Lennox at Oppenheimer Conference: Strategic Growth Amid Challenges

On Tuesday, 06 May 2025, Lennox International Inc. (NYSE:LII) presented at the Oppenheimer 20th Annual Industrial Growth Conference. The company outlined its strategic initiatives and long-term growth prospects, while acknowledging short-term challenges such as economic uncertainties and tariff impacts. Lennox remains optimistic about achieving 4-6% residential unit growth and expanding market share despite these headwinds.

Key Takeaways

• Lennox is targeting 4-6% growth in residential units and increased market share.
• The Samsung JV and digital experience initiatives are progressing well.
• Short-term challenges include tariff impacts and economic uncertainties.
• Strategic pricing actions are in place to protect margins.
• Significant growth is anticipated in 2026 due to various strategic initiatives.

Financial Results

• Q1 faced challenges in the BCS segment, but a recovery is expected in the second half of 2025.
• Lennox anticipates a positive price-cost balance for the rest of the year.
• Incremental margins are expected to remain steady: 40% on mix, 100% on price, and 30% on volume.
• The Saltillo transition has posed a cost challenge, but BCS margins are expected to improve.

Operational Updates

• The Samsung JV is showing positive feedback, aiming to capture more of the ductless systems market.
• Successful emergency replacement pilots are leading to a broader rollout.
• Investments in digital customer experience continue, with a new distribution network planned for 2026.
• Lennox aims to double parts and accessories sales within 3-5 years.

Future Outlook

• Long-term residential market growth is projected at 4% to 6%, despite potential declines in 2025 due to economic slowdowns.
• 2026 is expected to be a strong year, driven by strategic initiatives and favorable market conditions.
• Lennox is targeting high single-digit to double-digit revenue growth, with stable incremental margins.

Q&A Highlights

• Channel destocking is anticipated to be less than expected, with distributors more willing to hold inventory.
• Tariff scenarios are being evaluated, particularly concerning the Samsung JV and USMCA exemptions.
• Lennox is considering M&A opportunities to enhance its services and technology offerings, focusing on organic growth.

For more detailed insights, readers are encouraged to refer to the full conference call transcript.

Full transcript - Oppenheimer 20th Annual Industrial Growth Conference:

Noah, Oppenheimer Analyst, Oppenheimer: Good morning, everyone, and welcome back to day two of Oppenheimer’s twentieth Annual Industrial Growth Conference. We’re delighted to welcome back to the conference the management team of Lennox CEO, Alok Mascarra and CFO, Michael Krenser. Gentlemen, thank you both for being here. Looking forward to a great discussion today. Thanks for

Alok Mascarra, CEO, Lennox: having Same here, Noah. Thank you for having us.

Noah, Oppenheimer Analyst, Oppenheimer: Well well, it’s our pleasure. And, you know, I think given given some of the, discussions that, we’ve we’ve been having over the past, week or so, I actually felt it was appropriate to start with a big picture question, really around Linux’s transformation. If

Alok Mascarra, CEO, Lennox: I go

Noah, Oppenheimer Analyst, Oppenheimer: back to February, you talked about 2025 as a transition from recovery and investment into accelerating growth, and you called out four key pillars: the digital customer experience, Samsung JV, increasing parts attachment rate, and growing emergency replacement in the commercial business. So maybe, Lo, can you level set where progress stands on those four initiatives, the KPIs you and we should be tracking, and and where you’d like to be on all those by year end?

Alok Mascarra, CEO, Lennox: Sure. Thanks, Noah. Glad we can talk about long term. Every other question, that you’re facing these days about tariffs and short terms. But if you go back beyond those tariffs, I think growth’s transition year is the right phase for us to describe 2025.

Right? If you think about after the successful conversion to a two l, which we got, like, you know, higher share, higher loyalty because of our execution, we are seeing early sign of success in each of the four pillars that you mentioned. So if I start with Samsung, the conversion from our legacy four ten a ductless portfolio to the Linux powered by Samsung is actually going quite well. Feedback from our customers has been encouraging. We do have the opportunity to gain share.

