Earnings call transcript: Lennox Q4 2024 beats estimates, stock dips

Lennox International (NYSE:LII) Inc., a $21.1 billion HVAC giant with a track record of 15 consecutive years of dividend raises according to InvestingPro, reported robust financial results for the fourth quarter of 2024, surpassing both earnings and revenue forecasts. The company achieved an earnings per share (EPS) of $5.60, significantly above the expected $4.15. Revenue reached $1.3 billion, exceeding the forecasted $1.23 billion. Despite these positive results, Lennox’s stock declined by 2.33% to $592.42 in aftermarket trading, suggesting nuanced investor sentiment. InvestingPro analysis indicates the stock is currently trading above its Fair Value.

Key Takeaways

• Lennox’s Q4 EPS of $5.60 beat the forecast by $1.45.
• Revenue grew to $1.3 billion, surpassing expectations by $70 million.
• Stock fell by 2.33% in aftermarket trading despite strong earnings.
• Record annual revenue exceeded $5 billion for the first time.
• Anticipated 2025 core revenue growth of approximately 2%.

Company Performance

Lennox International Inc. demonstrated strong performance in the fourth quarter, marking its eighth consecutive quarter of double-digit year-over-year adjusted EPS growth. The company reported record annual revenue exceeding $5 billion and achieved significant core revenue growth of 22% in Q4. With an impressive InvestingPro Financial Health Score of 3.01 (rated as GREAT) and a return on equity of 142%, this performance was driven by strategic pricing initiatives, improved distribution efficiency, and successful product innovations, including an expanded heat pump offering in collaboration with Samsung (KS:005930).

Financial Highlights

• Revenue: $1.3 billion, up from $1.23 billion forecasted
• Earnings per share: $5.60, compared to $4.15 forecasted
• Operating cash flow: $332 million in Q4, $946 million for the full year
• Adjusted segment margin: Expanded by 250 basis points in Q4

Earnings vs. Forecast

Lennox exceeded market expectations with an EPS of $5.60, outperforming the forecast by $1.45, a surprise of approximately 34.9%. Revenue also surpassed predictions, coming in $70 million higher than anticipated. This marks a continuation of Lennox’s trend of outperforming forecasts, reflecting its strong operational execution and strategic initiatives.

Market Reaction

Despite the earnings beat, Lennox’s stock fell by 2.33% in aftermarket trading to $592.42. This decline may reflect investor concerns over broader market conditions or specific company challenges. The stock remains below its 52-week high of $682.50, indicating potential market caution.

Outlook & Guidance

Looking ahead, Lennox projects a core revenue increase of approximately 2% for 2025, with adjusted EPS expected to range between $22 and $23.50. The company also aims for a revenue target of $5.4 to $6 billion by 2026 and is forecasting free cash flow between $650 and $800 million. These projections underscore Lennox’s confidence in its strategic direction and market opportunities. InvestingPro subscribers have access to 13 additional key insights about Lennox’s future prospects, including detailed analyst forecasts and comprehensive valuation metrics in the Pro Research Report, part of the platform’s coverage of over 1,400 US stocks.

Executive Commentary

CEO Alok Musgara highlighted the company’s achievements, stating, "For the first time ever, Lennox delivered over $5,000,000,000 in revenue and over $1,000,000,000 in adjusted segment profit." He also emphasized the focus on North American growth markets, adding, "We are 100% focused on North America growth end markets of HVACR and are accelerating growth through share gains."

Risks and Challenges

• Supply chain disruptions could impact production and delivery.
• Market saturation in the HVACR sector may limit growth opportunities.
• Tariff and labor market uncertainties could affect costs and margins.
• Potential macroeconomic pressures, such as interest rate changes, could influence demand.

Q&A

During the earnings call, analysts inquired about the $125 million pre-buy impact in Q4 and the challenges of the refrigerant transition. Executives addressed concerns about potential tariff implications and labor market effects, providing clarity on inventory management and margin expectations.

Full transcript - Lennox International Inc (LII) Q4 2024:

Angela, Conference Call Operator: Welcome to the Lennox Fourth Quarter and Full Year 2024 Earnings Conference Call. All lines are currently in listen only mode As a reminder, this call is being recorded. I would now like to turn the conference over to Chelsea Poulshan from the Lennox Investor Relations team. Chelsea, please go ahead. Thank you, Angela.

Good morning, everyone. Thank you for joining us today as we share our 2024 Q4 and full year results. Joining me is CEO, Alok Musgara and CFO, Michael Kwenfair. Each will share their prepared remarks before we move to the Q and A session. Turning to slide 2, a reminder that during today’s call, we will be making certain forward looking statements, which are subject to numerous risks and uncertainties as outlined on this page.

We may also refer to certain non GAAP financial measures that management considers relevant indicators of underlying business performance. Please refer to our SEC filings available on our Investor Relations website for additional details, including a reconciliation of all GAAP to non GAAP measures. The earnings release, today’s presentation and the webcast archive link for today’s call are available on our Investor Relations website at investor. Lennox.com. Now please turn to Slide 3 as I turn the call over to our CEO, Alok Miskara.

Alok Musgara, CEO, Lennox: Thank you, Chelsea. Good morning, everyone. I want to start by expressing my gratitude to our 14,000 employees, our 10,000 plus dealers and all of our customers for their loyalty and innovation that enabled us to deliver an exceptionally strong finish to 2024. One of the highlights for 2024 is that for the first time ever, Lennox delivered over $5,000,000,000 in revenue and over $1,000,000,000 in adjusted segment profit. Another achievement in 2024 is that both our segments delivered double digit revenue growth.

In addition to delivering record results, we also made thoughtful investments such as starting a new commercial factory to create growth capacity. Let us turn to Slide 3 for the Q4 and full year 2024 overview. Adjusted earnings per share was a record $5.60 for the quarter $22.58 for the full year. Core revenue grew 22% in the quarter and 13% for the full year. Our adjusted segment margin expanded 250 basis points in Q4 and 150 basis points for the full year to 19.4%.

The team also delivered a record $332,000,000 in operating cash flow in the quarter $946,000,000 in the full year. Michael will provide more details later in the presentation, but I want to highlight how proud we are of the work the team did this year to deliver significant year over year improvement in our cash conversion. Now please turn to Slide 4 as I review some of the drivers of our 2024 success. In 2024, we successfully completed the initial phase of our self help transformation plan. The team’s effort in 2023 including pricing initiatives, portfolio simplification and strategic acquisitions not only restored margins but also established a strong foundation for an exceptional 2024.

