Q4 2023 Lennox International Inc Earnings Call

Unknown Executive: If you need assistance during your conference call today, please press star zero. Welcome to the Lennox 4th Quarter and Full Year 2023 Earnings Conference Call. All lines are currently in a listen-only mode, and there will be a question and answer session at the end of the presentation. You may enter the queue to ask a question by pressing star and 1 on your phone. To exit the queue, press star and 2.

During your conference today, Please press Star zero.

[music].

Speaker Change: Welcome to analytics fourth quarter and full year 2023 earnings conference call.

Speaker Change: So currently in a listen only mode and there will be a question and answer session at the end of the presentation.

Speaker Change: They entered the queue to ask a question by pressing star one on your phone to exit the Q Press Star and two as a reminder, this call is being recorded.

Unknown Executive: As a reminder, this call is being recorded. I would now like to turn the conference over to Chelsey Pulcheon from the Lennox Investor Relations team. Chelsey, please go ahead.

Speaker Change: I'd now like to turn the conference over to Chelsea portion from the Linux Investor Relations team Chelsey. Please go ahead.

Chelsey Pulcheon: Thank you, Shelby. Good morning, everyone. Thank you for joining us this morning as we share yet another quarter of outstanding performance. With me today is CEO Alok Maskara, our new CFO, Michael Quenzer, and our outgoing CFO, Joe Reitmeier. Alok, Michael, and Joe will share their prepared remarks before we move to the Q&A session. Turning to slide two, 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.

Chelsea: Thank you Shelby good morning, everyone. Thank you for joining us this morning, as we share yet another quarter of outstanding performance with me today as CEO of local Mascara, our new CFO, Michael Quenzer at our outgoing CFO, Joe Reitmeier, Hello, Michael and Joe will share their prepared remarks before we move to the <unk>.

Chelsea: Q&A session.

Chelsea: Turning to slide two 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.

Chelsea: We may also refer to certain non-GAAP financial measures that management considers relevant indicators of underlying business performance.

Chelsey Pulcheon: 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 three as I turn the call over to our CEO, Alok Maskara. Thank you, Chelsea. Good morning and welcome

Chelsea: 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.

Chelsea: The earnings release, today's presentation and the webcast archive link for today's call are available on our Investor Relations website at Investor Darla next dotcom.

Speaker Change: Now please turn to slide three as I turn the call over to our CEO elect mascara.

Mascara: Thank you Chelsea.

Mascara: Good morning, and welcome.

Alok Maskara: I'm proud to represent our 13,000 employees as we delivered another full year of record results. We are pleased with our 2023 growth, margin expansion, and, more importantly, cash generation. Our strong results were noteworthy given the unprecedented bee stalking faced by residential HVAC manufacturers last year. I'm deeply grateful for our employees and our customers, whose hard work, loyalty, and dedication drove the results that we will be discussing today. I would like to begin by highlighting four key messages on slide three. First, we delivered $3.63 in adjusted EPS for Q4, an increase of 41% year over year. Adjusted EPS for the full year was $17.96, a 27% increase year over year.

Mascara: I'm proud to represent our Tony Thompson employees as we delivered another full year of record results.

Speaker Change: We are pleased with our 2023 growth margin expansion and more important gas generation.

Speaker Change: Our strong results were noteworthy given the unprecedented destocking, we used by our residential HVAC manufacturers last year.

Speaker Change: I'm deeply grateful for our employees and our customers, whose hard work loyalty and dedication.

Speaker Change: The results that we will be discussing today.

Speaker Change: I would like to begin by highlighting four key messages on slide three.

Speaker Change: First we delivered $3 63 in adjusted EPS for Q4, an increase of 41% year over year.

Speaker Change: Adjusted EPS for the full year was $17.96, a 27% increase year over year.

Alok Maskara: Our 2023 full year results were also notable for 6% core revenue growth and a 300 Basis Point Expansion in Adjusted Segment Margin. In addition, our operating cash flow more than doubled compared to prior years. Second, we continue to invest wisely in manufacturing capacity, distribution optimization, technology transitions, and growth initiatives while maintaining our industry-leading ROIC of 44%. Third, while end market uncertainties linger, our transformation momentum sets a strong foundation and gives us confidence in our 2024 EPS guidance range of $18.50 to $20. Fourth, given the robust progress on the self-help transformation plan, we are pleased to increase our previously announced 2026 financial goals. Now, please turn to slide four for more details on the 2023 Self-Help Accomplishment.

