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

Good morning, everyone, and welcome back to day 2 of Oppenheimer's 20th Annual Industrial Growth Conference. We're delighted to welcome back to the conference the management team of Lennox, CEO, Alok Maskara; and CFO, Michael Quenzer. Gentlemen, thank you both for being here. Looking forward to a great discussion today.

Thanks for having us.

Noah, thank you for having us.

Well, it's our pleasure. And I think given some of the discussions that we've been having over the past week or so, I actually felt it was appropriate to start with a big picture question, really, around Lennox's transformation. If I go back to February, you talked about 2025 as a transition from recovering investment into accelerating growth, and you called out 4 key pillars: the digital customer experience; Samsung JV; increasing parts and accessories attachment rate; and growing emergency replacement in the commercial business. So maybe, Alok, can you level set where progress stands on those 4 initiatives, the KPIs you and we should be tracking and where you'd like to be on all of those by year-end?

Sure. Thanks, Noah. Glad we can talk about long term. Every other question that you are facing these days about tariffs and short terms. But if you go back beyond those tariffs, I think growth transition year is the right phase for us to describe 2025, right? If I think about after the successful conversion to A2L, which we got like higher share, higher loyalty because of our execution, we are seeing early signs of success in each of the 4 pillars that you mentioned. So if I start with Samsung, the conversion from our legacy 410A ductless portfolio to the Lennox Powered by Samsung is actually going quite well. Feedback from our customers has been encouraging. We do have the opportunity to gain share. And remember, we are like low single-digit share on this important product category, which now is up to 10% of the market. Customers love our product design, our integrated controls with Samsung and the heat pump technology of the new portfolio. So still early days, but we are bullish on our Samsung joint venture and the impact it will have. On the second one, the emergency replacement pilots that we did were very successful. The learning was instrumental. We have now done a broader rollout. We are locked and loaded for the summer season. And we saw early signs of share gain in Q1. Although the market was depressed, we just saw on a small base, we got good growth, and we are excited about the long-term opportunity. Just as a reminder, this is hundreds of millions of dollars for us over the next multiple years. Thirdly, on the customer experience, digital customer experience, that's been an ongoing initiative. And we closed in residential 2024 at a record market share, and that was because of better fulfillment rate, better digital experience. And we are continuing to make more investments. We're continuing to get additional growth benefits. And I think by early next year, we would have our new distribution network design, which is going to be more efficient. We'll have higher fulfillment rate and, hence, better NPS and better share. So good progress, but the best is yet to come in that as we start launching bigger initiatives with improved network in 2026. Lastly, in parts and accessories, we actually had a slow start in '24. It wasn't a great year for parts and accessories, as we're dealing with a lot of supply chain, a lot of changes. But growth has improved in Q1, and we did a test case on this on one of our business units. And over 3 years, we were able to double our parts and supplies. Now we are taking those learnings, applying it across all of Lennox and remain committed to doubling up on accessory sales over the next 3 to 5 years. So net-net, all of these, we are very optimistic, remain bullish on it, but it's going to take us a while, 3 to 5 years. And we will share the metrics as we come further along and start talking about. But each of these, we're starting with such a small level, Noah. We're very optimistic about the future.

Maybe on that last one, can you help us understand the role that the distribution network and even the digital investments might play in doubling the parts and accessories revenue from the current 20%? And can you maybe help us understand the margin delta between parts and systems and whether that differs between your 2 segments?

Sure. So the margin on our OEM parts is very good, as you can imagine, right? I mean, those are better than our equipment margins. The margins on some third-party parts, which are non-Lennox branded is not so good. Blended together, it comes out, the parts and accessories drop through at the same on the overall basis as the rest of Lennox. So no big delta on that. On digital, I give you some examples, Noah. So if you go to LennoxPROs, which is where majority of our dealers buy products from, over 50% of orders come through that. Earlier, we didn't have any tools that if they bought an air conditioning unit, there was no prompt. Now using AI, they get a prompt saying, "Hey, you're buying this. Would you like to buy so and so product?" That could be a humidifier. That could an accessory that we are using to install. That could be simply be about some ducting that we have a special promotion on or installation supplies. That's kind of a very simple example of a more sophisticated system that we are putting in place to make sure we have the right parts and accessories at different stores. Historically, Boston and Florida had the same parts. It doesn't work. They need very different type of accessories. So we're putting that together. Going back to fulfillment rate, our fulfillment rate on equipment has gone up, but our fulfillment rate on parts and accessories has not improved yet. That's where some of the distribution investment works. The new warehouse management system we have implemented, that's going to help substantially in making that together and having a centralized place to store all our parts and accessories and fulfill with 250 stores with ABC categories. So there's a lot of work still to be done there, Noah, but the potential is huge.

