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

Here at Cowen. My name is Gautam Khanna. I'm a research analyst at Cowen that happens to cover Lennox International. We're very pleased to have with us Chief Financial Officer, Joe Reitmeier.

Good morning, Gautam. Thanks very much.

Thank you. Thanks for coming. This is just going to be Q&A. So thank you for subjecting yourself to...

More age than coming.

Yes. Exactly. Well, so I was actually curious if you could talk just at the front end, about how if at all, the company has changed under the new CEO. What do you see?

Once again, typically, when you go through these transitions, there's a reason for it. The reason that Todd left, there was no adverse circumstances if the company was not in distress. And it was a situation where he just wanted to move on and do different things. So we don't recruit at a [low]. And I think one of the things that the Board wanted to send a clear message about was preserving the culture of Lennox. And once again, we have a solid strategy, track record of success. We've had some missteps of course. But all things around strategy and all that were sound. So he came in, he's going to pressure test it and he's still going through that process. We've announced that we're going to exit our European operations. So that's one fallout of that whole process. But aside from that, we love the portfolio of businesses we have. We've got a great team, tremendous opportunity in front of us. Back when you look at 2018 time frame, that was really the last time that I would characterize Lennox being on solid footing because of the tornado. And then we got into the pandemic and that really perpetuated some things. I don't want to make excuses but it did perpetuate some of the issues that we're dealing with through the tornado, which is largely product availability. So once we get on the other side of that, which was really at the end of last year, where we now have healthy levels of inventory. But one of the things -- and I'll go back to your question, preserving the culture, testing and perfecting the strategy and then nailing down the execution. We're ready to go. So that's where we're at with this whole CEO transition. I would characterize the CEO transition is behind us. Now it's about looking forward.

And I'm curious, like, how would you describe the culture of the company? And what do you think?

Yes. I think it's -- the way that I would characterize it, one of the reasons that I came to Lennox, and one of the reasons that many of us stay is the culture. It's -- the way I would characterize it, Midwestern value-type family-oriented culture, but we're a public company. And Lennox has only been a public company since 1999 but we've retained what we think are the core and critical elements of that Midwestern family-owned business. And we think it permeates the walls of Lennox, touches our customers, our suppliers and everyone that we do in a positive way.

Okay. That's interesting. It's interesting that the European divestment was announced and that was approximately what -- could you size it, it was like no EBIT, but...

Yes, it's roughly $250 million of revenue and breakeven business.

Breakeven. Okay. So that seems like a no-brainer. And then is there -- are there gaps in the portfolio as you look at it when you guys go to market? I'm just curious. You don't have a real business.

I think we've got the full breadth and depth of the product that we need. There may be some ancillary products that we can drive through our store footprint that we may not manufacture we may source and sell as finished product. So we'll look for things like that. But for what we need to succeed in the markets that we serve, we're well armed. And in fact, across the portfolio, we have industry-leading claims on innovation, whether it be technology or controls, feature functions, et cetera. So we're real happy with the portfolio of products we have. And with the portfolio of businesses we have going forward, like I said, it's about looking forward now.

Okay. So there's no need to ever develop an applied business, you have a VRF solution...

Yes, it's a different business applied is different manufacturing processes, different sales channels, different end customers usually radically has HVAC and its name, but it's a radically different business.

Totally understand.

And we had an applied business. That's what we had in Europe primarily. We sold rooftops, but it was an applied business. And once again, the skill sets and the whole support system around that business is radically different than the unitary of where we play today.

Okay. That actually is very helpful. I was curious also on one of the initiatives you guys have talked about is dual sourcing more from the supply chain. Where are you in that journey? And how hard is it going to be to move from where you are to where you want to go?

Yes. Some things are simple. They're less important to the system. We can easily change those out, things like motors, compressors, things like that are much more involved where you have to go out and qualify the component to meet the feature functions but also the quality specifications that we set for Lennox. So if it doesn't meet that, and that takes time. We've accelerated that. If you were to go back 10 years ago, it would take us 24 months to qualify components, et cetera. We're probably down to less than 6 months today with some techniques and some advancements that we were able to take advantage of.

