Good morning, everyone. I'm Tommy Moll, analyst here at Stephens. We want to welcome you to the conference. We appreciate your interest in our event, and specifically your interest in Lennox, where, to my right, I'm joined by the company's CEO, Alok Maskara. To his right, the general manager of the Heatcraft business, Bob Land. And then at the end of the table, Chelsea Pulcheon, director of investor relations. Alok, Bob, and Chelsea, thanks all for your time. We appreciate it today.
Thanks, Tommy. Thanks for the invitation. Delighted to be here on a beautiful day.
So we'll kick it off with some Q&A that I have prepared. This session runs 45 minutes. I can keep us going the whole time with questions tailored to both the generalist and the specialist in the audience. At the same time, once we're maybe 15, 20 minutes in, if you have a question you want to ask directly, definitely just shoot up a hand and feel free to ask anything on your mind. But for some of the generalists in the audience, Alok, I want to start with some overview questions here. And maybe at the very top, let's just talk about some of the distinguishing characteristics of the HVAC industry. It's one you joined a handful of years ago, and you've been very direct in articulating some of the structural advantages of HVAC and why investors should care. So maybe we'll just start there.
Great. Thank you, Tommy. Yeah, so I've been here two and a half years, worked in various different industries in the past, worked in the water industry and other building products industry for a long period, and I think HVAC industry is just beautiful and quite a few good things. When I say HVAC industry, please think of it as HVAC North America because Lennox is only in North America. The few things that really distinguish our industry from others, one is it is a perpetual growth industry. Climate change, no matter how your views are on that, means that there are more temperature swings, and more temperature swings means air conditioners run for a long time and get stressed more often, which means they need better technology and they also break more often. So that's kind of the one big things you see.
Growth in the industry, if you do nothing, is 3%-4% in unit growth, so it outpaces the GDP. New home construction and the fact that the average lifespan of a unit is getting shorter. So that's the growth part. Second, the industry structure is very good. 90% of the share is with four large publicly traded companies. They all invest in technology. We fight hard on the market, but we fight for factors that are not always just price. So this would be technology, dealer access, and putting it all together. And technology is also important because our industry is fairly regulated, regulated in terms of what refrigerant we can use, what minimum efficiencies we need to have. That also keeps a lot of the foreign competitors away because the products in the US and Canada are very unique. They are not used everywhere else.
U.S., Canada has what we call ducted product. Most of the other world is ductless product. So this is the only ducted market, fairly insular in that. Finally, just to kind of put the advertisement for Lennox in the same picture is we have a unique business model where most of the players, just like in other industries, go from manufacturers to distributor, distributor to a dealer or contractor, you might call it, versus Lennox is a manufacturer that sells majority directly to the dealer. So we are our own distributor. And that puts Lennox in a very strong position, especially during changes due to regulations to take digital forward. It's a great industry. Happy to talk about it offline as well. I wish I had discovered this sooner.
There are a couple of aspects specific to your tenure as CEO, Alok, that I want to unpack. First is on culture, which isn't always discussed in these sessions, though maybe it should be. So maybe just unpack a little bit of that for us.
Sure. I'll start by saying that Lennox has always had a good culture, 130-year-old industry. But since Bob's here and he's experienced the before and after, maybe Bob can take a crack at the answer, and then I'll come back and wrap it up.
All right. So as mentioned earlier, Tom introduced me. I'm Bob Land. I'm the GM of the Heatcraft division. I've actually been with the company for 22 years. And I'll echo what Alok said. It's always been a very performance-driven company, very focused on financials, very focused on operational discipline. I think a lot of companies struggled through the COVID period when that hit, became very internally focused. And I think one of the biggest cultural changes that I think Alok brought to us that was very, very helpful was getting back to a customer focus. Some of the things from his past experience, really focusing on Customer Charter metrics. I think we've upped our game in that. We do monthly reviews, actually at Alok's level, looking at each business unit and how they're performing, including how they're performing to the customer as well.