Our strategic initiative enabled us to successfully navigate the construction of a new commercial factory and overcome challenges associated with the refrigerant transition, showcasing our resilience and outstanding execution. In 2024, we continued making strategic investments while delivering impactful results, positioning us to continue our momentum into 2025 beyond. We successfully navigated the manufacturing transition from our 410A refrigerant effectively meeting customer needs and investments in sales and distribution channels elevated the customer experience. Our ongoing focus on pricing excellence programs partially offset the investments for improving customer experience. Our new commercial factory is now online and will be key to enhancing output and productivity.

The AES (NYSE:AES) integration remains ahead of schedule exceeding the original value proposition. We maintained our strategic M and A pipeline and our disciplined M and A approach. The best deals for Lennox in 2024 were the deals that we decided not to pursue, thus safeguarding long term shareholder value. Finally, by driving accountability through the Lennox Unified Management System, we ensured consistent performance. Before I hand the call to Michael, I want to extend my heartfelt gratitude to Gary Bedard, President of our HCS segment since 2023, who has announced his decision to retire from Lennox.

Gary’s 26 year tenure at Lennox will leave a legacy that will continue to shape our future. We have initiated a search process to identify our next HCS President. I’ll now hand it over to Michael who will walk you through how we successfully invested in the business while also delivering strong results.

Michael Kwenfair, CFO, Lennox: Thank you, Alok. Good morning, everyone. Please turn to Slide 5. We are pleased to report our 8th consecutive quarter of double digit year over year adjusted earnings per share growth. This quarter, we increased our adjusted segment margin by 2 50 basis points and achieved an impressive 22% revenue growth resulting in 54% adjusted EPS growth.

Our success is driven by volume growth in both segments as we continue to effectively manage the transition to low GWP refrigerants. As expected, customers prepurchased R-410A equipment, which is estimated to have positively impacted revenue by $125,000,000 and increased earnings per share by $1 Now let’s proceed to Slide 6 to review the Q4 financial performance of our Home Comfort Solutions segment. The Home Comfort Solutions segment had an exceptional quarter delivering 25% revenue growth, 67% segment profit growth and an impressive 5 50 basis point expansion in segment profit margin. Sales volume increased by 21%, driven by over 50% growth in our 2 step distributor channel, primarily reflecting the industry wide R410A equipment pre buy. Our 1 step contractor channel also saw volume increase low double digits.

This was supported by better R410A product availability compared to the broader market as well as some pre buy. After adjusting for the pre buy, segment sales volume still grew by mid single digits. Pricing initiatives continue to progress well. Although the impact to the quarter was limited, we have implemented price increases on our new R454B products and these initiatives are progressing as expected. Moving on to Slide 7.

The Building Climate Solutions segment delivered a very strong 4th quarter with revenue growing 17%. Of this growth, 3% was driven by inorganic contributions from our AES acquisition. From an organic perspective, sales volume increased 14% during the quarter. This reflects early revenue benefits from our new Saltillo, Mexico manufacturing facility as well as some R-410A equipment pre buy activity. Segment profit increased by $8,000,000 however, profit margin declined due to $20,000,000 in higher product costs related to new factory ramp up activities and inefficiencies at our existing manufacturing facility.

Production output continues to grow and is well positioned to support our 2025 emergency replacement growth initiative. Turning to Slide 8. Lennox delivered an impressive performance for 2024. We successfully navigated the low GWP refrigerant transition, achieving notable volume gains. Our disciplined pricing strategy drove consistent quarterly price yields, contributing to margin expansion of 150 basis points.

While strategic investments for future growth tempered this margin improvement, these investments are expected to deliver significant benefits in the coming years, including sustained revenue growth and further margin expansion. Turning to Slide 9, let’s review our cash flow and capital deployment. While revenue and earnings growth were impressive, our cash flow performance stood out even more. As highlighted in the Q3 earnings call, enhanced working capital efficiency has been a key focus. We’ve made significant progress, particularly in accounts payable initiatives, resulting in a free cash flow conversion rate of 97%.

This strong cash flow conversion comes despite capital expenditures exceeding depreciation by approximately $65,000,000 Capital expenditure investments in high ROI projects remain a core component of our cash deployment strategy. Over the past 2 years, capital expenditures have consistently outpaced depreciation. This trend is expected to continue in 2025 with estimated capital expenditures of $150,000,000 We maintained a robust balance sheet with net debt to adjusted EBITDA at 0.6 times down from 1.3 times in the prior year quarter. Our free cash flow deployment strategy continues to prioritize inorganic growth opportunities that deliver ROIC exceeding WACC within 3 years of acquisition. Additionally, we will continue leveraging share repurchases to efficiently return excess cash to shareholders.

If you will now turn to Slide 10, I will review our 2025 full year guidance. Anticipating another year of profitable growth, let’s begin with the table on the left, which summarizes our full year revenue growth drivers. Total (EPA:TTEF) company core revenue is projected to increase by approximately 2%. However, the 2024 pre buy will result in year over year revenue headwinds in both Q1 and Q4. We also expect a low single digit increase in sales volume driven by growth in our BCS segment.

Additionally, mix growth from the introduction of the new low GWP products will contribute an estimated 4% to revenue growth. The phase out of legacy 410A products is expected to conclude by the Q2. Turning to the right side of the slide, we’ve outlined key cost assumptions for 2025. Inflation is anticipated to increase costs by approximately 3%. At the same time, we plan to make strategic investments in areas such as information, system advancements, distribution growth initiatives and projects designed to improve customer service.

These investments will also include enhanced sales and marketing efforts with total investments estimated at approximately $25,000,000 for the year. In terms of cost productivity, we expect to generate savings of $50,000,000 as the ramp up costs of our new BCS factory subside and material cost efficiencies are realized. In summary, even with the headwinds from the 2024 pre buy, we anticipate revenue and profit growth with profit margins relatively flat. We expect adjusted earnings per share to fall within the range of $22 to $23.50 and free cash flow is projected to fall within the range of $650,000,000 to $800,000,000 With that, please turn to Slide 11 and I’ll turn it back over to Alok for an overview of our 2025 priorities.

Alok Musgara, CEO, Lennox: Thanks, Michael. Let us revisit our self help transformation plan which has been a cornerstone of our success since 2022. We transitioned from the recover and invest phase to the growth acceleration phase at the end of 2024. As we move through 2025 and into ’twenty six, we will maintain a disciplined approach to investing in the business while prioritizing growth. This year will lay the groundwork for the next phase of expansion supported by the momentum from share gains and new product introductions.