So is it still about 75-25 in terms of...

Yes, we probably -- it's probably going to take us a couple of years to get where we want with the dual sourcing. So -- but once again, we're going to be very methodical and go at it as fast as we can, but in a very measured approach.

And presumably, that will -- you'll have a lot of cost savings as a result of it, you can compete it...

I think it's less about cost savings as cost savings is always something that we're chasing, obviously, -- but I think it's more about just the resiliency that we learned that we need in the supply chain.

Okay. Talk about the supply chain. How has that evolved over the last 6 months? And -- where is it today?

I would say it's getting better, but it's not where it needs to be. We still are short products. I mean, most impacted on our commercial business. There's more electronical components in circuitry and the commercial equipment. So they've been hit the hardest, particularly on the high end. But we're navigating that. They're getting healthier. It seems like it could be a different challenge every day, but we're getting through it. And we did procure some more inventory at the 2022 end enable us to endure fewer disruptions on the factory floor. So that will help us a little bit. But once again, we're working very closely with our suppliers, dual sourcing where we can and just making sure we can keep the product flowing.

Okay. I'm curious, when do you expect this to abate? I mean, do you have visibility in the supply chain? Are they giving you realistic?

With [indiscernible] it's easy to predict with others where they're less sophisticated, maybe smaller it's a little more difficult to manage. So that's where we're looking for opportunities to diversify the supply base. But we'll continue to do that. Once again, it's going to take us a couple of years, got to get there.

What about on resi? Are you short components in resi as well?

It seems to be less now than it was before. We once again, I think things have settled down a little bit, but there's still challenges there, that's for sure. But it's not as severe as we noticed on the commercial-facing businesses.

And is it mostly on the high-end resi product, high resi product?

Yes, it's more with those electronic circuitries play more of a role and are more important to the product, and that tends to be on the high end.

Have you guys ever disclosed -- actually, I think you have what the entry-level product is as a percentage of your resi sales versus sort of the higher [indiscernible].

Yes, typically, it will be roughly 60% of the units and 50% of the volume. And that's the industry. And I think we're pretty much in line with the industry these days.

Okay. So the shortages are affecting less than half of it.

Yes. Sort of less than half.

Okay. Can you talk about -- I remember back in -- I think it was Q3, right, where you started talking about, there were some -- there were some issues still in terms of getting high end product out the door -- was that just a supply chain issue? Or is there anything else?

It was more supply chain than anything. Typically, where we've been disrupted, particularly at the end of the year was all supply chain related.

Okay. Yes. So operationally, within the factory, it's not a turnover issue. It's not a -- it's agnostic.

Yes. So we've called down our commercial factory where we had the biggest issue with direct labor. So we've settled that down, we're at a headcount level that we need to be. And now it's just a matter of getting those new employees productive on the factory floor. And then we had -- we really didn't have challenges on the other two businesses with respect to labor, it was more just exclusively supply chain.

Okay. I'm curious, what did you guys do? If you could just elaborate on what you did at the commercial facility in Arkansas.

Yes. Well, we had to be more competitive wages. So that was number one. And the type of candidates that we were recruiting weren't ideal. Typically, they were coming with less than 5 years' work experience and no manufacturing experience. When we raised wages, we got a different applicant when that occurred. So we got folks that had more than 5 years' experience, typically, at least a couple of years manufacturing experience, more career-oriented. So like I said, I think we're able to lift the quality of the workforce there by raising wages. No surprise, right? But that's one thing that we had to do. And then getting them in there, making sure that the ones that we identified that we wanted to keep, we continue to train. So the training and education continues once again, it will take a couple of quarters to get productive on the factory floor, but we'll get there. And then we're constructing a new facility in Saltillo, Mexico for our commercial business. So we're breaking ground on that. We'll have that done in time for 2025 A12 conversion and all that. So we'll be well positioned on the commercial side of the house there as well.