And then we've added a good process around customer surveys as well to really get customer feedback and make sure are we helping our customers be successful. Because I think that's a big part of our business is if we're helping our customers be successful, at the end of the day, we're going to be successful as well. So let's throw one other one. Alok's mentioned it a couple of times. I think another big thing is I think it's widely talked in Lennox that growth's our objective, I think more so than historically. So I think that's legitimately when he says that, we hear that internally regularly, and we're also focusing a lot of our efforts around that.
Great. And that growth is driven by, as we talk about, improving customer experience. Bob touched on it. We've also looked at making the right investments. For a while, we were scared of making investments. And I think putting all that together, that's led to a different culture. I think we see that in our employee engagement scores. We see that in many other factors. And really delighted to high performance with a heart. That's what we call our culture as it. It's high performance, but with a heart.
One other aspect I want to unpack with you, Alok, before we get into some of the more detailed questions is just on distribution execution. You mentioned a minute ago the majority of your volumes move through your captive distribution arm. And you've been pretty vocal about trying to enhance the performance of that distribution network that Lennox owns. So maybe you could just help us understand some of the factors in play.
Sure. I mean, first of all, let me start by just describing distribution. These are very bulky units. So if you think about distributing air conditioners, and remember they're getting larger every day because of efficiency requirement and so on. So distribution becomes very important. What we have come to realize is that our market share has a very straight correlation to fill rate. Now, there are other factors in there. So just to kind of break it down, and to improve fill rate, we need to be a better distributor. Where we are today is we grew up organically. So we had 10 stores and we had 20 stores. Now we have 250 stores, and our distribution network has not kept up with that. So we kept adding some RDCs.
We're doing a ground-up reevaluation and a redesign of our distribution network, including investing in systems, so new warehouse management systems, including using now AI to do better allocation of inventory because we would often have products just not in the right location, and including truly relooking at where is the right footprint, what mode of transportation we use. We are onto a multi-year journey to improve how we physically move goods. The good news is we might be new to it, but it's not new to figure out how to move boxes more efficiently. We have hired leaders from companies like Amazon. We have got consulting firms to redesign our network. We have partners with some of the best. We are investing in our own talent and resources as well.
At the end of Q3, we ended with one of the highest fill rates we have had in the history of Lennox. At the end of Q3, we also ended at one of the highest market shares we have had in the history of Lennox. So from those two perspectives, we know early signs are encouraging, but we have a long way to go. We are not a good distributor right now, but we are getting better every day. And in a few years, that'll make an even bigger difference to us.
So one more topic to unpack before we dive into some of the segment-level details is the elections, Alok. If you reflect on the biggest potential impact on your business from the recent elections in the U.S., what comes to mind?
Sure. Before the elections, when people asked me the question, I said, "Listen, either way, half the country is going to be pissed. If the election remains hung for weeks, then the entire country would be pissed." So one thing we take some consolation is that the results came quickly and it was universal and there was a clear mandate. For us as a company, there are like two or three different aspects. So let me just unpack it, right? First of all, 2024 has been a very difficult year for the residential business, just from an industry perspective. Unit volumes are down. Overall, there was a lot of concerns around new home building. So interest rate means new homes construction has been slow. Consumer confidence has been low. Higher interest rates means that people were stuck with mortgages and they're not moving houses.
So all of that means the industry has been on a fairly down level. With the election and some of the certainty that has come in, if interest rates continue going lower, we expect the industry to improve, consumer confidence to improve. So I think that's going to be the positive for us, right? From a concern perspective, the word that comes to mind for you and for me is tariffs, right? We always worry about tariffs. So let's unpack that a little bit. We think the highest likelihood is going to be tariffs from China. And in that, we are fortunate that our exposure to products imported from China is very low. So as a percentage of COGS, it's low single digit. And over the past few years, we have dual sourced pretty much all of that. So we have flexibility within our supply chain to move those around.