Investments in digital customer experience are making it easier for customers to engage with us, strengthening loyalty and satisfaction across all touch points. Our expanded heat pump offering supported by the Samsung JV not only broaden our product portfolio, but also position us to capitalize on growing demand for energy efficient solutions. Additionally, our focus on improving attachment rates for parts and accessories ensures that we provide a more comprehensive customer experience while driving incremental growth. An additional growth driver is our commercial emergency replacement program enabling us to better serve a significant segment of the market that we have been unable to fully supply in recent years. 2nd, we are committed to resilient profit margins.

Benefits expected from the low GWP product transition, increased productivity from BCS volume improvements and material cost reductions strengthen our ability to deliver consistent and reliable financial performance. Lastly, we will continue to utilize our Lennox Unified Management System to deliver superior execution with clear priorities. Defined M and A strategies, a robust distribution network and ongoing investment in customer satisfaction underscore our commitment to operational excellence. As we look ahead, the investments made over the past 2 years set the foundation for growth in 2025 with a strong trajectory into 2026 and beyond as we move towards the expansion phase. With our collective commitment and strategic focus, I’m confident that we are not merely executing a plan, we are creating a path for ongoing success.

We remain confident in our long term vision and given progress so far, we believe we will be within the 2026 revenue target range of $5,400,000,000 to $6,000,000,000 and at the high end of our ROS target range of 19% to 21%. The pre buy dynamics in 2024 will create impact in 2025 which is expected to normalize by the end of this year. Hence, we anticipate a stronger 2026 as our strategic investments continue to drive momentum. Now let us turn to Slide 12. Let me wrap up by summarizing the five reasons that make Lennox an attractive opportunity for all our stakeholders.

First, we are 100% focused on North America growth end markets of HVACR and are accelerating growth through share gains. 2nd, we are expanding our resilient profit margins through pricing, productivity and mix optimization. 3rd, we deliver superior execution through the Lenox Unified Management System. 4th, we are an advanced technology industry leader with high efficiency products and services supported by a digital customer ecosystem. 5th, we win because our exceptional talent and culture is defined by our core values and guiding behaviors.

Our pay for performance philosophy ensures that our internal goals are closely aligned with those of our shareholders. As I look forward, I remain confident that our best days are ahead. Thank you. We will be happy to answer your questions now. Angela, let’s go to Q and A.

Angela, Conference Call Operator: We’ll go first to Ryan Merkel with William Blair. Your line is open. Please go ahead.

Ryan Merkel, Analyst, William Blair: Hey, thanks. Good morning and congrats on the nice quarter. I wanted to start with the pre buy. It looks like it was

Michael Kwenfair, CFO, Lennox: a little bigger than maybe you’re expecting.

Ryan Merkel, Analyst, William Blair: Can you just comment on what you saw and why that was? And then what does it mean for 1Q? I think it’s really the question I have.

Deane Dray, Analyst, RBC Capital Markets: Hey, Ryan, good morning. I don’t think

Alok Musgara, CEO, Lennox: I heard the second part of the question properly, but the first part on the pre buy, listen, we are calling out $125,000,000 in pre buy. As you can imagine, it’s an estimate. We don’t have 100% visibility into the number. And we know there was some cloudiness because we had temporary share gains that happened in Q4 as some of our competitors were out of product. So it’s a little higher than we expected, but I would say it’s within the range of where our expectations are.

Michael Kwenfair, CFO, Lennox: And then Ryan, on the second part of your question, the impact to Q1, really the $125,000,000 the pull forward into Q4 from Q1, so we’ll see a headwind there. And then also you’ll see that in Q4 and 2025 is the year over year comps won’t have that as well.

Ryan Merkel, Analyst, William Blair: Got it. Okay. So $125,000,000 revenue hit 1Q sort of the math. Yes. Then the second question Okay.

The second question is that the flat volume outlook for the HTS segment. I mean, I think it makes sense to be conservative, but just talk about some of the assumptions behind that.

Alok Musgara, CEO, Lennox: Sure. I mean, there’s a lot of uncertainty in the market, right? I mean, you saw existing home sales are at a very low level, interest rates, mortgage rates, they continue to be high. So based on what we saw in 2024, we continue to model a flattish industry volume. It may be a little conservative, but given the uncertainty in the market, just seem like that’s the right assumption to make at this point.

Ryan Merkel, Analyst, William Blair: Yes, that’s fair. Okay. Thank you.

Alok Musgara, CEO, Lennox: Thanks, Ryan.

Angela, Conference Call Operator: We’ll go next to Joe Ritchie with Goldman Sachs. Please go ahead.

Joe Ritchie, Analyst, Goldman Sachs: Hey, good morning guys. Great year. So look historically you guys have tended to guide very conservatively as I look at the components of this bridge in Slide number 10. It seems like what you’re baking in for incremental margins, if I just take into account price mix and inflation is very low, like I’m calculating something that’s like low double digits. So just help me kind of understand, number 1, just like where you think there might be some potential cushion in the guide and how to think about that equation between price mix and inflation?

Michael Kwenfair, CFO, Lennox: Hey Joe, I think there’s some opportunity potential that Lothis mentioned there on the volume. If interest rates go down, maybe the HCS volume could give us a little bit more. That’s obviously would come through at 30% incrementals. But if you look at the overall guide, it does imply overall margins are approximately flat at 19.4%. The inflation assumption of 3% might come in a little less, but I think right now it feels prudent to keep inflation up there.

And obviously we as a group are trying to drive as much productivity as possible. So from a cost productivity perspective, we’re going to focus to drive a little bit higher if we can as well.

Alok Musgara, CEO, Lennox: And I think the bigger issue here is the amount of uncertainty that’s present. I mean if you look at noise around tariffs, if you look at noise around migrant labor and labor shortages for our dealers and if you just look at mortgage rates, interest rates, I mean, there’s just a lot of uncertainty. So we went with a fairly wide range. I wouldn’t call it very conservative, but I think it’s consistent with what we have done in the past.

Joe Ritchie, Analyst, Goldman Sachs: Okay. That’s helpful. And then as I kind of think through just the 1Q number, I think in answering Ryan’s question, so the right way to think about things sequentially in HCS is you’ve got, call it, dollars 125,000,000 that goes away 4Q to 1Q. And then there’s typically like, I don’t know, mid single digit sequential step down. So is the you’re still assuming then organic growth in HCS in the Q1?

Am I thinking about it correctly?