And so I think it was on the last earnings call, you guys may have mentioned that the productivity opportunity within the commercial facility today is you have 20% more to go or something? How would you measure that?

That's probably little more than that. I don't know that we've made significant strides on productivity just yet. I think we've been able to go out and recapture some of the revenue we lost, but we still have a ways to go there as well. But the productivity is -- once again, it was challenged as we finished the year really across the enterprise because of the supply chain. So that was no surprise. But we've not yet begun to bring out significant inefficiencies that we've incurred the last 2 years. That remains an opportunity for us in front of us and one of the elements of us getting to our 20% target margins.

So I am also curious because if you went back 2019, 2018, the commercial HVAC business is very healthy in terms of profitability. So what actually -- was it just the wage rates in the area just kept moving up and you guys...

We had a shrinking population. So unemployment was less than 3% at one time and it was a challenge then. But then the population continue to migrate away from the area of Arkansas we're in so that the unemployment rate was less than 1%. And once again, it's challenged to get the top tier folks. So we had to raise wages to become more competitive and that was successful for us.

And so one of the consequences has been exiting the emergency replacement market, right? Could you remind people like how big that used to be relative to...

For us, it was about 10% of our commercial business. We had about roughly 10% share. So we're back down to certainly less than 5% market share there. Overall, it's roughly 40% of the overall market for commercial. And it's a situation where they just have a situation where they have -- one of their units have a catastrophic failure. They'll pick up the phone, call a contractor, a contractor typically will make three phone calls, whoever has the lowest cost unit and can get it to them fastest will typically win the business. So it doesn't matter what label is on the box. So once again, as we get more product flowing through our Stuttgart factory, it will enable us to replenish those distribution channels and reengage in that emergency replacement vertical of the market.

Okay. Interesting. And so you would estimate you're at 5% of the sales right now of the segment.

Yes.

Is it higher margin? Or is that...

It's competitive. It's not radically different. It's a situation where, once again, it's competitive on price. But the way that we design the product that we went to market with, the [greater] product, we design it for lowest cost. So we made sure that it had just the features to function, not all the bells and whistles, and then we could take additional engineering actions or sourcing actions to continue to lower the cost there to make sure that the margins weren't radically different.

Got it. And the commercial Saltillo operation that you guys are building, how is that look, what's going to go through there. The exact same product made at Stuttgart? Like what's sort of the phase -- -- in of that capacity?

Typically, we're going to start with stockable products. That's the way we phase the residential products. We went with entry-level cooling product than the heating product. So we'll go with the stock units. So those things that typically support emergency replacement is where we'll start, and then we'll once again that we'll set the table for us to do more things there.

I imagine it's a much lower cost location, right, in terms of wage rates. Has that changed much over the last couple of years?

Yes. The challenge with the commercial business is because the units could be literally as big as this stage. So you're shipping larger units. So the arbitrage on the labor is not as significant because it gets eroded by the logistics, right, cost, but it's still advantageous for us to be there cost-wise. Just not as advantageous as it is on the residential side.

I'm curious, could you give us a little bit of an insight on the productivity in Saltillo and the resi facility now. How does that compare to the U.S. facilities?

Yes, we have three residential factories all on one campus in Saltillo, Mexico. And when you look at the statistics of that plan, it's our most productive. It's our safest. It's really the -- really what all of our other facilities aspire to be is what we've achieved in Saltillo. And it does catch fire. So once again, the success we're having in Saltillo motivates the folks that we have in Grenada, et cetera. So once again, we create a competitive environment where we can take advantage of that. But it's a situation where it is just a gem of a facility for us.

Does it make any of the higher-end Dave Lennox Signature series product?

The majority of that's built in Marshalltown. But once again, as we continue to migrate production and rethink our distribution and our manufacturing strategy that is something we consider.