Speaker Change: Our 2023 full year results were also notable four 6% core revenue growth.

Speaker Change: Basis point expansion in adjusted segment margin.

Speaker Change: In addition, our operating cash flow more than doubled compared to prior year.

Speaker Change: Second.

Speaker Change: We continue to invest wisely in manufacturing capacity distribution optimization.

Speaker Change: Larger transitions and growth initiatives.

Speaker Change: While maintaining our industry, leading ROIC of 44%.

Speaker Change: Oh.

Speaker Change: While end market uncertainties linger.

Speaker Change: Our transformation momentum sets, a strong foundation and gives us confidence in our 'twenty 'twenty four EPS guidance range of $18.50 to $20.

Speaker Change: Fourth.

Speaker Change: Given the robust progress on SaaS type transformation plan.

We're pleased to increase our previously announced 126 financial goals.

Speaker Change: Now please turn to slide four for more details.

Speaker Change: Treat self-help accomplishments.

Alok Maskara: In 2023, Lennox experienced significant success during the first phase of our self-help transformation plan. Our strategic initiatives allowed us to effectively navigate these talking challenges, which demonstrated our resilience and exceptional execution. This phase laid a solid foundation for future growth and positioned us to capitalize on further growth opportunities. We accelerated growth by strengthening our distribution muscle to better serve our existing customers, attract new customers, and increase our share of wallet from HVAC dealers. We are investing in our sales and stores teams to create greater alignment, accountability, and autonomy for improving the customer experience. To ensure resiliency, we implemented pricing excellence initiatives to recover margins from previously depressed levels, as many long-term key account contracts, which were signed before the recent inflationary period, came up for renewal. We also achieved higher factory output, enhanced productivity, and an optimized product mix. Together, these measures contributed to the overall margin expansion and strengthened our margin resiliency. Finally, to ensure consistent execution, we implemented a balanced scorecard-based operating system, which we refer to as the Lennox Unified Management System.

Speaker Change: In 2023, Lennox experienced significant success during the first phase of our self help transformation plan.

Our strategic initiatives allowed us to effectively navigate beat he's talking challenges.

Speaker Change: Which demonstrated our resilience and exceptional execution.

Speaker Change: This phased laid a solid foundation for future growth and positioned us to capitalize on further growth opportunities.

Speaker Change: We accelerated growth by strengthening our distribution muscle to better serve our existing customers.

Speaker Change: Attract new customers.

Speaker Change: And increase our share of wallet from HVAC dealers.

Speaker Change: We are investing in our sales and stores teams to create greater alignment accountability and autonomy for improving the customer experience.

Speaker Change: To ensure resiliency, we implemented pricing excellence initiatives to recover margins from previously depressed levels.

Speaker Change: As many long term key account contracts, which were signed before the recent inflationary period.

Speaker Change: Came up for renewal.

Speaker Change: We also achieved higher factory output enhanced productivity and optimize product mix.

Speaker Change: Together these measures contributed to the overall margin expansion and strengthened our margin resiliency.

Speaker Change: Finally to ensure consistent execution, we implemented a balanced scorecard based operating system, which.

We refer to as Linux unified management system.

Alok Maskara: This system was instrumental in driving accountability and ensuring alignment with our strategic goals to accelerate revenue growth and expand margins. We also simplified our portfolio with the sale of the European businesses and improved our total life cycle value proposition with the recent AES acquisition. On the next slide, I will share more about how we fine-tuned our internal engine to ensure the success of the transformation plan and accelerate growth throughout the journey. Slide 5 shows the five components that fueled Lennox's success in 2023 and are building momentum that will continue to power Lennox's bright future. At the heart of our transformation is our unwavering commitment to our vision and mission, which set the true north direction for everything we do.

Speaker Change: This system was instrumental in driving accountability, and ensuring alignment with our strategic goals to accelerate revenue growth.

Speaker Change: And expand margins.

We also simplified our portfolio with the sale of the European businesses.

Speaker Change: And improve our total lifecycle value proposition with the recent <unk> acquisition.

Speaker Change: On the next slide I will share more about how we fine tuned our internal engine to ensure success of the transformation plan and accelerate growth throughout the journey.

Speaker Change: Slide five shows the five components that few Linux its success in 2023 and are building momentum that will continue to power lanoxin bright future.

Speaker Change: Yeah.