Alok Musgara, CEO, Lennox: Well, first of all, the Q1 is an estimate, right, maybe only in January. Some of it could extend to Q2 depending on how dealers convert, because you’re now already selling the 454 B equipment and it’s just drawing like a line in the sand somewhere. But on your sequential question, maybe Michael can give you some color. Yes.

Michael Kwenfair, CFO, Lennox: I think that’s generally close, but not all $125,000,000 was in the ATS segment. Some of it was in the BTS segment. But I think as Alok said it right, we did have a little bit of our 410A inventory going into the quarter. So some of this might kind of move into Q2, but predominantly will be in Q1.

Joe Ritchie, Analyst, Goldman Sachs: Okay, great. Very helpful. Thanks guys.

Angela, Conference Call Operator: We’ll go next to Julian Mitchell with Barclays (LON:BARC). Please go ahead.

Julian Mitchell, Analyst, Barclays: Hi, good morning. Maybe just wanted to switch tack for a second to the BCS segment and sort of the guidance there. I think people have been concerned about the revenue outlook there because you don’t have AI exposure or what have you in BCS and there’s some question marks around the Ezra funding unwinding into 2026. So maybe just help us understand kind of what you’re seeing in the BCS segment top line wise across different verticals, mid single digit underlying volume growth assumption clearly speaks to I think a much healthier market than what a lot of investors have been thinking?

Alok Musgara, CEO, Lennox: Sure. I would say from our perspective, the markets that we serve remain healthy and at least this week on Monday, SEEK Chinese told us that it was good not to have data center exposure in our stock. So I think from that perspective, we are not terribly concerned since exposure there was low0 to start with. If I look at our exposure, it remains in places such as retail, food service, warehouses, big box, DIY type stores and we see the replacement volume, which is primary our sales actually picking up now since we have made the conversion to 454 and some of these companies have been waiting to go to the new refrigerant before they put more sales. Second thing underlying our confidence is that, clearly we have a new factory.

We were primarily supply constrained, not demand constrained and that was still the case in Q4. So we do expect us to get more fair share of the market including emergency replacement that we talked about. In terms of your funding for the schools, yes, I mean, I’ve heard that concern just like for the IRA, but we see most of the programs continue to move forward and some schools are issuing bonds and other things. I mean, just keep in mind, this is a non discretionary spend and the air conditioning breaks, you can’t run the schools. So from a nature of the replacement program and the non discretionary nature that we look at, we don’t see that as a much impact and that gives us sufficient confidence on our guide.

Julian Mitchell, Analyst, Barclays: Thanks very much. And then just my second one, I don’t really want to mention the P word, but if we’re thinking about Q1 specifically, and it’s been touched on a couple of times understandably, but classically Q1 in recent years has been a sort of 16%, 17% of the year’s earnings. So not a huge quarter and understand there’s some extra pressure right now because of the refrigerants change. But if we had to put a finer point on it, is the right interpretation maybe it’s a couple of points less of the full year’s earnings in Q1 than one would normally expect and then we get the full sort of catch up in the rest of the year, particularly Q2 with a big mix tailwind coming in?

Michael Kwenfair, CFO, Lennox: Yes, Julien, I think I’d bucket it a little different, maybe look more at the first half just because the dynamic of things kind of shift in Q1 to Q2 with the selling out of the Fortinet (NASDAQ:FTNT). So from a revenue perspective, we think kind of the first half will be about 45% of the year, second half being 55%. This is a little bit different than the normal kind of fifty-fifty. Second half of the year, you’ll really start to see the mix benefit of the 454B product coming up as well as some more of the gains from the new commercial factory in the second half.

Julian Mitchell, Analyst, Barclays: That’s great. Thank you.

Alok Musgara, CEO, Lennox: Yes. Thanks, Shirley.

Angela, Conference Call Operator: We’ll go next to Noah Kaye with Oppenheimer. Your line is open. Please go ahead.

Nigel Coe, Analyst, Wolfe Research: Thanks very

Noah Kaye, Analyst, Oppenheimer: much. So Alok, we’ve had a couple of years now of regulatory transitions where the company has executed well and really claimed the opportunity around pricing and share gains. You mentioned in some of the factors that went into your thinking did include potential tariffs and labor and other considerations brought about by the administration. So how would you think about your opportunities related to that? For example, if we do have tariffs on USMCA partners and others, perhaps that could be a pricing opportunity perhaps with your investments, there’s some share gain opportunities there.

The essential question is, how are you thinking about contingency planning and responding to any potential changes?

Alok Musgara, CEO, Lennox: Sure. No, that’s a great question and things remain very dynamic as you know. But if you take each of these, if tariffs come into more in China and less in Mexico, Canada, we would be net beneficiary as we have done a really good job of reducing our supply chain reliance on China. And the fact that we did the Samsung JV also means that things like our mini splits are now coming from Korea, not from China. So I think that in hindsight, not just the benefit of Samsung’s better quality product, but avoiding any tariffs coming from China would be a big win for us.

So if their tariffs coming in from Mexico, 40% of the industry capacity is in Mexico roughly, which means we’ll all have to work through offsetting with productivity, seeing the impact of any peso devaluation, but then offset with price. So we look at that price going to be incremental to what we have positioned here. But clearly there could be a delay in timing given I’m not sure how much time we would have to react to any tariffs and tariffs announcement. On the labor piece, listen, there’ll be no impact to our factories since obviously we are a different type of employer versus people who might be doing construction or HVAC installs in the field. I think what does happen with that is since replacements require less skill and less labor versus massive repair, I think the repair versus replacement trend would probably continue shifting more towards replacement as the units are harder to repair that requires much more skilled labor and not more labor versus higher ticket item just such as full replacement.

But from our contingency planning, we’re staying close to our customers, close to our dealers, making sure that we can address any of those concerns and also continue to monitor tariffs and work on supply chain redundancies because we are now have a much heavier dual source focus than we had 2 to 3 years ago, giving us flexibility in supply chain movements. Finally, the last thing on the consumer side, which is probably going to have the biggest impact, we just need to watch consumer confidence, interest rates, mortgage rates and help our dealer offset any weaknesses that come in either through financing programs, either through like really more education to the consumer and keep working with new home builders and others, which are more guaranteed volume for us. So I hope that answered your question. I was a little winded.

Noah Kaye, Analyst, Oppenheimer: No, it was comprehensive and I realized

Nigel Coe, Analyst, Wolfe Research: I asked in some respects a

Noah Kaye, Analyst, Oppenheimer: multipart question. So out of respect to colleagues, I’ll take myself offline and follow-up then. So thank you very much.

Alok Musgara, CEO, Lennox: Thanks, Dovah.