Okay. Interesting. I did want to just get back into demand for because everyone is obsessing -- what are you seeing? So what do you -- I mean you guys are guiding, I think, mid-single-digit decline in units for the industry, I recall, in residential North America and Asia.

That's correct. And that's driven largely by residential new construction being down roughly 20%. And we're not seeing anything that will tell us to deviate from what we've guided originally. So we're seeing things play out the way we thought, but it's still early.

So it's interesting because we hear a carrier, I think they're guiding high single-digit declines in unit volumes. JCI had a tough Q4, but they're guiding the same kind of thing, high single-digit unit decline. Why the -- do you have -- like what is it that it's based on? Is there any of...

None of us really know what the right answer is. So I think we surround it and gain a consensus and move on from there. But the real answer is no one knows.

But there's no obvious cliff that you're seeing. It's...

No. When you look at the data, and if you think about why and how all motors replace their HVAC equipment, it's typically not a discretionary purchase. Typically, they have a catastrophic failure and the equipment needs to be replaced. So if you're in the dead of winter or in the dead of summer, and it's hot or cold, you're going to replace that equipment. So really, I think there's some inherent just I have to do it nature to the business -- and that's really almost 80% of the business.

Right. I mean, have you seen any evidence of not full system replacements but rather patchwork repairs. Things that would...

Yes, we keep a very close eye on that. One of the things that we pay very close attention to is parts and supply sales pacing equipment sales, and we're not seeing that yet. That was what we saw during the financial crisis where homeowners elected to repair versus replace even when there was a catastrophic failure, just to save a few extra dollars, but delaying the inevitable, quite frankly. But we're not seeing any of that yet.

Really. Okay. So there is no evidence of that emerging as a [indiscernible]. What other early warning signs could there be? I'm just curious like what else would -- how else would it manifest? Is it in the Allied distribution network? Where would you see it first?

Well, I think what we'll see it first is in the overall health of the homeowner. So it would be unemployment. It would be wages, it would be existing home sales, all of those statistics consumer spending is another important one because it tells you something about the homeowner, but it also tells you something about how it's going to impact our commercial business as well, right? So we keep a very close eye on all those things. Those things seem relatively stable, but they could change. But we -- like I said, we keep a close eye on those more macroeconomic indicators as well. And then the parts and supplies dynamic I mentioned. And then just staying close to the customer. So the customer is going to tell you what you need to know. So whether it's a residential dealer or a large commercial national account, that's where is -- that is the best source of our information.

Right. And your point is that you're not hearing anything that deviates from that down mid-single digits?

Right.

I remember -- we went back to Q2 of '20, I think it was Q2 of '20, but remember, that was a strange year, right? We had COVID. Nobody bought anything, and people started restocking the channel on the allied channels right. And then it was a great year for residential age and that continued and continued. Where are -- like do you -- on the indirect channel, what are you seeing in terms of levels of inventory desire to get ahead of the cooling season?

And I think we saw some of that in the fourth quarter, some destocking in the 2-step channels. So we go direct to dealers, so we'll sell direct to contractors. Most of our competitors are hybrid or go almost exclusively through the 2-step channel. And what we saw as we got through the fourth quarter was some destocking in that channel. And we saw it earlier in the Refrigeration business, so I think it's behind us in that operation. But there's probably still a little bit more on the residential front to come, but we'll see.

The thing that complicates this analysis is we have a series of change at the same time. So like I wonder like, do you know if the destocking, could you discern whether the destocking related to repositioning inventory from one region to another? Or was it actually like in aggregate, there's just some destocking going on?

Yes, I think there was probably inventory levels that were higher than necessary just to give distributors some safety with respect to inventory stock. And I think that's what's burning off. So I actually think the minimum efficiency change was nothing more than a speed bump for most of us. I know Carrier, I know Trane. I know us, and I think we all did it well. I think there are some others that -- and there's always some missteps when there's change, right? And I think there may be -- some of the smaller competitors may struggle with this transition a little bit more. But once again, I think it was more of a speed bump than it was an amount and we needed to decline with this one. The mountains coming in 2025.