Because the China concern is not new. We faced it during COVID. We faced it during the last Trump presidency. So we are very well prepared for that. One of the benefits of the China tariffs is we primarily manufacture in the U.S. and Mexico. A lot of other products, whether it's made by Gree or Midea, have been imported from China. So we think that gives U.S.-based manufacturers a significant advantage compared to products coming from overseas. In fact, last AHRI show, people are talking about how the industry will be disrupted because of products coming from overseas. So I think those concerns were overblown, and further tariffs would make it even less likely that more products from China would come in. Let's talk about Mexico. That's the other piece on the tariff, right? We think the likelihood of that is unknown.
But if past is any history, the current Mexico trade agreement was done during Trump administration. So there's a high chance that remains the same or gets protected. There's a high chance that that's going to be used to negotiate border security, and products from Mexico would come pretty close. Now, we manufacture in Saltillo. There are many other manufacturers there, including companies like Tesla. So if they have any influence, then maybe this would work out just fine. If there are tariffs in Mexico, it'll come down to the nature of the tariff, the time of the tariff, when it's implemented. If it's a net of import and export, impact onto us would be very small because a lot of our components, like Copeland compressors, all come from the U.S. anyway.
If it is on total value of goods coming out, then the entire industry will have to deal with it. We are not the only one manufacturing in Mexico. Almost all our competition manufactures in Mexico as well, so we'll work through it. We make a lot of products in the U.S. too, and we have factories there which have sufficient flexibility if we need to move production between different regions and optimize it, so lots of uncertainties, but our strategy remains the same. I don't see any fundamental changes in our strategy, and we are excited that the nature of the U.S. industry, which is somewhat unique, remains protected if there are more tariffs coming from China.
So let's dive in, Alok, on the residential segment, specifically to start on the A2L pricing. Originally, you called for something in the range of 15% cumulative pricing price mix, really, over a two-year period. More recently, the discussion has focused on a roughly 10% tailwind in 2025. So maybe we could just clarify. Are you actually saying the same thing here, or would you say that expectations on this tailwind have evolved over time?
No, we're saying the same thing. In 2024, you'll see mid-single-digit pricing, and you've seen that in our results. When we made the statement 15%, that was back in 2023, and we had said over the two-year period. So that included 2024 and 2025. So there's no change to that. If anything, we are more optimistic given that we are kind of a year since we made that statement. 2024 is essentially in the bag from pricing, and 2025 pricing is now released in the market by us and our competition. And we're looking at 10 plus, at least 10, whatever word we want to use, pricing. And our costs have gone up too. I mean, the new refrigerant requires more efficient compressors, more heat exchange surfaces, which means larger units and different types of motors and products as well, and increased capital in our factories.
So it's to offset our cost increase, just like everybody else in the industry. So we feel good about the impact of A2L as it comes to price impact from manufacturers.
So moving on, Alok, to the pre-buy discussion, and this can focus more on your two-step business within Resi. But last quarter, you talked about some early signs of pre-buy that came late in the quarter. How much of an impact do you really see this as having in 2024 as a tailwind of volumes? And then, flip side of the coin, how much of a headwind do you really see in 2025?
Yeah. So the pre-buy is very interesting. It's unlike the previous regulatory transitions. Let me start by saying any pre-buy we see is much less than for old industry folks. We'll see R-22 went to R-410A because the rules have been clarified substantially by DOE and EPA. So from that perspective, there's much less. We saw some signs of pre-buy in Q3, and we are clearly seeing some signs of pre-buy right now. I would probably cap it at saying in the two-step channel, which remembers only 30% of our sales, you might see at max one quarter worth of pre-buy, so 20%, 25% of the annual volume. I think that's on the high side, honestly. A lot of what we thought would be pre-buy is being actually put and being installed in the ground because the industry today is short on R-410A product.