Angela, Conference Call Operator: We’ll go next to Tommy Moll with Stephens. Please go ahead.

Tommy Moll, Analyst, Stephens: Good morning and thank you for taking my questions.

Noah Kaye, Analyst, Oppenheimer: Good morning, Tommy.

Tommy Moll, Analyst, Stephens: I want to start on the topic of your 454B pricing. Are we still thinking 10% or maybe 10% plus? There’s at least one OEM in the market that’s less disciplined than that. And if we just look at the mix guide for Home Comfort anyway in the mid singles range, maybe you could bridge us from whatever the 454 contribution is to how you get to that mid singles?

Michael Kwenfair, CFO, Lennox: Sure, Tom. Yes, I’ll give you some more clarity on that. Yes, our plan still is a 10% price increase on average on the 454b product and that equates to about 70% of the revenue in the HCS segment. And as we’ve been talking about, we’re going to continue to sell through some 410A equipment in the first half of this year. So it will take a little bit of time to bleed into the 454B products.

So we think about 65% of the full year will be sales of that 454B products. So when you kind of do all that math, it dilutes down to that mid single digit mix benefit for Home Comfort Solutions.

Alok Musgara, CEO, Lennox: Yes. And on the competitive question, Tommy, I mean, we have heard that too, but I also think people are talking about 2024 pricing because some of the OEMs release 455 in 2024 and we released 2025 percent pricing. So we are optimistic that as we take this forward, all the OEMs will be adjusting price in 2025. That typically happens in the Q1 anyway.

Tommy Moll, Analyst, Stephens: Thank you both. And as a follow-up, I wanted to unpack the home volume outlook a bit. So where you’ve talked about the pre buy as a mid single digit headwind and then the separate volume call out you have there is flat. I just want to make sure I’m interpreting this correctly that for the volumes that you would report in your financials that you just add those 2 together, so it’d be a mid singles headwind. Maybe you could just clarify how we should think about that?

Michael Kwenfair, CFO, Lennox: That’s exactly right. That’s exactly how to look at it.

Tommy Moll, Analyst, Stephens: Okay. And then if we take that mid singles headwind for the segment level, can you give us any sense of the sell in versus the sell through assumptions you’re making there?

Michael Kwenfair, CFO, Lennox: I think you could see in the results in the Q4, we were more impacted in that channel for the sell in the 2 step channel. But we did see a little bit of a pre buy on the sell through as well.

Tommy Moll, Analyst, Stephens: Okay. Thank you. I’ll turn it back.

Angela, Conference Call Operator: We’ll go next to Chris Snyder with Morgan Stanley (NYSE:MS). Please go ahead.

Alok Musgara, CEO, Lennox0: Thank you. Appreciate the question. You guys talked to $125,000,000 pre buy in Q4. But if I kind of look at that next year, it’s about a 2% headwind on a $5,000,000,000 plus revenue base. I guess is that imply that there is maybe like a similar amount of pre buy in the Q3 numbers as well?

Or am I missing something in that math?

Alok Musgara, CEO, Lennox: Yes, Chris, this is a great question. So what happens is if you take that 125, first we will get the destocking impact of that and let’s say that’s in the Q1, Q2 and then in the Q4 timeframe Q4 2025, we will fix difficult comps. So that kind of impacts you twice, right. So from that perspective, that’s why the number seems twice.

Michael Kwenfair, CFO, Lennox: And then in Q1, 2026, you’ll get that benefit back.

Alok Musgara, CEO, Lennox: Right. So one of the destocking and one of the comp impact, right.

Alok Musgara, CEO, Lennox0: Okay. Thank you. I really appreciate that. So I guess the assumption is that there wasn’t, I guess, a material free buy impact in Q3. And then maybe just following up on that, I know it’s kind of hard, I imagine to kind of triangulate and kind of pinpoint what the pre buy is.

I’d just be interested in how you guys went about doing it because obviously a lot of focus on that at the 2025s. Thank you.

Alok Musgara, CEO, Lennox: Great. But first of all, thank you for acknowledging and we admit that it is not easy nor is it precisely accurate, right. We think we are directionally correct, not precisely accurate on 125. So but we just wanted to give a clean number. We did not encourage any pre buys.

We did have last call on 410A. So that may have like force some distributors and others to order pre buy. We remain fairly neutral and now we did not switch all our lines over to 454B as some of our competitors did and we only did that at the tail end of the year and we delayed that as much as possible. I believe that led to better availability for Lennox products in the marketplace when it come to 410A product and that gave us share gain in addition to the pre buy impact that we are talking about. Our goal is of course to keep as much of that share gain as we can, but realistically speaking, we have baked in that we are unlikely to keep all the share gain that we had had.

And that’s one reason we are being more muted in the volume outlook for 2025.

Alok Musgara, CEO, Lennox0: Thank you. I appreciate that.

Angela, Conference Call Operator: We’ll go next to Brett Linzey with Mizuho (NYSE:MFG). Please go ahead.

Alok Musgara, CEO, Lennox1: Hey, good morning everyone.

Alok Musgara, CEO, Lennox: Good morning, Brett.

Alok Musgara, CEO, Lennox1: Yes, first question is on the new commercial Mexico facility. So you’re moving from the piloting to the production, you said it’s online. Are you able to quantify what you’re embedding in 2025 in terms of the volume contribution and better throughput there?

Michael Kwenfair, CFO, Lennox: Yes. If you look at the volume guide in BCPS, we’re up above mid single digits. There’s a few points in there for share gain, which would be predominantly related to the new factory supply improvement.

Alok Musgara, CEO, Lennox1: Okay. Got it. I imagine that’s a little more back end loaded or should we think about that as progressing evenly through the year?

Michael Kwenfair, CFO, Lennox: A little more back end loaded. I mean the season for emergency replacement is predominantly Q2 to Q3. So it started more in late Q2 and Q3 is when it will start to ramp up.

Alok Musgara, CEO, Lennox1: And then just a follow-up on the inefficiencies in the existing facility, maybe just a finer point there. Was that Arkansas late in the year? And then any update on the status of those improvements into January?

Alok Musgara, CEO, Lennox: Sure. Yes. I think the existing facility inefficiencies were related to the start up as we got a lot of components from Stuttgart during ramp up to send to Mexico and do trial runs and otherwise. But yes, that was late in the year and it was on the higher end of what we were expecting. So those inefficiencies, which obviously we will capture back in 2025 as we are through the ramp up phase.