Yes. I'm thinking of the Amazon algorithm I get where it shows you bought this, customers also bought this. What you're saying, if I hear you right, that you've kind of tailored that to be regionally appropriate for the markets that you serve, and it's quite a step forward. Go ahead, please.

No. I'm saying Amazon did it 10 years ago. We are finally getting around to doing it, right? So I think that's the piece I keep telling my engineers. Why is such a big deal? They've been doing it at Amazon for years.

Interesting. And on BCS, I think you're targeting, as you said, mid- to high-teens ER share versus the current low single digits. So how do you get there? And I think, more broadly, how long should it take to get to full run rate on the revenue capacity additions you're able to fulfill now with the new Saltillo plant?

Sure. I think the revenue capacity that we added right now is 20%. So I think that's the one we look at it. But remember, we can add 20 more, 20 more, 20 more as our sales ramp up. So I think that we have tons of capacity given our existing footprint. To get to that extra 20% capacity, I think it takes us about 2 to 3 years. Now the industry is down this year, so it's hard for me to compare apples-to-apples. But emergency replacement, what we have done so far is, first of all, working back from our dealer base, done lots of segmentation and broken our customers into multiple categories. Loyal Lennox dealers, dealers who used to sell commercial from us and no longer do that, alliance dealers and then finally looking at like a new target. So we pull all that together. They all want quotes back within 2 hours, and they want product delivery the same day or next day. So we are putting that capability. First, we test marketed that in Chicago, got really good results. Now we have that in 14 other locations as we get ready for the summer season, and we have deployed the right kind of resources. Like every district has a specialist for emergency replacement, who can go to customers and attract new customers. We have an inside sales team putting together. And then finally, the products. Our new products that we are targeting, they are all made in Saltillo, very high quality, much better efficiency. They are all A2L. They're able to get payback periods that are world-class and with better performance that we have had. Putting it all together, this is something that we used to do. Low single digits to double digits is not going to happen soon enough. But I think 3 to 5 years, we are very optimistic we're going to get there.

One strategic question for you, but it is also about personnel. Gary Bedard retiring from the company after 26 years, and we wish him well. Maybe can you give us an update on succession planning and how you're defining priorities for home comfort solutions as part of that planning process?

By the way, Gary had the biggest smile recently when he had -- like 26 years at Lennox is probably much more in dog years, but we wish him well in the retirement. Sarah Martin has joined us as the new HCS President. She comes from Honeywell, has lots of experience in channel, channel management. She comes with very digital. Her business used to do sensors. One of the great things about Sarah joining the company is she comes from a business that used to be much higher margins. Sometimes, our legacy Lennox leaders, they feel guilty about making the margins. When we talk about manufacturer's margin plus distributor margin at 20%. They're like, "Ow, ow, ow." I think Sarah's business used to make high 20s, and I think she's looking at this and saying, "Oh, I'm coming to a low-margin business," but different perspective. So we are super excited about Sarah. Her background in sensors and digital was going to help us. The margin profile is very attractive. We have a very strong bench of leaders. This time, we had to go outside just based on timing. But as we look at Lennox, our leaders have done well. Many of them have been around for multiple years and are ready to go play with grandkids or whatever else they want to do. Imagine people who don't want to come to work for the rest of their lives, do you know what I mean? Just kidding. I mean, from our perspective, we're happy for those leaders. Like our employees and leaders who are moving on, We would be happy to bring some new fresh blood in the company as well.

Sure. I mean, that's part of how you get satisfaction out of your work, right? It's compensation, it's the people and culture you work with. And it is the opportunity for growth. So we get all of that.

You guys will have an opportunity to meet Sarah at one of the conferences. I think you'll just really like her.

Excellent. We look forward to it. And I think that's a good segue into talking about demand in end markets. Maybe starting with residential, of course, there have been so many different analysts who tried to frame that longer-term view of demand. You've obviously done so, including at your Investor Day back in 2022 when you talked about 4% to 6% CAGR in residential unit growth over the next decade. So does that framework still look right to you? And I guess if we take out the pre-buy distortions on 2024 and 2025 units, would it be fair to say your updated guide for mid-single-digit volume decline for 2025 would take us below the trend line of unit growth?