If you were to go to buy R-410A product, many of the distributors can't buy. Some of our competition is already out of R-410A product. So I think at most, it'll probably be one quarter's worth. This quarter and next quarter, we'll see. We still have a few weeks to go. But if you look at 2025, our estimate hasn't changed. We think two-thirds or 65% would be R-454B. One-third or around 35% would be R-410A. And that's a mix for us that's going to be different than some of our competition because mix for us is based on the fact that we sell direct to the dealer. If I was purely a manufacturer going to a two-step distribution, then my mix is closer to 80%-20% because remember, the other part is that just like other distributors, we have built up R-410A inventory as well.
We'll see how much of that lasts by the end of the year. If the current shortage continues, there may not be much 410A to pre-buy. They all might just be share gain as others have run out of product faster.
So, let's think that through for a minute, Alok, on some of the competitors you mentioned that are short the 410A product already. So potentially, they end up at the end of this year with more of the 454B product in inventory than originally planned. What risk do you see into next year where there's maybe some less disciplined behavior on the initial 454B sales from these folks?
I would be surprised if there is less disciplined behavior. And part of it is everybody's cost is going up as well. Can you imagine some of my competitors sitting in a conference room like this talking about why their margins are lower with the new product and what impact it would have? Remember, these are fairly large publicly traded companies. So I think that impact is pretty low. I think the big thing that we all need to watch out for is share gain and loss. So I think pricing is highly unlikely to move much. Do people run promotions? Yep, we run it all day. Would my salespeople come and complain that Carrier is cutting prices? Yes. Would Carrier salesperson complain that Lennox is cutting prices? Yes. Is it true? No. So I think that'll happen. Share is what we got to watch, right?
This year, companies who have 410A products like us are getting share. Our goal next year is going to be very focused on retaining that share, making sure it's not a temporary share gain, making sure it's more of a permanent share gain. And that's what we are fighting for. And we know we can't fight that on price. Industry buys on quality. Industry buys on availability. Industry buys on digital connection. Industry buys on warranty. They don't buy for 2%-3% or 5% price changes. So I think that's what we'll focus on.
So last topic to unpack on the residential side, Alok, you highlighted all the factors that the industry buys on, but let's talk about the consumer, the homeowner here, and whether you've seen any signs of fatigue. You mentioned the consumer sentiment this year has been so-so at best. Have you seen any evidence on the repair versus replace decision tree or what's also referred to as the trade-down, sometimes just more consumers interested in the value tier product than you would typically see?
We see more of the shift towards value tier than we see any changes in repair versus replace. With the value tier shift, you got to keep in mind that the minimum standards went up in 2023. So what that means is earlier, what was mid-tier has become value tier now because we couldn't sell the 13 SEER products anymore. We're only selling 14, 15, 16 SEER , right? So the mixdown is as much due to regulatory changes as it is on the consumer behavior piece. On the repair versus replace dynamic, not a major change. Repairing a 14-year-old unit is a fairly uneconomical decision for our consumers. If they're really strapped for cash, then maybe they'll make that uneconomical decision. But when a 14-year-old unit breaks, consumers are usually better off to get a new unit.
As long as the financing markets are open, which they are, I think consumers are continuing to do that. So we haven't seen any dramatic shifts in repair versus replacement. And the tier mix, which we all have seen, is more likely due to regulatory change, not due to consumer behavior. But we continue watching out for it. I mean, this has been a difficult year from a demand perspective. The new home construction, as the stocks go up, and they have since the dip down below, and at least the industry charter on the R&R. So if I look at our colleagues at Home Depot and Lowe's and everybody else, they expect more renovations and more things next year simply because people are stuck in their homes. If you have a mortgage that you're paying 3% on, you can't switch to a different home.
So the conversation is, "Honey, we are going to stay here for a while. Might as well get the air conditioner fixed. Might as well put a new deck. Let's just make sure this home is comfortable." That we are going to be excited about.