But yes, it was Stuttgart and then the ramp up we shouldn’t install to you, but Stuttgart was a bigger impact. The factory in Stuttgart is doing much better and frankly having the new factory in Saltillo means we are going to reduce the number of SKUs we manufacture in Stuttgart as some of the emergency replacement SKUs move over to Saltillo. So we are more optimistic on recovering. But as you know, that’s been a difficult factory for many years. So fingers crossed, we are optimistic for this year.

Alok Musgara, CEO, Lennox1: All right. Appreciate the insight.

Angela, Conference Call Operator: We’ll go next to Joe O’Dea with Wells Fargo (NYSE:WFC). Please go ahead.

Alok Musgara, CEO, Lennox2: Hi, good morning.

Alok Musgara, CEO, Lennox: Thank you.

Nigel Coe, Analyst, Wolfe Research: I

Alok Musgara, CEO, Lennox2: think Michael you touched on maybe the inflation has a bit of conservatism in there, but can you unpack that a little bit and that’s 3% inflation presumably across all costs. And so you’re talking sort of labor materials freight kind of all in bundled and anything in particular where you’re seeing more of the sort of inflationary headwinds coming through?

Michael Kwenfair, CFO, Lennox: Yes, it’s on average on all of our costs. We have about $4,000,000,000 of costs. We’re seeing higher inflation at SG and A around healthcare and some of the wages there more than the $3,000,000 a little bit lower on the commodity side, but in general kind of blends to $3,000,000 I think we’ll continue to watch it. And like I said, it could be some conservatism, but inflation definitely continues to exist and especially on some of the SG and A side.

Alok Musgara, CEO, Lennox: And keep in mind that some of the tariff uncertainty impact that as well. If there are tariffs on things like steel, then we clearly want to acknowledge that and be prepared for that.

Alok Musgara, CEO, Lennox2: Right. But I guess so the idea is that price in the revenue bridge of up 1 compares to inflation up 3. So you’re not going out to the market and saying we got we have a right to get more because the costs we’re getting burdened with.

Michael Kwenfair, CFO, Lennox: Correct. I mean, we had some of that through the mix as well, that we’re getting a little bit better incrementals to cover for some of that, but we’re also looking to drive more productivity as well.

Alok Musgara, CEO, Lennox: And keep in mind the 4.54 B, we could have put in mix and price, you put that in mix. So you got to think of a lot of that is covering inflation as well.

Alok Musgara, CEO, Lennox2: Right. Okay. And then, just as it relates to that 454B price and the 10% you talked about, which I think is the HCS side, not the BCS side, But that 10%, at what point in the year do you think you’ll have confidence in visibility to kind of realization just when we think about the seasonality of the business, trying to understand kind of when you’d really get a good sense of that 10% sticking?

Alok Musgara, CEO, Lennox: I think the mid to late Q2 when we’ll get a good sense because we also like some of the OEMs have not announced their 2025 pricing. So that’s when we get a good sense of it. But so far the early signs are positive. I mean, there’s no reason for us to be concerned about it. The reason the impact is what we called out is it 70% of 70% of that 10%.

So that’s why you kind of see the numbers what they are, which mean progressively as we go towards the second half, we have a greater portion of that getting captured. But like right now there’s no reason to waver or be concerned with that number.

Noah Kaye, Analyst, Oppenheimer: Got it. Thank you.

Angela, Conference Call Operator: We’ll go next to Jeff Hammond with KeyBanc. Please go ahead.

Alok Musgara, CEO, Lennox3: Hey, good morning everyone. Good morning, Jeff. Just a few cleanups. So just on the Mexican production, you said industry capacity 40%. Can you just level set us on what your mix is?

And if there’s any particular OEMs you’re aware have particularly lower mix versus the industry?

Alok Musgara, CEO, Lennox: Yes. I mean, I guess, we have just looked at all the different OEMs and looked at other reports and come with that number. It’s a I wouldn’t say it’s precisely accurate, Jeff, it’s directionally correct. For our perspective, we make the low end merit products in there and we haven’t previously talked about if they’re tariffs, we believe about $1,000,000,000 of our, so 20 percent of our output would be impacted through that, since we make our premium products in U. S.

And we also have 3 residential factories. Commercially so far, all our production was in U. S. And none in Mexico. So we’re just starting on that together.

But we do know, U. S. And none in Mexico. So we’re just starting on that together. But we do know many of our competitors often sometime in the same geographical area within Mexico that they manufacture in Mexico as well.

So we think the 40% number is about right, obviously more skewed towards residential versus commercial.

Alok Musgara, CEO, Lennox3: So you’d say today you’re probably below that industry average?

Alok Musgara, CEO, Lennox: Yes, slightly below, but it depends on which OEM, right? For some OEMs, we are significantly below. With some OEMs, we are actually a little bit higher. So it just goes OEM by OEM, Jeff.

Alok Musgara, CEO, Lennox3: Okay, great. And then just on this distribution margin focus, can you just level set us on kind of progress over the past year? What are some of the big opportunities this year? And do you think you start to move those margins up? Or is that a longer timeframe?

Alok Musgara, CEO, Lennox: It is over a long timeframe, but some of the results that you see today are based on that initiative as well. So if you think about HCS, we did have a record ROS and you have followed us for a long period of time and that is consistent with us getting more distributor margins. Realize a lot of the incentive changes that we made and the reorganization that we did happen at the end of Q2 in 2024. So I think some of those results are just coming through. But that’s a long journey, right.

We’ve talked about manufacturers plus distributor margin is higher than our 2026 targets. So I think that continues beyond 2026. But progress so far gives us the confidence to say that we would be on the high end of our previously published targets for 2026.

Alok Musgara, CEO, Lennox3: And what’s your parts and accessories mix today and what do you think entitlement is?

Alok Musgara, CEO, Lennox: Hasn’t changed much over the past year. I mean, we remain at about 20 ish percent in parts and accessories. I’m confident my entitlement is twice that much, but we’ve been talking about that for many years and I think it’s finally time to show some results over the next few months years, but entitlement remains high and our current volume remains low.

Alok Musgara, CEO, Lennox3: Great. Thanks a lot.

Angela, Conference Call Operator: We’ll go next to Nicole DeBlase with Deutsche Bank (ETR:DBKGn). Please go ahead.

Alok Musgara, CEO, Lennox4: Yes, thanks. Good morning, guys.

Alok Musgara, CEO, Lennox5: Good morning, Nicole.

Angela, Conference Call Operator: A lot of a lot of

Alok Musgara, CEO, Lennox4: ground has been covered here, but I guess maybe just some cleanups for me. How are you guys thinking about new construction versus replacement demand within HCS for 2025?

