. It really doesn't create a significant lift for the business. I think as we get into 2023, we might see some mix benefit. I don't expect a significant buy ahead of this only because it's a 1 SEER step change, and we'll see what happens. The last time we went through this, it was in the South a few years ago. And what had happened then as dealers and distributors adopted the new minimum efficiency a couple of quarters in advance. So they moved to in the South, for instance, the 14 SEER minimal efficiency and started buying that. So we ended up just moving the 13 SEER to the North and selling more of that product there. But once you, I don't know if it's going to be a significant change. Once again, there will be a mix lift -- a mix benefit. I don't expect it here in 2022, more likely in 2023.

And not so much in 2022 because of supply constraints. Is that right?

Right? Yes. That's a significant contributing factor quite frankly.

And when we talk about a mix benefit, can you describe how the pricing differs between a SEER-14 versus 13, 15 versus 14?

Yes. It's almost linear. So if you go from 13 to 14, I think that's roughly 7%. As an example, a 28 SEER unit is twice the cost of the 14 SEER unit from a pricing perspective. The margins are better. One of the things that we've always done is to make sure that we have our costs in line such that we're preserving margins so that we're not taking our margin hit either on a rate or dollar perspective. When it comes to one of these transitions and our engineering team has done a great job of making sure that we're well positioned so that when 2023 comes, once again, there's opportunity for us.

So just to be clear, it's both margin in rate and margin in dollars are better on higher ...

Right.

Okay. Does that -- do those ultimately then start to converge down? In other words, as SEER 14 becomes a minimum, does it start to match SEER 13 pricing over time. Like it is down in the ...

Yes, the largest part of the market is the entry level. So roughly 60% to 70% of the market depending on the dynamics in any 1 year is entry level. And that's usually the battleground for price. But once again, as an industry, I think we're pretty disciplined on price. Once again, depending -- certain geographies or certain areas of the country might have a different demand pattern that will result in a lower price. But all in, these SEER transitions don't result in significant benefit or what I'll call margin contraction.

Okay. That's good to hear. I was also going to ask, Todd has mentioned and you've also mentioned R22 units being phased out because of -- they're replaced early because of the cost of refrigerant going to the roof.

Right.

Yes. What -- how much -- do you have -- have you quantified how many units that might bring to the industry ahead of what would the normal 15-year life. I'm just curious what that...

Once again, I don't know the answer to that, Gautam. It's a situation where, I think, the economics would create the opportunity for replacement. So if I had an old R22 unit that failed, roughly, depending on whether it's a 3-ton unit or a 5-ton unit, typically, they run between $2,500 to $3,500 for replacement. It would probably cost you half of that just to replace the refrigerant if you wanted a substitute R22 or refrigerant that would run in that system. But you could spend another $1,000 or so and get a brand new unit with a new 10-year warranty and all of that. And I think that's more compelling, particularly when you have a healthy consumer that can afford that.

And this brings up a broader question. A lot of folks are concerned about resi having overearned in terms of number of units for the industry. I wonder I just ask -- do you -- any of the next 3 or 4 years is having a down unit year in resi? And what are you seeing on utilization? At one point, you talked about 30% higher utilization on the units you monitor going to 20. What are you seeing there?

Yes. We've not seen any change in the information that we gather around utilization. So I think that remains 20% to 30% higher than it was historically. And it's a situation too where if you look back and we've looked back all the way to World War II and setting aside the economic prices, there's never been 2 years in a row where the residential markets were down. Now at some point, I think it will level off, maybe down little bit, but it has a tendency to bounce back rather quickly. And that's what I would expect should we have that. But we still think there's probably another at least 2, 3 years of solid demand in the residential side of the business. So we remain confident there.

Interesting. Okay. Can you talk a little bit about IAQ traction, both in the commercial space and in the resi space. Are you seeing...?

Yes. Once again, I think it's not a significant upsell whether it's -- because, for example, on the commercial side of our business, we've got all the filters. We've got the ionization capabilities. We've got all of the indoor air quality capabilities that people have desired for. A lot of folks were already buying that. But once again, it's not another -- it's not going to double or triple the price of the sale. It's a situation where if it fits into the budget of those that want it then they're going to buy. If it's not, it gets negotiated away. We are seeing some interest once again, in more higher quality filters. And then once again, other indoor air quality components on the residential side, but it's not going to be a game changer from what we see today. It's opportunistic. We educate our dealers, and our dealers do a great job of selling it but it remains once again not something that's going to be disruptive or be a significant game changer to what we've seen or experienced so far.