And remember, we are, like, low single digit share on this important product category, which now is up to 10% of the market. Customers love our product design, our integrated controls with Samsung, and the heat pump technology of the new portfolio. So still early days, but we are bullish on our Samsung joint venture and the impact it’ll have. On the second one, the emergency replacement pilots that we did were very successful. The learning was instrumental.

We have now done a broader rollout. We are locked and loaded for the summer season, and we saw early signs of share gain in q one. Although the market was depressed, we just saw on a small base, we got good growth, and we are excited about the long term opportunity. Just as a reminder, this is hundreds of millions of dollars for us over the next multiple year. Thirdly, on the customer experience digital customer experience, that’s been an ongoing initiative, and we closed in residential 2024 at a record market share.

And that was because of better fulfillment rate, better digital experience. And we are continuing to make more investments. We’re continuing to get additional growth benefits. And I think by early next year, we would have a new distribution network design, which is gonna be more efficient. We’ll have higher fulfillment rate and, hence, better NPS and better share.

So good progress, but the best is yet to come on that as we we can start launching bigger initiatives with improved network in 2026. Lastly, in parts and accessories, we actually had a slow start in ’24. It wasn’t a great year for parts and accessories as we’re dealing with a of supply chain, a lot of changes. But growth has improved in q one, and we did a test case on this on one of our business units. And over three years, we were able to double our parts and supplies.

Now we are taking those learnings, applying it across all of Linux, and remain committed to doubling our parts and accessory sales over the next three to five years. So net net, you know, all of these, we are very optimistic, remain bullish on it, but it’s gonna take us a while, three to five years. And we will share the metrics as we come further along and start talking about. But each of these, we are starting with such a small level, Noah. We’re very optimistic about the future.

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

Alok Mascarra, CEO, Lennox: Sure. So the margin on our OEM parts is very good, as you can imagine. Right? I mean, those are better than our occupant margins. The margins on some third party parts, which are nonlinux branded, is not so good.

Blended together, it comes out the parts and accessories drop through at the same on the overall basis as the rest of Linux. So no big delta in that. On digital, I’ll give you some examples, Noah.

Noah, Oppenheimer Analyst, Oppenheimer: So if you go to Linux pros, which is where majority of our dealers buy products from Mhmm.

Alok Mascarra, CEO, Lennox: Over 50% of orders come through that. Earlier, we didn’t have any tools that if they bought an air conditioning unit, there was no prompts. Now using AI, they get a prompt saying, hey. You’re buying this. Would you like to buy so and so product?

That could be a humidifier. That could be an accessory that we are using to install. That could be simply be about some ducting that we are have a special promotion on or installation supplies. That’s kind of a very simple example of a more sophisticated system that we are putting in place to make sure we have the right parts and accessories at different store. Historically, Boston and Florida had the same parts.

It doesn’t work. They need very different type of accessories, so we’re putting that together. Going back to fulfillment rate, our fulfillment rate on equipment has gone up, but our fulfillment rate on parts and accessory has not improved yet. That’s where some of the distribution investment works. The new warehouse management system we have implemented, that’s gonna help substantially in making that together and have been a centralized place to store all our parts and accessories and fulfill with two fifty stores with a b c categories.

So there’s a lot of work still to be done there, Noah, but the potential is huge.

Noah, Oppenheimer Analyst, Oppenheimer: Yeah. I’m thinking of the, Amazon algorithm I get where, you know, it shows you bought this, customers also bought this. What you’re saying, if I hear you right, is that you kind of tailored that, you know, to be regionally appropriate, you know, for the markets that you serve, which That’s right. And is quite a step forward. Go ahead, please.

Alok Mascarra, CEO, Lennox: No. I’m saying Amazon did it ten years ago. We are finally getting around to doing it. Right? So I think that’s the piece I keep telling my engineers.