Michael Kwenfair, CFO, Lennox: The new construction is about 20% of that segment. We think it’s going to be kind of flattish, but the big driver there is going to be if interest rates continue to go down. If it goes down, we think that there’s pent up demand in that space for new home construction that could happen. But obviously some labor challenges as well on that side of the industry too, making sure they can keep up with the demand. So it’s mostly interest rate driven, but kind of flattish within the guide.

Alok Musgara, CEO, Lennox4: Okay. Okay. Got it. Understood. And then just thinking through kind of the margin dynamics by segment, I know you guys don’t give official margin guidance by segment, but is directionally the right way to think about it?

Maybe HCS could be a bit more challenged year on year given some of the pre buy in 2024 and then BCS should be up. And I guess is it fair to assume that BCS sees more margin expansion in the second half as some of those new plant ramp up costs roll off? Thank you.

Michael Kwenfair, CFO, Lennox: Yes, that’s correct. Overall, the margin guide is about flat, up in BCS, down in HCS. A larger portion of the $50,000,000 of productivity will be in BCS, which is a big driver of that margin expansion. That will kind of happen throughout the year, but the volume gains, the share gains will mostly be kind of in the second half for BCS as that factor ramps up.

Angela, Conference Call Operator: Thanks, Michael. I’ll pass it on.

Alok Musgara, CEO, Lennox: We’ll go

Angela, Conference Call Operator: next to Deane Dray with RBC Capital Markets. Please go ahead.

Deane Dray, Analyst, RBC Capital Markets: Thank you. Good morning, everyone.

Alok Musgara, CEO, Lennox5: Good morning. Good morning, Deane.

Deane Dray, Analyst, RBC Capital Markets: Hey, I’ll echo some of the previous comments you provided some really good calibration on what you think the pre buy was for you guys. And Alok, could you expand a bit? You referenced some of your competitors who had stock outs because they switched over earlier. How much of a surprise was that? How tactical were you and how you position in the Q4?

And could you give us a sense of how the individual months played out? Was it a big, like windfall in December or was it level loaded?

Alok Musgara, CEO, Lennox: Yes. First of all, we were not surprised that a competitor had a misstep almost always happens in any of these regulatory transition. But yes, we were surprised as to which competitor had that misstep. I mean, we would have expected somebody else to have it. From that perspective, there was a bit of a surprise.

How it impacted us was like we were fully loaded and we had really high fill rates throughout. So we were able to capture additional share. And now the whole challenge is to take that share and make it more of a permanent share. And we know that’s going to be a challenge and we bake that in. In Q4, it was fairly even across all 3 months and part of it was driven by just anything we could manufacture, we were selling.

So it was more constrained by manufacturing capacity and where we had different inventory stationed in our supply chain. Some of the temporary share gain did start in Q3. So I think from the share gain that happened and we remain very optimistic that we’ll convert a part of that to more permanent share gain. But tactically, our response was, we were very selective, I mean, to make sure that customers that we took on were customers who would stay with us for more permanent and were not buying from us just during the stock out. So I think we were able to gain some new customers and convert some loyalty from existing customers as well.

Deane Dray, Analyst, RBC Capital Markets: Yes. Let’s be clear that that’s a high quality problem to have to talk about temporary market share and windfall from a pre buy and a tough comp. So that’s I appreciate all the calibration. And then the second question, look, can you expand on your comment, where you said some of your best deals, in 2024 were those that you did not do? Was it just a question of price?

But I have a hunch there’s probably there was a data center opportunity that you passed on, but any kind of color there would be helpful.

Alok Musgara, CEO, Lennox: Sure. Yes, there were data center opportunities that we passed on. There was international expansion opportunities that were passed on. There were some domestic consolidation opportunities that we passed on as well. It all came down to a very disciplined framework.

I mean, helps having a conservative CFO to give Michael some credit for this, right. I mean, we have ROIC target. We are kind of don’t wear rose colored glasses to look at the industry and we feel that often we can get more share with better execution versus going and buying share through M and A. So I think we were kind of proud of those calls. I was hoping somebody would catch on to my comment.

We had a lot of fun with that comment when we were writing the script.

Deane Dray, Analyst, RBC Capital Markets: All right, good. I’m glad I didn’t let you down, Alok.

Ryan Merkel, Analyst, William Blair: Thank you. Thanks.

Angela, Conference Call Operator: We’ll go next to Nigel Coe with Wolfe Research. Please go ahead.

Nigel Coe, Analyst, Wolfe Research: Thanks. Good morning, everyone. Look, maybe can you just maybe just dig into the BCS volume guidance for the year, up in mid single digits. Any way to quantify how much is baked in for the Sotelo ramp up? And I’m thinking, is it industry flattish and that mid single digit is all share gain?

Anything there would be helpful.

Michael Kwenfair, CFO, Lennox: Yes. We think there’s a little bit of market growth. And then remember, we have 3 businesses, the service business, refrigeration and an HVAC business. So a little bit of market growth, but about 1 or 2 points of that would be a share gain specifically around emergency replacement.

Nigel Coe, Analyst, Wolfe Research: Okay, that’s helpful. And then just back to 410A, I don’t know if you want to sort of put your industry hat on, but if you had to guess on the excess image excess 410A units shipped in 2024, would that be $1,000,000 or any way to size that? And then just thinking about your inventory levels in 4Q, obviously, a little bit higher Q over Q, I don’t know, dollars 25,000,000 to $2,000,000 perhaps higher than I would have expected. Is that a good way to think about the $4.20 inventory held at year end?

Alok Musgara, CEO, Lennox: So first of all, on the previous one, there are lots of industry reports and I will first admit I’m no industry expert. But I think the units our estimate range is from low end of 300, high end of 600. So it’s in that number, not a 1,000,000. So I think it’s half of the 1,000,000 that talking about. So that’s a range.

We think it’s within that range and nobody has more insight to be more precise within that. On our own internal inventory, I mean, it was a case of 2 things, right. I mean, commercial, we are building a bit of inventory to get into emergency replacement. You need inventory positioned in the local market. So we are building inventory for commercial and you will probably see that trend continue in Q1 because Q2 is our peak season.

But that’s probably driving the variation to your model there.

Nigel Coe, Analyst, Wolfe Research: Okay. That’s helpful. Thanks a lot.

Angela, Conference Call Operator: We’ll go next to Damon Karas with UBS. Please go ahead.

Alok Musgara, CEO, Lennox5: Hey, good morning, everyone. Good morning. I wanted to ask you about the free cash flow guidance. So cash flow obviously came in a good bit better than you had expected in 2024, but the guidance for this year, the range is pretty wide. So could you just maybe spell out the moving pieces there?