Yes, it would. But if you think about a 10-year time frame, it won't matter. So think over the 10 years, if you look at 2009 to '19, you would see a 4% to 6% unit growth. I think if you take a 10-year view here, whether it starts at '25 or so, you'll see the same thing. Our mid-single-digits decline for '25, let me just address that. That is based on a scenario of significant economic slowdown in the U.S., and the consumer confidence continue to plummet.. Currently, we see consumer spending remains robust, despite like all the challenges. If that remains, then our guide would turn out to be conservative on the volume side. Our pricing assumption is based on tariff. But in the long term, we remain very convinced that the residential market will continue growing 4% to 6% in unit terms. Now we haven't had a normal year for us since the tornado, for industries since COVID. COVID, SEER change, now refrigerant change. If you took all that away, I think you'll see a very similar growth rate. The demand grows up because temperature extremes are getting more and more prevalent. There is just general increase in summer. Every summer seems to be the hottest in the past 10 years or 20 years that we are having. Population is moving South, so a lot more air conditioning in Florida and Texas and other areas, which need more air conditioning versus Minnesota and Wisconsin. And then heat pumps. They last much less than air conditioning and much less than furnaces. You put all of that together and the fact that the repair costs are going up as much, if not more than the replacement cost, I see no reason for the overall dynamics to change. We have been convinced that the industry is going to go 4% to 6% in unit terms, plus pricing, which may not be as high as tariffs have cost it, but there's still -- we always recover inflation. So I think this industry remains a very attractive industry.

To unpack that a little further, I think new construction, call it, 25% of the segment's volume. And it sounds like that's about a couple of points of volume headwind this year in your updated guide, right, which means you would think it would be down at least 10% to 15%. So to clarify, is that macro driven? Or at this point, are you getting clear indications on that forecast from your builder customers?

From a builder customers, we do get clear forecast, and it's not that extreme, right? I mean, part of it is we expected new home construction to go up. And now we don't expect it to go up because it was already depressed last year. So if you think about new home construction in 2024, it was at a low level. We were just optimistic that it's going to go up because of lower interest rates. So we took that optimism out, and we kept the replacement kind of like going downward trend based on consumer confidence. But no, it's not down that much. It's 20% to 25% of our business. And at this stage, I think it's going to be down maybe 5-ish, not 20-ish percent.

Yes. Right. Relative to your prior guide, I think I was benchmarking. And just remind us...

Compared to the guide, it's down much more, but compared to last year, not as much.

Right. I'm with you. Maybe just further on that, remind us on the cycle time and the visibility with those customers from when new units are being built to when you get the order to when you ship.

Sure. If you take home starts, the indoor units typically go in about less than 6 months since the home start. The outdoor unit typically goes about 12 months. That's rough numbers. We can put some error bars depending on the builders. If they are good builder, they are faster. And we do have decent visibility on that. Now keep in mind, it's also one of our lowest margin in the industry, right? I mean, new home builders, they always buy the lowest merits SEER product and the margins are low, but we do have 6-month stock visibility on the first unit.

Okay. And I think on the subject of near-term signals. During 1Q earnings, you've talked about potential channel destocking as a headwind for 2Q. Peers also raised the subject of having some elevated inventories in the channel. But at the same time, not necessarily seeing any slowdown in movement so far. Maybe talk through any difference in behavior you're seeing between your own distribution and the 2-steps. And if possible, can you kind of give us a sense of the delta between direct channel inventory versus what you've got in 2-step.

Sure. So in our direct channel, we are essentially done with 410A, and we have moved all to 454B. And it's going well. There's been no air pocket. We don't expect any at this stage. On the 2-step, I think it's similar. In some cases, there is maybe 2 to 3 weeks of extra inventory that they have built up on 410A just to get some price advantage on that. I think that gets flushed out by end of May or early June. We all -- I mean, the entire industry may have overestimated this destocking because of how badly we were wrong in the SEER change where we thought destocking would be less than it was more. The other thing to keep in mind, the distributors are more willing to hold inventory right now because some of them with the tariff environment, they're expecting supply chain disruptions. So it's not just a normal, right? You've got to think about distributor mindset. For SEER change, distributors were willing to cut it down. They had more confidence in supply chain and more confidence in manufacturers. Today, we have less confidence in supply chain. Net-net, we may not see this destocking. And if you see, it will be probably much less than any of us predicted.

Very interesting. You announced 2 pricing actions related to tariffs already. What's been the retention on those price increases? And how dynamically can you adjust price further as the tariff and cost inflation scenarios play out this year? I mean, we don't know what's going to happen, same as you. So just talk to us about the ability to change as the scenario changes.