Why is it such a big deal? They’ve been doing it on Amazon for years.

Noah, Oppenheimer Analyst, Oppenheimer: Interesting. You know, and, on on VCS, I think you’re targeting, as you said, you know, mid to high teens ER share, versus the current current low single digit. So so how do you get there? And and I think more broadly, how long should it take to get to full run rate on the the revenue capacity additions you’re able to fulfill now, with the new Saltillo plant?

Alok Mascarra, CEO, Lennox: Sure. I think the revenue capacity that we added right now is 20%, so I think that’s the one we look at it. But remember, we can add 20 more, 20 more, 20 more as our sales ramp up. So I think that we have tons of capacity given our existing footprint. To get to that extra 20% capacity, I think it takes us about two to three years.

Now the industry is down this year, so it’s hard for me to compare apples to apples. But emergency replacement, what we have done so far is, first of all, working back from our dealer base, done lots of segmentation and broken our customers into multiple category. Loyal Linux dealers, dealers who used to sell commercial from us and no longer do that, alliance dealers, and then finally looking at, like, a new target. So we put all that together. They all want quotes back within two hours, and they want product delivery the same day or next day.

So we are putting that capability. First, we test marketed that in Chicago, got really good results. Now we have that in 14 other locations as we get ready for the summer season, and we have deployed the right kind of resources. Like, every district has a specialist for emergency replacement who can go to customers and attract new customers. We have inside sales team pulling together.

And then finally, the products. Our new products that we are targeting, they are all made in Saltillo, very high quality, much better efficiency. They’re all a two l. They’re able to get payback periods that are world class and with better performance that we have had. Putting it all together, you know, this is something that we used to do.

Low single digits or double digits is not gonna happen soon enough, but I think three to five years, we are very optimistic we’re gonna get there.

Michael Krenser, CFO, Lennox: One

Noah, Oppenheimer Analyst, Oppenheimer: strategic question for you, but it is also about personnel. You know, Gary Bedard, retiring from the company after twenty six years, and we wish him well. Maybe can you give us an update on succession planning and how you’re defining priorities, for Home Comfort Solutions as part of that planning process?

Alok Mascarra, CEO, Lennox: Yeah. By the way, Gary had the biggest smile recently when he had like, you know, twenty six years at Lenox is probably much more in dog years, but wish him well in the retirement. Sarah Martin has joined us as the new HCS president. She comes from Honeywell, has lots of experience in channel channel management. She comes with very digital.

Her business used to do sensors. One of the great things about Sarah joining the company is she comes from a business that used to be much higher margins. Sometimes our legacy Lennox leaders, they feel guilty about making the margins. When we talk about manufacturers margin plus distributor margin at 20%, they’re like, woah. Woah.

Woah. I think Sarah’s business used to make high twenties, and I think she’s looking at this and oh, I’m coming to a low margin business. A different perspective. So we’re super excited about Sarah. Her background in sensors and digital was gonna help us.

Margin profile is very attractive. We have a very strong bench of leaders. This time, we had to go outside just based on timing. But as we look at Linux, like, you know, our leaders have done well. Many of them have been around for multiple years and are ready to go play with grandkids or whatever else they wanna do.

You know? Imagine people who don’t wanna come to work for the rest of their lives. You know? Mean, just kidding. I mean, from our perspective, we’re happy for those dealers who like, you know, our employees and leaders who are moving on, but we’re happy to bring some new fresh blood in the company as well.

Noah, Oppenheimer Analyst, Oppenheimer: Sure. I mean, that that that’s part of how you get satisfaction out of your work. Right? It’s compensation. It’s the people and culture you work with, and it’s the opportunity for growth.

So we we get all of that.

Alok Mascarra, CEO, Lennox: You guys will have an opportunity to meet Sarah at one of the conferences. I think we just really like her.