Is that also true on the commercial side?

Yes.

Interesting. Okay.

I think it depends also because I've heard about some of the estimates that some of our competitors that play in the applied side of the house. And I think that's a different opportunity than what we have or see on the [indiscernible] side. It's an opportunity. But once again, it's not a $1 billion jolt to the industry, for instance.

Yes. Although do you sell into the K-12 vertical, right?

Yes.

Have you seen any meaningful inquiries there on IAQ or is that...

That would be one vertical that I would say, yes, we've seen some traction with more interest and procurement of indoor air quality capabilities. So yes, that would be one, medical facilities are another, hospitality would be another. But once again, those are verticals that we play in, and we've seen some of it. But once again, with large national account customers, Walmart, for instance, I'm not necessarily sure. They were already purchasing some of that. So it's not going to be a huge step up for someone like that.

That makes sense. Any sense for where we -- we talked about resi and where we are in the cycle, a couple of years of demand growth. We'll get some pricing on top of it, at least that's -- from where we sit, that looks reasonable. On the commercial units and in refrigeration side, this year, we got to catch up, that's the tailwind from 2020's deferred replacement. Where do you think we are in that cycle? So when that tailwind starts to abate next year, what is sort of a normalized level of growth for both of those submarkets.

I think we've often talked about the residential side of the business being a multiple GDP business. And I think the commercial businesses are probably a GDP based growth. Once again, the discretion around the replacement side where commercial customers are more proactive with replacement when they can take advantage of the economic team, they can go out and make an investment of more highly efficient equipment and the payback back on that is typically 3 years or less. And that motivates them once again, when we're looking at opportunities to drive down their operating costs, particularly if you're looking at refrigeration, for instance, where margins are razor thin in the grocery side. And there's an opportunity for them to take advantage of continued gains and advancements in efficiency and drive down their operating costs. That's very compelling, particularly when the HVAC or refrigeration systems are consuming 60% of energy. So that presents -- once again presents opportunity for them. And we've seen that be more proactive, and we continue to gain traction there. New construction, on the commercial side, particularly in retail. Once again, that's going to be down and expect that to be a catalyst for growth in that business. But planned replacement and that's going out and continuing to win new business with national accounts, and that's how we'll continue to grow that business and continue to outpace our competitors.

Makes sense. I'm curious on the 3-year payback for some of the newer refrigeration systems and unitary systems. Is that relative to something that was installed 10 or 15 years ago or 5 years ago? I'm just curious how quickly it gets done.

Typically, what we'll do is we'll gather the Intel or the information on their current running -- the equipment that they're running and use that as the baseline. So typically, that's the baseline, and that tends to be something that was installed could be anywhere from 10 to 15 or even 20 years ago.

And so that drives replacement prior to failure because they're proactively getting payback.

Right.

Anything you've seen with respect to the infrastructure funds that have been thrown out there to municipalities. And has that really filtered its way down into...?

We've not seen it yet. And a lot of the verticals, I think, where we play, we may not see a significant benefit, but one area will be schools. I'm not necessarily sure that's part of the infrastructure, but there's certainly government funds pointed in that direction. And that's something that we've already seen or are seeing a benefit from that.

You guys did mention that emergency replacement in unitary was down quite a bit in Q4 because of the supply challenges. What -- if that work is lost by definition, right, because it's spot -- that's a spot sale?

Yes, on the -- yes, on the emergency replacement side. But the key of success in that is not necessarily the customer relationship per se. It's more about product availability. Having the right product at the right place at the right time with the right price. And the only thing we need to solve for is the product availability. Once again, we need to get healthy in the factory and then continue to solve or navigate the challenges in the supply chain, which we've done. So once again, we expect that in 2022 when we engage and gain share in the emergency replacement market.

Interesting, which also brings me to PartsPlus stores and having the locations where you need to have them because the plan is still 30 net new stores, correct?

Correct. But in addition to that we also have more than 20 dedicated commercial distribution locations around North America that support that. And then we take advantage of certain markets where we can colocate commercial, light commercial equipment with our residential product, and we'll put those in the same location.

And are any of the 30 being contemplated -- the new stores going to have that dual use?

Some, yes, absolutely some will.

What is sort of the upper limit to the PartsPlus stores? When do we have saturation, if you will?

Yes. When we look at our desired footprint and where we are today, we think we're probably roughly 50% -- 45% to 50% of the way there. And if you use Watsco as a proxy, I think they've got more than 600 stores. So I think that math works. Will it be 600? I don't know. Will it be something around it, most likely.