So let's shift to a discussion around Heatcraft. And Bob, I have a few questions specifically for you here. I'll give just a couple of introductory points describing the business, which may be less familiar to some in the audience, and then maybe you can fill in some of the details. But just the high-level sketch I have here is it's a roughly $400 million business. It sits inside of what's now referred to as the Building Climate segment . And it's really focused on refrigeration. So some of the markets, I think, include food with grocery stores, convenience stores, restaurants, but as well as some industrial applications, which would include data centers. So beyond that very high-level introduction, though, in the marketplace, how does Heatcraft sit vis-à-vis some of the competition, and what's the brand really known for?
So Heatcraft's number one in North America when it comes to the commercial refrigeration. We own the largest market share. It's a company. The Heatcraft name, if you look it up, there's actually four different brands underneath there, which were companies that were acquired over a period of time in the 1990s. Most well-known brand and probably the biggest one in the marketplace is a product brand called Bohn, B-O-H-N. It's very well-known. It has a very strong reputation out there in the marketplace. When you start talking to contractors, they actually know the Bohn brand from a long history of it. So there's a lot of loyalty built into that as well. We're headquartered in the Atlanta area, and then we manufacture in South Georgia overall. And as Tommy was saying, roughly 80% of our business is food service, food retail.
Another 20% is what we call cold storage or light industrial, which is more the distribution of food and products throughout the nation.
You mentioned it's a collection of brands under that Heatcraft umbrella. Should we think about this in the same way that investors do, for example, in a resi context where you have a value tier brand, a premium brand, and then maybe one in the middle?
Slightly different is a little bit how we go to market. We actually, because our distributors, some of them overlap, we actually use the brands to give to different distributors that may be in the same area, but it allows us to, "Hey, this customer may have the Bohn brand, but another distributor wants to get into refrigeration." So we may give them a secondary brand like Larkin is another one of our brands. That way, we can cover a territory well and give them options as well to compete with each other.
You mentioned some of this earlier, but I want to go back to the biggest changes you could identify for us that have been put in place under Alok.
So when I mentioned earlier, the customer experience was definitely one for us on the refrigeration side. A lot of what we do is engineered to order. It's an applied product. It's a little bit different from the HVAC side, or I should say a lot different. A lot of customization comes into play during that. So it's a much more complex product that you're selling there into the marketplace. So COVID and supply chain was definitely a bigger challenge for us on that side, being 50% ETO. I spent some time on the Resi side when I was in operations, and I can tell you a residential plant, the number of SKUs we deal with in refrigeration, even though our volume isn't as much, is almost 6X what they deal with on the residential side.
One of the big things for us coming out of COVID was building back customer confidence as we overcame the supply chain things and really getting refocused on what really matters to the customer, things like quotation time, confirmations, on-time scheduling, supply chain resiliency. Alok really gave us quite a few tools that helped us. I think the first quarterly ops review, when we were talking about just our position in the marketplace, that was one of the first times Alok brought up a Customer Charter . And then I think we led the company overall with rolling that out. And he printed it, put it on his desk. All of the other business units have heard well about how we led with the Customer Charter and have all copied it since then. But I think that plus the growth mindset. Refrigeration has always been a very stable market.
If you think about it, you got to keep food cold. You got to keep pharmaceuticals cold. So even though the market doesn't necessarily go up as high as maybe residential at times, it also doesn't go down. You still have to do those things. You have to transport food. You have to keep pharmaceuticals at certain temperatures, and some of these customers have very high dollar value of product that they're sitting in their warehouses or stores.
So I want to hear from Bob and Alok on this last point, just in terms of the takeaways for investors. And what I mean by that is from the investor perspective, Lennox stands out as a U.S.-based OEM that really emphasizes and invests in this business. It's been de-emphasized elsewhere in certain cases. And so from the investor perspective, what are some of the attractive characteristics, whether we're talking about growth, margins, returns, brand value, anything that comes to mind that you want to make sure investors take away because it is a fairly unique exposure here?