Noah, Oppenheimer Analyst, Oppenheimer: Excellent. We look forward to it. And I think that’s a good segue into talking about demand in end markets, maybe starting with residential, of course. There have been so many different analysts who’ve tried to frame that longer term view of demand. You’ve obviously done so, including at your Investor Day back in 2022 when you talked about 4% to 6% CAGR in residential unit growth over the next decade.

So does that framework still look right to you? And I guess if we take out the pre buy distortions on 2024 and 2025 units, would it be fair to say your updated guide for mid single digit volume decline for 2025 would take us below the trend line of unit growth?

Alok Mascarra, CEO, Lennox: Yes. It would. But if you think about a ten year time frame, it won’t matter. So I think over over the ten years, if you look at February ’19, you would see a four to 6% unit growth. I think if you take a ten year view here, but it starts at ’25 or so, you’ll see the same thing.

Our mid single digits declined for ’25. Let me just address that. That is based on a scenario of significant economic slowdown in US and the consumer confidence continued to plummet it. Currently, we see consumer spending remains robust despite, like, you know, all the challenges. If that remains, then our guide will turn out to be conservative on the volume side.

Our pricing assumption is based on tariff. But in the long term, we remain very convinced that the residential market will continue growing four to 6% in unit terms. Now we haven’t had a normal year for us since the tornado, for industry since COVID. COVID, SEER change, now refrigerant change. If you took all that away, I think you will see us very similar growth rate.

The demand grows up because temperature extremes are getting more and more prevalent. There is just general increase in summer. Every summer seems to be the hottest in the past ten years or twenty years that we are having. Population is moving south, so a lot more air conditioning in Florida and Texas and other areas, which need more air conditioning versus Minnesota and Wisconsin. And then heat pumps, they lost much less than air conditioning and much less than furnaces.

You put all of that together and the fact that the repair costs are going up as much, if not more than the replacement cost, I see no reason for their overall dynamics to change. We remain convinced that the industry is gonna go four to six in unit terms plus pricing, which may not be as high as tariffs have caused it, but there’s still we always recover inflation. So I think this industry remains a very attractive industry.

Noah, Oppenheimer Analyst, Oppenheimer: To unpack that a little further, think, you know, new construction, call it 25 of of the segment, volume. And it sounds like that’s about a couple points of volume headwind, this year in in your updated guide. Right? Which means you would think it would be down at least 10 to 15%. So so to clarify, is that macro driven, or at this point, are you getting clear indications on that forecast from your builder customers?

Alok Mascarra, CEO, Lennox: You know, from a builder customers, we do get clear forecast, and it’s not that extreme. Right? I mean, part of it is we expected new home construction to go up, and now we don’t expect it to go up because it was already depressed last year. If you think about new home construction in 2024, it was at a low level. We were just optimistic that it’s gonna go up because of lower interest rate.

So we took that optimism out, and we kept the replacement kind of, like, you know, going downward trend based on consumer confidence. But, no, it’s not down that much. It’s 20 to 25% of our business. And at this stage, I think it’s gonna be down maybe not percent. So

Noah, Oppenheimer Analyst, Oppenheimer: Yeah. Right. Relative to your prior guide, I think I was sort of benchmarking. And and just to remind us

Alok Mascarra, CEO, Lennox: guide is down much more, but compared to last year, it’s as much.

Noah, Oppenheimer Analyst, Oppenheimer: Right. I’m with you. May maybe just to further on that, remind us on the cycle time and the visibility with those customers, you know, from from when, you know, new units are being built to when you get the order, to when you ship.

Alok Mascarra, CEO, Lennox: Sure. If you take home starts, the indoor units typically go in about less than six months since the home start. The outdoor unit typically goes about twelve months. It’s rough numbers. We can put some error bars depending on the builders.

If you’re good builder, they are faster, and we do get decent visibility on that. Now keep in mind, it’s also one of our lowest margin in the industry. Right? I mean, new competitors, they always buy the lowest merits of your product, and the margins are low. But we do have six months top visibility on the first unit.