Which brings me to M&A. You guys have been buying back a lot of stock over the years. But you can either build your own PartsPlus stores, you could acquire someone else's distribution line -- sort of what's in the pipeline, what's being contemplated today? And how might M&A be used? Is it -- what would be of interest to you guys?

Yes, it would be something where we're at today. When it comes to the PartsPlus dynamic, we found that we can do it inexpensively. So it's low capital investment and the way that we can negotiate leases, et cetera, it's low risk. So we can easily close a facility, move the facility, increase the size of the facility with the resources that we have. So there's no need nor desire to pay a premium for someone that may be already stood up distribution when we can do it efficiently ourselves. And then where we would have interest would be from an M&A perspective, a unitary business in North America or maybe something on the refrigeration or applied HVAC side in Europe would be opportunistic for us. But we've been rather disciplined around that. We've got some scars around some acquisitions that we had made in the past, namely running display case business that we acquired in 2011, and it just didn't work out for us. So we remain confident in our ability to grow the business effectively and grow profitably through organic initiatives and we remain confident in our ability. So I still think we have quite a runway with our distribution strategy. We continue to have industry-leading claims on the products that we offer, and we think those are the keys to success.

Joe, I couldn't conclude the interview without asking about your perspectives on the CEO search and how -- where are we on it and how might the new CEO have a different strategy for the company? Or do you think this is going to be a continuation of what you and Todd have articulated previously?

Yes. Good question, one that I expected. It's a situation where Todd expects to be around through the middle of 2022. The Board is going through a diligent search. What I will say is the circumstances around Todd's departure, the business isn't broken. There's no adverse circumstances around his departure. So it's simply that he wanted to go do something different. He's going to take the opportunity to do that. The Board is going through a very disciplined and rigorous process to identify who that next CEO is going to be. I expect that we'll have an announcement by the middle of the year or sooner -- if not sooner. And I think -- one of the things that I think would be attractive to this is the fact that this is a well-run company with a business that has a track record of success, plan runway in front of us. And it's an opportunity that we bring someone that might have different ideas. But it's hard to imagine we would abandon all that we've built and all that we have in place and the strategy we have in place today and completely take that in a different direction. I just don't think that's in the cards.

Are there any areas of the portfolio today that you view as -- you mentioned Kysor Warren back in the day, the display case business. Is there anything within the portfolio that you think may qualify as noncore even if you don't want to describe specifically what it is? Or do you think the portfolio as it stands is what you're going to go to war with?

You never say never quite frankly. But it's a situation where I think we've got 3 fundamentally core businesses that we're running today. We need more scale in Europe, but that's something that's solvable. We can fix that over time. It's a situation where we've got industry-leading claims like I said, in each of our businesses and great returns. Once again, we were challenged a little bit in commercial in 2021, but we're going to fix that once we get healthy in the factory. And once we get on the other side of some of the supply chain challenges that business will be back to the 18%, 19%, 20% margins. So we're confident in that. Once again, I think we've shed a lot of the noncore businesses. We sold the Hearth business. We've sold Kysor Warren. We've gotten out of the residential dealer business with the Service Experts divestiture. So once again, pretty content with what we have but there's opportunities still in front of us.

Carrier just announced that they're purchasing the share of the JV with Toshiba which helps bolster their VRF cost structure presumably over time. How does that -- what are you guys doing with VRF? Is that an area -- I know you have the MIDEA relationship, but anything more planned in that space, anything needed to kind of fill gaps in your portfolio?

Once again, we view that as an opportunity for us to encroach into certain vertical markets and the smaller applied business where we traditionally don't play particularly here in North America. We'll see how it goes. Once again, it's an opportunity for us. But I think we have bigger fish to fry than VRF. I'm not sure it's going to place things significantly here in North America. They have talked about being an emerging technology that's going to grow at 30%. I don't believe that's happened. It's opportunistic. But once again, we're very selective with that. We continue to do well there. But quite frankly, given where we're at today, I think we're more benefited by focusing on our core businesses, and we'll continue to grow that where we have opportunities to bundle VRF with our current unitary offering. I think it's maybe different for those that play in the larger applied side of the house where they can use that as a solution to be more competitive with certain verticals. But aside from that, once again, VRF is a nice add to us, but it's not a game changer.

Joe, I really appreciate your time and your insights. Thanks again for participating.

My pleasure, Gautam. And thank you all.

All right. Take care.

Bye-bye.