Yes. I mean, we'll remain flexible. And our goal is to be fair to our customers, like, while protecting our margins. The first price increase, we call it the pre-Liberation Day price increase. That was about the impact of steel and aluminum and everything else that went in. And we looked at that as a more permanent change. I mean, there was a spike up, and we had to look at that, and we did that. The second price increase we did was post-Liberation Day, and that was more targeted. Remember, Mexico, we are USMCA compliant 100%. So that comes out. It is mostly on the other products. In some cases, the second price increase went as a surcharge, and multiple reasons for that. One is because, in some cases, we are contractually prohibited from doing 2 price increase a year, but you can do surcharge. So we're just trying to push that through. Second, we were just trying to maintain some flexibility to see what the competitive reaction is and to see what kind of tariff changes might occur. Remember, this was a time where you could wake up in the morning and you find that there was a new tweet and the tariffs have been withdrawn. So -- and it takes us from announcement to implementation is a 30-day cycle time for us, right? And so we want to maintain that flexibility and credibility with the dealer. But I would ignore the difference between a surcharge and a price increase, and I would just look at what flexibility we have created, which I think is enormous for us to serve the customer fairly and recover any impact of tariffs. Now in reality, what's going to happen is we are going to mitigate the impact of tariffs one way or the other. Lots of production shifting between China and Thailand, working with our vendors. Like the mini-split vendor is able to do that within 3 months. Our motor vendor, it might take them 6 months, but they all can move production from China to Vietnam. They're actually not moving production. All they're doing is U.S. customers are getting it from Vietnam. The rest of the world is now getting it from China. So just new moves versus actually new factories.

Rerouting shipping, yes, yes.

Rerouting shipping. So I think once we do the mitigation, I don't think we have to give it all back in pricing, right? That's where we'd like to continue to hold as much as we can. So we can reinvest it back in digital, reinvest back in innovation to serve our customers better.

It's an interesting point you just made about the flexibility there. But just to double-click on it, when you announce whether it's the surcharge or the price increase, and we're not going to fixate on it, how quickly can we see the retention and any sort of related impacts on that? Just give us a sense of the cycle time.

We start seeing retention numbers pretty quickly in terms back from large accounts and all. The first one, I'd say retention was very high. The second one is still evolving. And in that case, and it's also because the tariff environment is evolving, right? Every day, we see some new changes in release. But I think the first one is to create was very high. Pretty much every competition has followed the first one, and now every competition is following the second one as well. So I think we're just going to be -- amount of second one is going to vary, and we'll know more by the time Q2 ends. But we are pleased with what the industry has behaved in pricing net-net.

I want to ask on the BCS side because, obviously, that was a headwind in 1Q. I think you characterized that we -- I'm so impressed leading with my conclusion, but we characterize that as somewhat transitory really kind of tied to the refrigerant transition and the factory ramp. I think you also commented on your order rates picking up as you move through 1Q. So help us understand, were those dynamics more same-store with national accounts? Did the orders growth you're seeing now have a broader dimension? Maybe comment on that.

Sure. It is transitionary. The other interesting thing I went back and looked at what happened to us in Q1 after the SEER change, pretty much the exact same thing. I mean, in terms of our key accounts, when you go through these transitions, they just wait. They don't want to schedule anything in the first month. They don't want to be the first -- Lowe's, they don't want to be the first one to put new units up on their rooftop. They want Walmart or Home Depot to do it first, right? So there was a bit of that. And remember, the factory startup that we did last year still had inefficiencies, and Q1 is the one when we went from 410 to 454B. So we essentially had very low production in January as well. So putting that, and then we moved lines from Stuttgart to Saltillo. That always creates a lack of productivity or inefficiency through the process. We'll work through the internal inefficiencies. So I would expect a very normal second half. Q2 obviously would be transitioned between normal and how bad Q1 was. So you can draw some of a straight line through that. And on volume, yes, we saw improvements. So we know key accounts that are back to normal. The industry is down, right? Industry is down double digits, and we can't control that. But net-net, we ended it up Q1 with higher share, and we gained share in Q1 as we close it, as now all the numbers have come out. And we think that trend continues, and our efficiencies get better and inefficiencies get left behind, as we lap with the new factory and as we finish with the line moves. So yes, we remain quite confident in the numbers we have given on the volume. And the last reminder on that, only half of BCS is unitary rooftop, right? So some people applied the entire industry softening to BCS, and that's just wrong. Services are resilient and growing. Heatcraft, which is refrigeration, is also doing quite well. So the soft -- industry softness applies to about only half of our total revenue.