Right. Okay. We'll get to that. But I was curious about there's some destocking that started in the fourth quarter, maybe it persists into Q1, we'll see. What about the positioning into the summer selling? When do we start to see the cooling buys start to kick in? Is it a...

Yes, we'll see that probably mid-March is when we'll see our loading for the peak seasons.

And do you have any indication yet of like what those guys are thinking? And your dealer networks thinking?

Yes, once again, they're seeing healthy demand. So we're not seeing anything slip off. Once again, there are some -- we expect to see residential new construction slowdown, but HVAC is typically the last thing that goes into the home when it's finished. So as long as those projects continue to finish, I think we'll see healthy demand. And then I think we'll see it slump off a little bit, probably second quarter as we get into the second half of the year.

Weather permitting -- on the replacement side and always a wildcard. We thrive in the extremes, as you get?

But it's a situation where weather could affect demand as well. So those all factor into the decisions that they'll make when it comes time for them to decide what level of inventory they're going to carry.

And in this kind of environment, naturally, investors worry about competitive pressure, AKA pricing pressure discounting?

Any kind.

Are you seeing any evidence of that? Are you seeing any contraction now in the minimum or pricing or...

Now the battlefront is always on the minimum efficiency when it comes to price usually. And I think we all learned long ago that you don't win with price in this industry, and you can lose with it but you're not going to win with it. So even if one of our competitors decide in a certain geography or with a certain deal that we're going to drop price, we'd match it, we'd both suffer from lower margins and then we move on so...

Right. But you're not seeing any evidence of that happen.

Now there's always seasonal discounting that takes place to help distributors carry the load a little bit. But aside from that, it's just normal routine things.

Okay. That's good to hear. And we haven't seen price compression because I remember last year, the SEER 14, 15 was 10% to 15% more expensive than SEER 13, 14 correct, right? That has not compressed?

No, no.

Do you expect that it might over time?

Once again, it always seems to be the battleground for prices on the entry level. So it may over time. But once again, I don't think it's going to do anything that's going to be catastrophic or harmful to the industry.

How would you layer in the inflation Reduction Act rebates? And how you guys are going to market? Like what are you how are you...

It's a little messy because it's funded by the federal level, but administered by the states and states have different ways of going through their processes. Some are ahead, some are behind, but we have to manage it by state. And we do make that part of the ammunition that we give to the deal and when he sits down with the homeowner to make the homeowner aware of all financial relief that's available to them. It will be one that will last longer. I think that it's got a 10-year life with this one. So that will be nice and it should give a nice lift to the industry once the consumer gets a little bit healthier.

So yes, I was going to -- I mean, is it actually being -- are there any states that are early adopters at this point that have actually...

There were these types of incentives in place before. So once again, it's nothing revolutionary to the industry. So it's just something to drive more of the electrification. And that creates a tremendous opportunity for us at Atlantics simply because we're undersized just geographically where we grew up in the Midwest is not prime real estate for heat pumps. But we've developed a technology that will work in a cold climate, a cold climate heat pump. So we're excited about the opportunity that presents as well.

Okay. Interesting. I remember it was during COVID, the former CEO Todd would talk about the eye Comfort -- you could tell that the utilization of units was -- of residential units was like 30% above what it used to be. And you anticipated that it might continue at some elevated level for a while. Do you guys have any new insight into where that level is? Is it...

Yes, it's probably north of 35% today. So the attachment rate is north of 35%. We were in the teens, I think, when we introduced the eye comfort. With our other co-branded controls for residential applications, but we're north of 35% today.

And in terms of, can you tell how much more people are utilizing their HVAC systems at home relative to pre-COVID at this point?

Yes, we can because we can monitor the systems and get real run time data. So we have insight into how that's changed over really the last 5 years. And people are still using their systems 10% to 15% more than pre-COVID.