Noah, Oppenheimer Analyst, Oppenheimer: Okay. And, and I think, on on the subject of near term signals during 1Q earnings, you you talked about potential channel destocking as a headwind for 2Q. You know, peers also raised the subject of having some elevated inventories in the channel, but at the same time, necessarily seeing any slowdown in movement so far. Maybe talk through any difference in behavior you’re seeing between your own distribution and the two step? And if possible, can you kind of give us a sense of the delta between direct channel inventory versus what you’ve got in two step?

Alok Mascarra, CEO, Lennox: Sure. So in our direct channel, we are essentially done with four ten a, and we have moved all to four fifty four b, and it’s going well. There’s been no air pocket. We don’t expect any at this stage. On the two step, I think it’s similar.

In some cases, there is maybe two to three weeks of extra inventory that they have built up on 410 A just to get some price advantage on that. Think we that gets flushed out by May or early June. We all I mean, the entire industry may have overestimated this destocking because of how badly we were wrong in the CR change where we thought destocking would be less than it was more. That’s right. The other thing you gotta keep in mind, the distributors are more willing to hold inventory right now because some of them, with the tariff environment, they’re expecting supply chain disruptions.

So it’s not just a normal. Right? You gotta think about distributor mindset. Posterior chains, distributors are willing to cut it down. They had more confidence in supply chain and more confidence in manufacturers.

Today, we have less confidence in supply chain. Net net, we may not see this destocking. And if you see it, it’ll be probably much less than any of us predicted.

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

Alok Mascarra, CEO, Lennox: Yeah. I mean, we’ll remain flexible, and our goal is to be fair to our customers, like, you know, while protecting our margins. The first price increase, we call it the pre liberation day price increase. That was about the impact of steel and aluminum and everything else that went in. And we looked at that as a more permanent change.

I mean, there was a spike up, and we had to look at that and we implement. The second price increase we did was post liberation day, and there was more targeted. Remember, Mexico, we are USMCA compliant %, so that comes out. So it’s mostly on the other products. In some cases, the second price increase went as a surcharge.

And multiple reasons for that, one is because some cases, we are contractually prohibited from doing two price increase a year, but you can do search out. So we’re just trying to push that through. Second, we were just trying to maintain some flexibility, to see what the competitive reaction is and to see what kind of, like, you know, tariff changes might occur. Remember, this was a time where you could wake up in the morning and you find that there was a new tweet and the tariffs have been withdrawn.

Noah, Oppenheimer Analyst, Oppenheimer: Yep.

Alok Mascarra, CEO, Lennox: So and it takes us from announcement to implementation is a thirty day cycle time for us. Right? And so we want to maintain that flexibility and credibility with the dealer. But I would ignore the difference between a surcharge and a price increase, and I would just look at what flexibility we have created, which I think is enormous for us to serve the customer fairly and recover any impact of tariffs. Now in reality, what’s gonna happen is we are gonna mitigate the impact of tariff one way or the other.

You know? Lots of production shifting between China and Thailand, working with our vendors, like the mini split vendor is able to do that within three months. A motor vendor, it might take them six months, but they all can move production from China to Vietnam. They’re actually not moving production. All they’re doing is US customers are getting it from Vietnam.

Rest of the world is now getting it from China.

Noah, Oppenheimer Analyst, Oppenheimer: So

Alok Mascarra, CEO, Lennox: just s new moves versus actually new factories.

Noah, Oppenheimer Analyst, Oppenheimer: Routing shipping. Yeah.

Alok Mascarra, CEO, Lennox: Yeah. Rerouting shipping. So I think once we do the mitigation, I don’t think we have to give it all back in pricing. Right? That’s where we’ll like to continue to hold as much as we can So we can reinvest it back in digital, reinvest back in innovation to serve our customers better.

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

Alok Mascarra, CEO, Lennox: We started seeing retention numbers pretty quickly in terms of pushback from large accounts and all. The first one, I’d say retention was very high. The second one is still evolving. And in that case and it’s also because the tariff environment is evolving. Right?