And I'll just say, Q1 was transitory from a price and tariff cost perspective as well. So if you go to the balance of the year, you'll have a price cost benefit on that equation as well.

Yes, I forgot the famous LIFO. This is the first time I had to learn so much about LIFO and when impacts us immediately.

Yes. You had a high-cost inventory and you were unable to adjust price for it.

Yes. Price cost will flip in the balance of the year.

Okay. I guess, pulling back a picture on growth, obviously, there's a lot of near-term macro uncertainty. But when I start to sketch out the setup for 2026, I think no prebuy headwind, no drag from Saltillo transition, probably easy comps on new construction, mix benefits from a full year of 454B and pricing rollover from these tariff actions, that's a lot of growth drivers. Perhaps, there's some we're missing. Maybe you can add to that. But when you put it all together, what kind of growth could it imply for the company?

First of all, I'm delighted that it's 5th -- 6th of May, and we're talking about 2026, right? We can't wait to put 2025 behind us. So thank you, Noah. I think it could be an attractive year, right? What we don't know is where the macro is going to be heading, where the consumer things are heading. In addition to what you said, the other thing we're very confident on is in our share gain initiatives. That's when we are launching our new network design that I talked about, which will lead to better efficiency and higher fulfillment rate. We would have had significant experience in our emergency replacement initiative. Like all the new additions would have had 12 to 18 months of experience, so they would be more productive. And of course, the Stuttgart versus Saltillo balance, we would have got it right. So there's a lot to be looking forward to in 2026. I think the macro would be probably our only concern at this stage and make sure we don't go in a deep recession or some new crisis. Every time I get optimistic about a year, and I get pretty optimistic about 2025 before these tariff things came around, right? I mean, 454B mix, which is coming through as we expected, the pricing is holding as we expected. Emergency replacement is as we expected. Like the transitory headwinds are a little bit more, but the tariff uncertainty just clouded the whole picture. So let's just hope there's nothing new. Otherwise, 2026 should be a good year. That's one reason, going back to history when we did Investor Day, we didn't want to give 2025 guidance. We were giving 2026 guidance even at that stage, saying that '25 is going to be messy. So we're going to meet or beat our '26 guidance.

That's a great headline, Alok. I guess, within that, there's a framework around incrementals. 40% makes 100% on price, 30% on volume. Do you see incrementals kind of generally holding steady, if we think about the year ahead, we'll be lapping some of the tariff cost impacts, of course.

Michael, what do you think?

Yes. Short answer is, yes, those incrementals should still apply to 2026. And we're even more excited about 2027 and beyond. I think a lot went through some of the macro end market drivers of industry units kind of 4% to 5%. You get a few percent share or gain, and then you have low single-digit price increases. All that adds up to high single-digit, if not double-digit revenue growth, which is really what we're focused on. But those incrementals should hold.

I want to ask a couple of items related to supply chain and tariffs. The Samsung JV, good foresight there. Maybe talk about the implications of tariff dynamics for your ability to gain share, how you're managing the 10% reciprocal. Maybe how much opportunity do you see to take share from the Chinese competitors in the duct-less market?

I think it's significant. In hindsight, this was a stroke of genius. I think we didn't do it because of China versus South Korea manufacturing, but I think this was a stroke of genius from our side. Remember, we are low single digits. The share opportunity was already huge, but our estimate, about 40 -- or more than 40% of those units are coming from China. So the fact that us and the other beneficiary, too, like Mitsubishi and Hitachi and Fujitsu, like -- but I think there's going to be a significant share shift there. Now I don't think we should take that for granted. I mean, there -- some of the Chinese companies like Midea, they're opening factories in Mexico, which will be USMCA compliant. So I think folks are going to fight back, but we do have a short-term opportunity to gain significant share here.

And I'll just add. Even on the ducted units, there could be up to 5% of ducted units that come as well.

On ducted, yes. If we think about the industry and the USMCA compliant, good exemption. That's been a benefit so far. Hopefully, it stays in place. Are you making any investments today to potentially derisk the loss of that exemption? This would, of course, affect the entire industry, but you do have significant Mexico exposure.

We do, and I think our view, 40% of the industry units have Mexico-USMCA exposure. I think any investments we are making are in the design stages. Like are we creating scenarios? Or what would we do? Yes. Are we putting any concrete in the ground? Or are we looking at any real investment. Not yet. But yes, we're doing scenario planning. Remember, we still have most of our factories in the U.S. We used to make in U.S. So yes, we do have scenario planning, and we have done, but we haven't spent any real dollars behind it.