So does that not naturally shorten the life expectancy of the unit?

It does. It does. It has a finite life. And even more so, I was talking about electrification and heat pumps. Heat pumps have a shorter life simply because they're running almost all year round. So if you think about an air conditioner and a furnace, they have seasons to them, the heat pump is running constantly. So once again, as we continue to go down the electrification path and decarbonization, it will bring down the overall life of the portfolio.

Yes. So do you have a sense for what is the average life of a unit these days and how that's changed?

Yes, it's probably roughly 15 years is what we think it is somewhere around there. Heat pumps probably closer to 12 years.

Okay. And your point is that is lower than what it was, right? It may have been 16, 17 years.

Right.

Okay. Got it. That's based on the data you're seeing, or -- okay. Curious about what you're seeing in -- right as of Q4, I don't think there was a big difference between the Allied channel and direct a little bit of...

Yes, we won some sizable business in the Allied channel. So once again, I think most of the folks that go through two steps, their volumes were down. We're up 26%.

I mean that's amazing. So you just -- it was what these are homebuilders like condo? What did you...

It wasn't necessarily homebuilder. I don't think it was any particular vertical. I think it was the horses that we're aligned with. So the distributors that we're doing business with have been very successful. And that's one of the things that we strive to ensure, we arm them with technical support an array of product. But the key much like with the dealers is making sure our distributor wins in their local markets.

Interesting. Okay. Can we talk about PartsPlus? So what are the plans this year in terms of build out of stores?

Yes. I don't think we gave a specific number of stores. We used to give a number of roughly 20 stores. I think we're probably going to do something between 10 and 20, whatever makes sense. But as you and I were talking earlier, when you have 250 stores it's really about what you can do with those 250 stores, not necessarily the next 10. When we had 50 stores for the next 10 were very important. But with 250, it's about what can we do with that existing store footprint that we're not doing today and drive more volume across those assets, and that's the objective.

And so what is the -- like how do you do that? What is the...

Well, it may differ by geography, so they may need different types of -- when a contractor comes in, typically, they're not buying everything that they need for the job. They're coming in to get equipment from us. So what we want to do is expand our offerings such they can come in and get everything that they need for the job. So we're going to expand that, that make it into other things like maybe water products. Do we carry water heaters and things like that? We don't carry them today, but we're looking at those types of things that would open up the envelope of what we could offer in these stores and once again drive more business with captive customers.

Okay. Yes. And it's actually an interesting point that up the huge base of the installed base today, it's about optimizing and driving throughput. But what is full saturation? Would it be 300 stores, 500 stores? Watsco as a proxy.

I think the roughly 600 were 250 today. Yes, we think we're in the prime geographies, but there's more saturation that we can do typically a contractor doesn't want to drive more than 30 minutes in Los Angeles, that's across the street. In more rural areas, it's a longer distance. So we're going to look for opportunities where we can continue to increase the density of the distribution we have in certain key markets, but also looking for opportunities on how we can gain share and then drive more volume through that asset base.

Okay. And of the 10 to 15 net new store adds, there's also churn presumably. Is there any -- like how many typically get shut down or...

What we'll do is if they're underperforming, that will be a catalyst. They may be in the wrong geography or they may be the wrong size. So there's an array of reasons of why we'll shut down stores and maybe relocate or open up a bigger store, just depending on what we're seeing in that particular location. It could be more commercial equipment going through a location, and we need more space, more warehousing. So we'll adjust accordingly there.

Okay. I think Alok has made a point of emphasizing that the SEER change, the way you guys designed the product was really efficient relative to a total redesign. Could you talk a little bit about it?

It was a little bit of a unique situation because typically, when there's a minimum efficiency change, you have to change out the whole system, meaning both the indoor and outdoor units. With us, you can just do the outdoor unit the way that we design the indoor unit. So it would be compatible and work efficiently. So if you have a Lennox system in your home today and you have to change it out with a new minimum efficiency, you're going to be afforded the opportunity to do that at significantly lower cost than some of our competitors. Not really doesn't help us if you have a Carrier of your unit. But if you have a Lennox unit, there's an opportunity for you to make that change at a much lower cost.