Sure. I'll start, and then Bob can jump in. I think what we like about the business and the reason we kept it in the portfolio is, first of all, high recurring revenue. So Bob mentioned the majority of the things are repair, replacement, and there's some new build, of course. We like that. We like the margins. We like being number one and two. We are number one in this case, in this industry. We also like the fact that this business has liquid cooling technology. So if you think about us and the rest of the business, we only have air-cooled products, right? This is the only business that has liquid cooling technology, which can apply in many different applications, including data centers. So as we look at the core technology in here, they obviously use the same refrigerant products we use. So there's significant technology synergies.
Our technology teams are consolidated. So are our controls team. And in future, there are service opportunities. If you look at a food service place, you will have Bohn, which is a Heatcraft product in their meat chiller. You'll have an RTU on the rooftop, and we have a service technician circling around that place. We haven't cracked the code yet, but we need to work through what are the different opportunities there where we could do service through here as well. So we like those things in the portfolio. Bob, what else would you add?
I would agree with everything Alok said there. One of the big ones, I think we're investing a lot. We're obviously following HVAC with the regulation changes. So A2L is our first step, but refrigeration quickly is also going to start looking at CO2. So there's a lot of investment going on in the business of not just lab testing and equipment, but actually starting to order the equipment for manufacturing to be able to do CO2 products, which is different from what you traditionally have done with HFC and/or A2L as well. So there's a lot of preemptive investment going on in the plants right now today.
Yeah, that's a great thing to mention. I mentioned technology synergies, but Bob's right. This industry is typically ahead of the residential HVAC technology curve, so if you think about the next two to three refrigerant changes that might be mandated, when we get to natural refrigerants, we'll already have a leg up because Bob's business is already doing that, so engineers are already trained on that.
Alok, let's move on to a broader discussion on the Building Climate segment . Really here, I'm thinking about the plant where you're investing about $150 million in a greenfield opportunity in Saltillo, Mexico. Just walk us through the strategy here to recapture some of the market share that was lost during the pandemic and the emergency replacement market. Going forward, how much of that market and how much revenue is up for grabs here?
Sure. No, that's a big piece of our excitement right now is the new plant we are putting up. So that business, which is a commercial rooftop HVAC business, we have been supply constrained for probably five plus years. So this has been a period of just shortages of equipment. If we had more equipment this year, we would have sold more equipment this year. Same is true for the past five years. So the new plant provides a much-needed relief and much-needed extra capacity. As our output has essentially remained flat and the industry has grown, we have lost share. A large part of the share we lost is in a segment called emergency replacement. So if we take a step back, we are very big in national accounts. So these are national accounts which we protect and serve very well.
So when we have product shortages, what suffers is our emergency replacement market because those are quick order, quick shipment business. This plant is geared towards making products for mostly emergency replacement because they are more standard products. They are more stockable products. That business, if you just say the overall rooftop HVAC business is about $5 billion in U.S. every year, emergency replacement is about 40% of that business, right? Our market share there is down in single digits, whereas in key account and otherwise, we are in teens. So that's kind of the delta big opportunity for us. The plant startup is going well. We are starting to pilot test those products. Early feedback has been excellent. We are very optimistic about growing our share in emergency replacement.
But the new plant will also probably allow us to gain shares in a key account as well because even in key accounts, we have not been aggressive in seeking new accounts because we just didn't have the capacity. As the leader who runs it, he says, "Alok, to sell a product, you must have the product to sell." So now we're at least overcoming the first barrier. Starting this quarter and into next year, we will have products to sell. So very excited about it.
So you mentioned it's going on five years that you've been capacity constrained here. Where are we in this commercial cycle? Some might suggest that we're rather late in the cycle, but your volumes have been consistent and you still can't catch the demand.