Every day, we see some new changes and release, but I think the first ones to create was very high. Pretty much every competition has followed the first one, and now every competition is following the second one as well. So I think it’s just gonna amount of second one is gonna vary, and we’ll know more by the time q two ends. But we are pleased with how the industry’s behaved in pricing net net.

Noah, Oppenheimer Analyst, Oppenheimer: I wanna ask on on the BCS side, because obviously, that was a headwind in ’1 q. But I think, you know, you you characterized it. In fairness, so did we. So I’m perhaps leading with my conclusion, but we characterized that as as somewhat transitory, really, kind of tied to the refrigerant transition and the factory ramp. I think you also commented on your order rates picking up as you move through 1Q.

So help us understand, were those dynamics more same store with national accounts? Did the orders growth you’re you’re seeing now have a broader dimension? Maybe comment on that.

Alok Mascarra, CEO, Lennox: Sure. It is transitionary. The other interesting thing, I went back and looked at what happened to us in q one after the CERA change. Pretty much exact same thing. I mean, in terms of our key accounts, when you go through these transitions, they just wait.

They don’t wanna schedule anything in the first month. They don’t wanna be the first Lowe don’t wanna be the first one to put new units up on their rooftop. They want Walmart or Home Depot to do it first. Right? So there’s a bit of that.

And remember, the factory startup that we did last year, still had inefficiencies, and q one is the one when we went from 04/10 to April b. So we essentially had very low production in January as well, supporting that. And then we moved lines from Stuttgart to Salt Geo. That always creates, like, you know, lack of productivity or inefficiency through the process. We work through the internal, inefficiencies, so I would expect a very normal second half.

Q two, obviously, would be transition between normal and how bad q one was, so you can draw sort of a straight line through that. And on volume, yeah, we saw improvements. So we know key accounts that are back to normal. Now the industry is down. Right?

Industry is down double digits, and, we can control that. But net net, we landed up q one with higher share, and we gained share in q one as we closed it as now all the numbers have come out. And we think that trend continues, and our efficiencies get better and inefficiencies get left behind as we lap with the new factory and as we finish with the line moves. So, yeah, we we remain quite confident in the numbers we have given on the volume. And it the last reminder on that, only half of BCS is unitary rooftops.

Right? So some people apply the entire industry softener to BCS, and that’s just wrong. Services are resilient and growing. Heat craft, which is refrigeration, is also doing quite well. So our the soft industry softness applies to about only half of our total revenue.

Michael Krenser, CFO, Lennox: And I’ll just say q one was transitory from a price and tariff cost perspective as well. So as you go to the balance of the year, you’ll have a a price cost benefit on that equation as well.

Alok Mascarra, CEO, Lennox: Oh, yeah. I forgot the famous LIFO. This is first time I had to learn so much about LIFO and why that impacts us immediately.

Noah, Oppenheimer Analyst, Oppenheimer: Yeah. I mean, you you just had a high cost inventory, and you weren’t able to, you know Correct. Adjust price for it.

Michael Krenser, CFO, Lennox: Yeah. Yeah. Price cost will flip the balance of the year. Yep.

Noah, Oppenheimer Analyst, Oppenheimer: Okay. I guess pulling back a picture on growth, you know, obviously, there’s a lot of near term macro uncertainty. But, you know, when I start to sketch out the setup for 2026, you know, I think no prebuy headwind, no drag from the Saltillo transition, probably easy comps on new construction, mix benefits from a full year of four fifty four B and pricing rollover from these tariff actions. That’s a lot of growth drivers. Perhaps there’s some we’re missing.

Maybe you can add to that. But but when you put it all together, what kind of growth could that imply for the company?

Alok Mascarra, CEO, Lennox: First of all, I’m delighted that it’s fifth sixth May, and we’re talking about 2026. Right? We can’t wait to put 2025 behind us. So thank you, Noah. I think it could be an attractive year.