Okay. That's interesting. I also wanted to get to the 2025 refrigerant change. And if you could just walk us through what is changing? And how is that going to impact kind of...

Well, what is changing is everything. It's because we have to redesign our entire product offering so that it's compatible with mildly flammable refrigerant. So they're trying to do away with obviously lower the emissions, the CO2, et cetera. But it's a situation to where it's moving to a refrigerant that has different characteristics than the one that they're doing away with, meaning it's mildly flammable. So what it's going to require is us to once again reengineer the product, but also it will contain sensors such that if there's a leak in your system today, basically, it just dissipates in the environment, nothing happened.

Right.

Other than the fact you can't cool your home.

Correct. You got a refresh.

But with this mildly flammable refrigerant because it's mildly flammable, the sensors will shut down the entire system immediately, and you have to have a certified technician should come out and perform and service to get your system back to [functioning] normally. So it's going to be disruptive for homeowners in that respect. What we expect to see is a full court press with contractors, making that a selling point to try to probably pull forward some demand so they can install the pre-A2L.

Interesting. And so that's why you think 2024 will have a higher rate of growth than perhaps.

Yes, I think there will be some demand to the extent they can pull it forward in 2024 just to escape, like I said, the inconveniences of these new systems potentially with homeowners going forward.

So just to be clear, do you guys have -- have you already designed a system compatible with these new refrigerants that are coming down the play?

Yes, we're -- once again, there's different refrigerants that each OEM can choose and some are aligned with others. So there's going to be different refrigerants than there is today. And yes, it's a situation where you've got to redesign the whole portfolio.

Okay. Does that -- is that going to ding profitability in any meaningful way just because there...

We're doing it in smaller bites, so we're not going to feel the full effect in 2024. So it takes time. It takes resource. We want to make sure we do it right and when the curtain comes down on 2024 or goes up on 2025 that we're well positioned.

Interesting.

And we're ahead of that. Once again, we're in the process of designing all this today, making the necessary decisions. And by the time 2025 comes around, we'll be well positioned.

Speaking of that, you guys have not -- have you decided on a refrigerant you're going with because...

We have. We just have not made that public.

Okay. Interesting. Yes. And this is -- it could be CO2. It could be Solstice.

It could be a variety of things, correct.

Okay. Got it. I'm curious about the replacement cycle broadly because we used to talk about the housing echo boom 2005, 2006, 2007, et cetera. And then we had really hot weather in the 2010s. And I'm just -- do you think we've actually replaced much of that housing boom related -- because they'd be theoretically end of like 15 years 2022 minus 15% is...

Yes, what you're saying, we should be in the sweet spot of that boom of housing, which could have an outsized replacement demand but we're not seeing -- I don't think we've burned through all of that yet. I still think that there's -- and the way that we look at the data is we look at the installed base, we look at residential new construction, and then we project that forward. And when you project it forward, the last 10 years grew at a multiple of GDP, roughly 5%. And when we look at the data that we're projecting for, it's a similar growth trajectory for the next decade. Once again, there will be a little bit of noise as we get into 2024 because of regulatory change. But if you set that aside, we still think that this is a multiple of GDP growth business at the foundation.

So what I always struggle with is it felt like we were over-earning for 2, 3 years -- 2.5 years, at least. Right. We were growing at a rate well above 5% in terms of industry unit volumes. And we're going through a bit of a correction that feels like -- if you actually -- I always go back to -- if you actually just took -- stood at 2019 and projected forward a growth rate of 4%, 5% in units but we actually saw more like 10% compounded a couple of years to actually get back to the underlying trend line, you'd have to be down like 8%, 9%, 10% in any 1 year. But that's not what you guys are projecting, obviously.