In the short term, obviously, you have announced the price increases. Maybe just double-click on the impact of the tariffs on price/cost dynamics through the rest of the year. From a timing perspective, you implemented these price increases relatively early in the quarter. So how balanced is sort of the price/cost dynamics on a quarter-to-quarter basis as we move throughout the year?

Michael, do you want to take that?

Sure, yes. So the first price increase that we announced is effective kind of April. So Alok mentioned really good stick rates on those. We're just starting to go through that second price increase right now, which is kind of beginning to take an effect in May. So those will both ramp up over the balance of the year and kind of deliver that price cost positive that I mentioned. And again, our goal here was to protect our profit margins. So -- and that's related to tariff and tariff-related inflation. So there is cost out there that isn't specific to tariff, but we continue to monitor. We'll continue to mitigate our costs as well. But overall, we should see that price/cost positive for the rest of the year.

And then, Michael, this is maybe another one for you. Just help us better understand the BCS margin step-up as you see it moving through the year. You called out some of the drivers, but maybe we can kind of think about it a bit more numerically.

Yes. I think the big balance of the year question is going to be on the volume. So right now, we've assumed it's about a flat volume. And Alok mentioned, about 25% of that segment is service, 25% refrigeration. So those markets continue to progress well. And we also expect to have some share gain within the emergency replacement in there. Offsetting some of that is this uncertainty on kind of where light commercial unitary is going to be. We have backlog visibility, about 1 or 2 months. Right now, that seems good, but it's something we're definitely watching. And we're definitely focused on cost productivity initiatives. We should start to have in the second half of the year the lapping of some of those launch costs that we had for the new factory in Mexico as well as new cost initiatives that we're taking in the organization as well. And then finally, the last one is we'll start to see the full benefit of the mix. So we saw a little bit of mix benefit in the first quarter, but that will ramp up as we'll sell almost all 454B kind of exiting the second quarter.

That's helpful. I just want to close with a question or 2 around investment priorities. With the refrigerant transition and the Saltillo factory build behind the company, it does seem like the focus is, for the time being, shifting from manufacturing to distribution infrastructure. How do we think about payback times or ROIC as you see it for manufacturing versus distribution investments?

I'll take that. I think the manufacturing investments, they typically have a longer payback compared to distribution for us. And manufacturing also, there's a lot of inefficiencies and ramp-up versus distribution, things are just faster. A lot of our distribution facilities are leased versus -- not that it makes a difference beyond the kind of anecdotal. But some of the large distribution investments that we are making in Dallas, we are looking at less than 2-year payback, often 1-year payback versus manufacturing is typically 4, right? So I think that's where we look at the total payback. We feel like in today's environment, like, there are lots of opportunities we have. We'll continue focusing on internal improvements and internal growth investments first. We'll continue doing polite dividend increases. We'll continue looking at M&A opportunities, which market is currently frozen. And then at this level, share buyback, I mean, I think we've been sitting on a lot of firepower for that as well. So we feel like from a capital, we're in a very good spot.

You mentioned M&A frozen. Maybe unpack that a little bit more. And where might it make sense to still buy versus build?

Yes. I mean, market is frozen, I don't mean like we are frozen. Like in any discussions we've had just start getting put on ice because buyers and sellers can agree on a valuation and there's much fluctuation and tariff noise in the market. For us, we would really like to continue boosting up our services portfolio. We've done one acquisition that was in services. We'd like to do more in parts and accessories. There's just a lot of attachment. Think of it like 6 feet around our box, whether it's in the basement or outside, we still have lots of opportunities in those areas. We would like to continue looking at more technology play as well. There's a lot of new IAQ, controls and other technology that we can look at. And those would be sort of defining our M&A priorities. Again, at this stage, the broad industry consolidation is out of the question on where we are, but we look at that. And in each of those cases, we don't have to do an acquisition. That's probably one reason we don't -- we are very critical on ourselves when we look at acquisitions. We analyze it much more than others probably, and we are very disciplined because I think our organic pathway has paid well for us over the past multiple years.

We look forward to seeing that continue. I think we're out of time, but I want to thank you all for the great discussion, and thanks to everyone who listened in on the webcast. More meetings to come, more discussions over the course of today and the next coming days. Alok, Michael, thank you very much for the time. Hope everyone has a great day.

Thanks, Noah.

Thank you.