That's right. Listen, every time I read one of the big reports, whether it's the Dodge Index or something on commercial, I feel like the world's going to end tomorrow. But then when I go look at order rates, I feel a little different. When I look at a backlog, I feel even more different. Part of it is we are facing an industry where the average life of a rooftop unit, so take Lowe's or Home Depot or Walmart for an example, they all have rooftop units, which heat and cool that building, right? The average life is past due for replacement. So those units are supposed to last 14-16 years. The life of the units on the roof is now 16-18. Because when we talked about we are out of capacity, guess what?
A lot of people in the industry were out of capacity too because the core components, whether they are inverters or variable drives or motors, were all out of capacity, so there's just a latent demand that's existing out there, and in some cases, customers have decided to wait till the new refrigerant comes into play starting next year, so we don't see this market slowing. Now, also remember, new construction is a small portion of the business. Majority of this business is still replacement business, so if you think of that, along with the fact that the replacement is overdue, and new retail establishments are still coming up. I mean, from that perspective, there are more and more of these locations coming up, so you're going to think of us being more exposed to retail food service places, single-story, large buildings that require heating and cooling.
The downside that we see is often in places like office markets and others, which we are not really exposed to, so at least in our micro market that we serve, we feel good about the demand.
So let's end today, Alok, with a couple of financial questions. First question I want to make sure to ask and have you answer is on the early thinking you provided for 2025. This was last quarter during your earnings presentation. And basically, you framed next year as one where you would again expect to see revenue growth and margin expansion. What are the biggest risks and opportunities to those two things happening next year?
Thanks. We stick with that broad statement. So yes, we expect next year to have revenue growth, and we expect next year to have margin expansion. The underlying reason for revenue growth, clearly, we get mixed benefits from the new refrigerants. Clearly, we'll have more products to sell on our BCS segment. Clearly, we think consumer confidence is not getting any worse, and new home construction has actually started back up from the really low, low levels we had hit earlier. So pretty confident. I don't see tons of risk with that statement. Now, in January, we'll tell you whether it's low, mid, or high single digits, right? I mean, we can talk about that a little bit. The risk there, if any, is about the extent of pre-buy.
At least at this stage, we feel like the pre-buy is going to be probably less than people thought because the industry is already out of capacity. So from that perspective, I see it. On the margin piece, again, going back to the 454 piece and the benefit of drop-through on the incremental pricing, the fact that this year we have had a plant that was fully staffed for about six months and had produced nothing, which is a new plant in Saltillo, plus the manufacturing inefficiencies during the 454B conversion, there's always risk, right? I feel much better about next year than I did other places. The pre-buy stuff is going to sort itself out in the next six weeks or so, right? I mean, the year ends in six weeks, so we'll know where that stands.
But at this stage, those two statements, we feel pretty good about.
And then moving on to some longer-term targets you've put out, Alok, specifically for 2026. A couple of years ago at your investor day, you identified some targets for a range of revenue and operating margin. Then earlier this year, you raised both of those. And then if you just take this year's guidance and some early insight on 2025, you may need to raise those again. So just give us some of the drivers here of the momentum that you have experienced as these targets keep moving higher and then what you could experience going forward.
Sure. That's a great question. And by the way, this is a great problem to have when you're forced to increase your long-term target every year when you're trying to talk about three years, right? I mean, last year, my CFO said, "We don't have a choice. Alok, we are forced to raise the target." So we raised it last year. Listen, where we are is more focused on our entitlement on margins, right? So if you think about it, we want to be double-digit growth or close to double-digit growth. We are trending that way right now, but we know we need to sustain it and we need to work through that. Our entitlement on margin should be a manufacturer's margin plus a distributor margin, right? Historically, we have been a little complacent in agreeing to just have the manufacturer's margin.
But I think from a shareholder perspective, I want to make margin on manufacturing and distribution because we own both. And that entitlement leads us to a much higher margin number. We are close to the range, but we haven't been in the range. And remember, the range has got 200 basis point delta. So I have.