Michael Kwenfair, CFO, Lennox: Yes. I think if you look at it from a conversion perspective, the midpoint of our free cash flow guide to the midpoint of our net income guide, it’s about 85% conversion. So a little below the compared to the 90% conversion that we’ve traditionally targeted, mostly because of us having to reinvest in inventory both in VCS and HCS as we depleted some of that, as well as the capital expenditures continue to be a little bit higher than depreciation. But we think when we get back into 2026 and beyond, we’re going to be well into the 90% again. High end of the range would obviously reflect just better performance on receivables and accounts payable initiatives that I’m leading.

Alok Musgara, CEO, Lennox5: Got it. That’s helpful. And then Alok, you talked a little bit before about potential policy implications from tariffs and immigration policy. Just curious, thinking about the pause on IRA funding, is that something that gives you some cause for concern at all, just thinking about your 2020 6 targets and beyond and what that might mean for heat pump penetration where I know you guys are very confident that you’ll be gaining some share in the markets?

Alok Musgara, CEO, Lennox: Yes. I mean, I think the good news with the IRA pause is that was not making a huge difference in our volumes in 2024 or 2023. We are all sort of waiting for that to come through the states and come back to it. Now the tax part of it is already there, right. So the energy efficiency rebates on tax that has not changed.

So no, I think the IRA has no whether it was paused or going on did not have a material impact for us in 2024 and not going to have a material impact in 2025 even if it’s paused. So it’s a bit of a no news for us.

Alok Musgara, CEO, Lennox5: Okay, great. Thanks a lot. Thanks.

Angela, Conference Call Operator: We’ll go next to Steve Tusa with JPMorgan. Please go ahead.

Alok Musgara, CEO, Lennox6: Hey, good morning.

Alok Musgara, CEO, Lennox: Hi, Steve.

Alok Musgara, CEO, Lennox6: So I just wanted to kind of clarify a couple of things. So are you guys still saying that there was no pre buy in 3Q? You’re saying that most of like the vast, vast majority came in 4Q?

Alok Musgara, CEO, Lennox: Yes. Yes, that’s true, Steve. But also with the caveat that Q3, we did see some share gains, which we were calling the temporary share gain when some of the OEMs were not able to fulfill demand. But yes, otherwise all of REVY we expect was in Q4.

Alok Musgara, CEO, Lennox6: And then on that share gain, do you think the share gain in 4Q was kind of like commensurate with that rate that you booked in the 3Q? Or was there any, commensurate with that rate that you booked in the 3Q? Or was there any difference? Because I don’t think those guys kind of changed it. Maybe they did change their strategy a little bit, but do you think like commensurate split between the share in 3Q and 4Q?

Ryan Merkel, Analyst, William Blair: No, I

Alok Musgara, CEO, Lennox: think Q4 was less. They did improve their position and then they launched the 454B and they were aggressive in the marketplace with that. So I think from that perspective, I think share gain was more of a Q3 story. It obviously bled into Q4, but towards the tail end of Q4, I think it was almost all pre buy.

Alok Musgara, CEO, Lennox6: Right. So what happened was you guys they didn’t really have a competitive product. You guys shipped a lot of the 410A, gained some share. And then when they came with their 454B, those share gains ebbed a bit. Is that kind of

Tommy Moll, Analyst, Stephens: the right?

Michael Kwenfair, CFO, Lennox: Yes, it

Alok Musgara, CEO, Lennox: slowed down a bit. That’s right, yes.

Alok Musgara, CEO, Lennox6: Okay. And then on the inflation numbers, the 3%, what is the hard number? Like what’s the base on that? Is that like total cost just sales minus profit or COGS or what is the actual run rate like the actual number on that, the absolute number?

Michael Kwenfair, CFO, Lennox: Total cost sales minus profit, about $4,000,000,000 of cost.

Alok Musgara, CEO, Lennox6: Yes. Okay. That’s super helpful. And then sorry one more. Just on Mexico, what is the plan for you guys?

Will it be mostly price increases? Or can you shift some back here if they do go through with some of these things, which I’m not sure that they will, but if they do, will it be mostly price increase or can you shift some stuff back to the U. S?

Alok Musgara, CEO, Lennox: So in the short term, besides any impact from peso devaluation and productivity, it will be mostly pricing. On the long term, if it is a long term, then yes, we’ll start looking at like looking at getting more in Marshalltown, more in Orangeburg. I think some of these factories used to make this product, but to ramp that back up would take us some time.

Alok Musgara, CEO, Lennox6: Got it. Okay. Thanks a lot. Appreciate all the color.

Angela, Conference Call Operator: We’ll go next to Jeff Sprague with Vertical Research. Please go ahead.

Alok Musgara, CEO, Lennox7: Hey, thanks. Good morning. Just one more on inventory, if I could. You addressed it a little bit. But actually your inventories relative to sales, right, were a lot lower than normal here in the 4th quarter, right?

So obviously, you’re blowing out 410A. But if I think about what you said about kind of some commercial inventory build and the fact that inventories look a bit low relative to sales in Q4, it doesn’t really jump out to me that you have a lot of 410A left in house to be pushing into the channel in the first half or the first quarter. Maybe can you just triangulate me on that and a little bit more color on the position? And maybe a second part of that too, Michael, sorry, just you did give us kind of the 45, 55 revenue split. But I guess my question about inventory is going to you had over absorption in Q4, obviously under absorption likely in Q1.

Maybe just a little more color on how to think about the margin trajectory would be helpful.

Michael Kwenfair, CFO, Lennox: Sure. Yes, I think it’s a good point on the inventory. And what we’re seeing is we did have some 410A availability at the end of the year, but a lot of that was pre bought into Q4. So we’ll kind of sell that through kind of early into Q1. It’ll kind of start to mitigate and be gone, fully gone by the Q2.

But I think that’s really the depletion of that inventory you’re going to start to see going into the Q1. And then on the absorption side, you’re right, we will could start to ramp up the new 454B product in the first half of the year. And that should give us access to more tailwinds in HCS. On the BCS side, though, we’re going to have unfavorable comparisons in the first half as we continue to launch that new factory. Second half of the year, you get a lot better productivity from that absorption on BCS.

Great. Thanks. I’ll leave it there.

Angela, Conference Call Operator: Thank you for joining us today. Since there are no further questions, this will conclude Lenex’s 2024 Q4 and full year conference call. You may disconnect your lines at this time.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.