Right? What we don’t know is where the macro is gonna be heading, where the consumer things are heading. In addition to what you said, the other thing we’re very confident on is in our share gain initiatives. You know, that’s when we are launching our new network design that I talked about, which will lead to better efficiency and higher fulfillment rate. We would have had significant experience in our emergency replacement initiative.

Like, in all the new additions would have had twelve to eighteen months of experience, so they would be more productive. And, of course, the Stuttgart versus RTO balance, we would have got it right. So there’s a lot to be looking forward to in 2026. I think the macro would be probably our only concern at this stage and, make sure we don’t go in a deep recession or some new crisis. Every time I get optimistic about a year, like, I was pretty optimistic about 2025 before these tariff things came around.

Right? I mean, four fifty four b mix, which is coming through as we expected. The pricing is holding as we expected. Emergency replacement is as we expected. Like, you know, the transition headwinds a little bit more, but the tariff uncertainty just clouded the whole picture.

So let’s just hope there’s nothing new. Otherwise, 2026 should be a good year. That’s one reason going back to history. When we did Investor Day, we didn’t wanna give 2025 guidance. We were giving 2026 guidance even at that stage saying that ’25 is gonna be messy.

So we are gonna meet or beat our ’26 guidance.

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

Michael Krenser, CFO, Lennox: Michael, what do think? Yeah. Short short answer is, yes. Those incremental should still apply to 2026. And, you know, we’re even more excited about 2027 and beyond.

I think Alok went through some of the macro end market drivers of industry units, kind of four to 5%. You get, you know, a few percent share gain, and then you have low single digit price increases. All of that adds up to high single digit, if not double digit revenue growth, which is really what we’re focused on, but those incrementals should hold.

Alok Mascarra, CEO, Lennox: I want to ask a

Noah, Oppenheimer Analyst, Oppenheimer: couple of items related to supply chain and tariffs. You know, Samsung JV, you know, good foresight there. Maybe talk about the implications of tariff dynamics for your ability to gain share, how you’re managing the 10% reciprocal, maybe how much opportunity do you see to take share from the Chinese competitors in the ductless market?

Alok Mascarra, CEO, Lennox: I think it’s significant. You know? In hindsight, this was a stroke of genius. You know? I think, we didn’t do it because of China versus South Korea manufacturing, but I think this was a stroke of genius from our side.

Remember, are low single digits. The share opportunity was already huge, but in our estimate, about 40 or more than 40% of those units are coming from China. So the fact that us and they are the beneficiary too, like Mitsubishi and Hitachi and Fujitsu, Like you know? But I think there’s gonna be a significant share shift there. Now I don’t think we should take that for granted.

I mean, there some of the Chinese companies like Media, they’re opening factories in Mexico, which will be USMCA compliant. So I think folks are gonna fight back, but we do have a short term opportunity to gain significant share here.

Michael Krenser, CFO, Lennox: And I’ll just add, even on the ducted units, there could be up to 5% of ducted units that come from as well.

Noah, Oppenheimer Analyst, Oppenheimer: Unducted. Yeah. If we think about the industry and the USMCA compliant goods exemption, that’s been a benefit so far. Hopefully, it stays in place. Are you making any investments today to potentially derisk the loss of that exemption?

This would, of course, affect the entire industry, but you do have significant Mexico exposure.

Alok Mascarra, CEO, Lennox: We do. And I think our view, 40% of the industry units have Mexico slash USMCA exposure. I think any investments we are making are in their design stages. Like, you know, are we creating scenarios, or what would we do? Yes.

Are we putting any concrete in the ground, or are we looking at any real investments? Not yet. But, yeah, we’re doing scenario planning. Remember, we still have, most of our factories in US and many of the units we used to make in US. So, yes, we do have scenario planning, and we have done, but we haven’t spent any real dollars behind it.

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

Alok Mascarra, CEO, Lennox: Michael, do you want to take that?