We're not seeing it. Like I said, we don't see it in the data. We don't see it in the installed base. I think there's one thing that probably doesn't get the recognition that it deserves is. When you think about a system going into the house, it's two units. We're adding two units to the installed base for each new home. But it's more like 2.5 units because there's typically more than one system that goes into a single-family home.

It's a good point.

I think that's giving us, once again, a little bit of momentum that really may not get the complete light of day of why the replacement rates are what they are. It's because typically, in any home, there's roughly 2.5 units that go on each home.

Okay. That's interesting. And also on the new -- the homebuilder business, if you will, the 20 -- the new construction business, do you guys have any regional concentration there? Or is that just kind of follow the PartsPlus network or...

It doesn't necessarily follow the PartsPlus network, but we do have contracts with national builders. We have 5 of the top 10. So we don't think it's a regional business for us, but there are regional players in there. But it's a solid business. We make good money at it. They tend to be consumers of entry-level product, which is no surprise. But once again, we still make good money there as well.

Okay. Shifting back to commercial and the national account business there. What kind of visibility do you guys have on demand this year?

Typically, it varies by customer. Some of the best customers will know 18 months, what their intentions are. They often change, but at least we have some idea of what their intentions are. But usually, that's the segment of the market that we have the most visibility to on the commercial side.

And what are you seeing in that business?

Once again, order rates remain steady. The backlog remains full. And one of the things that's prompting 2023 up, is pent-up demand. So last year, the industry was short of product. So there were a lot of projects that didn't get completed in 2022 that now will get completed in 2023 and then you still have your normal replacement demand on top of that as well. So it's going to be healthier. We think high single-digit growth in that business this year.

Because of the catch-up on the backlog.

Yes, because of the pent-up demand is how we characterize it.

So how far out are you guys quoting business to the national account customer? I mean, are we talking 10 month lead times, -- so you basically have visibility through the year at this point?

Yes. Typically, it's anywhere from 3 to 9 months is where we're quoting business today.

Okay. Yes. So you have a good sense of the first half of the year.

Yes. We're locked and loaded, I think, for the first half. the industry as well. The wild cards will begin to show themselves in the second half.

Right. And you're not seeing pricing -- incremental pricing pressure emerge. I mean it's always competitive on national accounts probably, but it's not more -- there's no change.

We don't have a 10% yield in. That's for sure. I wish we would. But circumstances just aren't calling for that right now.

Right. In fact, I was going to ask about that. You've had -- is it just one price hike this year at the...

So far, we announced one price increase effective at the beginning of the year for all three businesses up to 8%.

Okay. And typically, what do you guys yield? Like 1/3 of that?

It depends on how commodities and cost component costs are behaving. So in an environment where we have inflation, we'll typically announce a price increase normally between 2 and 6. And we'll get between 1% and 2% on a normal yield if, once again, costs are higher then we'll get more. But typically, that's the way it plays out.

And that's interesting because we've had a surge -- not a surge. We've had an uplift in commodity costs of late, right? So maybe you get a higher yield on this.

I'm going to call the sales guy when I get better.

Okay. capital deployment. I was just curious, longer term, what -- in the past, you've done these ASRs. Anything changing on the cash deployment?

No, the only thing that I would say is we're going to be investing more heavily in the businesses over the next couple of years. We have a $100 million price tag on the commercial factory. The majority of that will be in 2023. That's going to take us from a typical capital spend of roughly $100 million with about 10% to 15% of that being maintenance. And then the $100 million for the commercial factory, and then there's another $50 million for the A2L conversion coming in 2025 or we're going to get ahead of some of that. And then there will be more investment in 2024. And then you'll see it probably land closer to the $100 million annual that we historically been at after that.

So we will dial back the buybacks?

Yes I think we're on a, we've always used them as a throttling mechanism. So we'll continue to do that.

Thank you. I appreciate it, Joe. Thanks so much for your time.

My pleasure.