Michael Krenser, CFO, Lennox: Sure. Yeah. So the the first price increase that we announced is effective kind of April. So look, Matt, you’ve really good stick rates on those. We’re just starting to go through that second price increase right now, which is kind of beginning to take an effect in May.

So those will both ramp up over the the balance of the year and kind of deliver that price cost positive that I mentioned. And and, our goal here was to protect our profit margins. So and that’s related to tariff and, tariff related inflation. So there is cost out there that isn’t specific to tariff, but we continue to monitor. We’ll continue to mitigate our our costs as well.

But overall, we should see that price cost positive for, the rest of the year.

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

Michael Krenser, CFO, Lennox: Yeah. I think the big balance of the year question is gonna be on the volume. So right now, we’ve assumed it’s about a flat volume. And and Alok mentioned about 25% of that segment is service, 25% refrigeration. So those markets continue to progress well, and we also expect to have some share gain within the emergency replacement in there.

Offsetting some of that is this uncertainty on kinda where light commercial unitary is gonna be. We have backlog visibility about one or two months. Right now, that seems good, but it’s something we’re we’re definitely watching. And, we’re definitely focused on cost productivity initiatives. We should start to have in the second half of the year the lapping of some of those those launch costs that we had for the new factory in Mexico as well as new cost initiatives that we’re taking, in the organization as well.

And then, finally, the last one is we’ll start to see the full benefit of the mix. So we saw a little bit of mix benefit in the first quarter, but that’ll ramp up as we’ll sell almost all four fifty four b kind of exiting the second quarter.

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

Alok Mascarra, CEO, Lennox: I’ll take that. You know, I think the manufacturing investments, they typically have a longer payback compared to distribution for us. And manufacturing also, there’s a lot of inefficiencies and ramp up versus distribution. Things are just faster. A lot of our distribution facilities are leased

Not that it makes a difference beyond the, you know, anecdotal. But some of the large distribution investments that we are making in Dallas, we are looking at less than two year payback, often one year payback, versus manufacturing is typically four. Right? So I think that’s where we look at the total payback. We feel like in today’s environment, like, you know, there are lots of opportunities we have.

We’ll continue focusing on internal improvements and internal growth investments first. We’ll continue doing polite dividend increases. We’ll continue looking at m and a opportunities, which market’s currently frozen. And then at this level, share buybacks. You know?

I mean, I think, you know, we’ve been sitting on a lot of firepower for that as well. So we feel like from a capital, we are in a very good spot.

Noah, Oppenheimer Analyst, Oppenheimer: Oh, you know, you mentioned m and a frozen. Maybe unpack that a little bit more, where might it make sense to, to still buy versus build?

Alok Mascarra, CEO, Lennox: Yeah. I mean, market’s frozen. I don’t mean, like, we are frozen. Like, any discussions we’ve had just start getting put on ice because buyers and sellers can’t agree on evaluation. Sure.

And there’s so much fluctuation and tariff noise in the market. For us, you know, we would really like to continue boosting up our services portfolio. We’ve done one acquisition that was in services. We like to do more in parts and accessories. There’s just a lot of attachment.

Think of it like, you know, six feet around our box, whether it’s in the basement or outside. We still have lots of opportunities in those areas.

Noah, Oppenheimer Analyst, Oppenheimer: Right.

Alok Mascarra, CEO, Lennox: We would like to continue looking at more technology play as well. There’s a lot of new IAQ controls and other technology that we can look at. And, those would be sort of defining our m and a priorities. Like, you know, at this stage, the broad industry consolidation is out of the question on where we are, but we look at that. And in each of those cases, we don’t have to do an acquisition.

That’s probably one reason we don’t. We are very, critical on ourselves when we look at acquisitions. We analyze it much more than others probably, and we are very disciplined because I think organic pathway has paid well for us over the past multiple years.

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

Michael Krenser, CFO, Lennox: Thanks, Noor. Thank you.

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