Speaker Change: At the heart of our trials transformation is our unwavering commitment to our vision and mission.

Speaker Change: Do you set the true north direction for everything we do.

Alok Maskara: Aligning our efforts towards a shared goal. Moving outwards. The strategy to great will deliver accelerated growth, resilient margins, execution consistency, an Advanced Technology Portfolio, and Talent and Culture that help us win every day. Next is the commitment to our customer charters.

Speaker Change: Aligning our efforts towards a shared goal.

Speaker Change: Moving outward the.

The strategy to great will deliver accelerated growth.

Speaker Change: <unk> margins.

Speaker Change: Execution consistency.

Speaker Change: Advanced technology portfolio.

Speaker Change: Talent and culture that help us win every day.

Next is the commitment to our customer charters empathy.

Alok Maskara: Emphasizing our dedication to always being a partner of choice by delivering exceptional customer experiences and quality solutions. Another crucial element to our outstanding performance was the implementation of our Lennox Unified Management System. We are utilizing a balanced scorecard to drive accountability, integrating standard processes and best practices, and aligning operating cadence for efficiency.

Speaker Change: Emphasizing our dedication to always being a partner of choice by delivering exceptional customer experience and quality solutions.

Speaker Change: Another crucial element to our outstanding performance was the implementation of our Linux Unified management systems.

Speaker Change: We are utilizing balanced scorecard to drive accountability.

Speaker Change: Integrating standard processes and best practices.

Speaker Change: And aligning operating cadence for efficiency.

Alok Maskara: This represents our commitment to a unified approach that enables Lennox to shift into a higher gear and outperform competition. Lastly, our core values and guiding behaviors serve as a foundation of our high-performance growth culture with a passion for improving the customer experience. Last year, we rolled out nine guiding behaviors that improved the team's focus on critical behaviors such as positive engagement and sustainability.

Speaker Change: This represents our commitment to a unified approach that enables linux to shift into a higher gear and outperform competition.

Lastly, our core values and guiding behaviors serve as a foundation of our high performance growth culture with a passion for improving the customer experience.

Speaker Change: Last year, we rolled out nine guiding behaviors that improve the team's focus on critical behaviors, such as positive engagement and sustainability.

Alok Maskara: These five components not only helped us build momentum on a self-help transformation this year but also act as a springboard to continue our long-term journey of growth and expansion. Before we move into the detailed financial section, allow me a few moments to express my gratitude to our outgoing CFO, Joe Reitmeier. I am thankful for Joe's years of service to Lennox, and I'm especially grateful that he stayed with us to train me, the new CEO, and to oversee a smooth transition to a new CFO, Michael Quenzer. Now, for the last time, on an earnings call, let me hand the call over to Joe. Thank you, Loke, and greetings to everyone joining us this morning as we announce Lennox's record-setting performance and outlook.

Speaker Change: These five components not only helped us build momentum on our self help transformation this year.

Speaker Change: But also act as a springboard to continue our long term journey of growth and expansion.

Before we move into the detailed financials sections allow me a few moments to express my gratitude to our outgoing CFO Joe Reitmeier.

I'm thankful for jaws use of service to Linux and I'm, especially grateful that stayed with us to train me, the new CEO and to oversee a smooth transition to our new CFO Michael Cleanser.

Joseph William Reitmeier: Now for the last time on an earnings call, let me hand, the call over to Joe.

Joseph William Reitmeier: Thank you Luke and greetings to everyone. Joining us this morning, as we announced <unk> record setting performance and outlook.

Joseph William Reitmeier: I've had the pleasure and privilege of serving as Lennox's Chief Financial Officer during a period of transformation and record-setting achievement. Portfolio changes enabled a more intense focus on our key North American end markets, and the team introduced new and innovative solutions.

Joseph William Reitmeier: I've had the pleasure and privilege of serving as <unk> Chief Financial officer during a period of transformation and record setting achievements.

Joseph William Reitmeier: Portfolio changes enabled a more intense focus on our key north American end markets.

Joseph William Reitmeier: The team introduced new and innovative solutions.

Joseph William Reitmeier: We delivered on initiatives that drove significant increases in profitability, and that, coupled with efficient capital allocation, resulted in industry-leading returns on invested capital. We fortified the balance sheet, and, most significantly, we generated exponential increases in returns for our shareholders. Now, before I hand it off to Michael, I'd like to reflect briefly on 2023.

Joseph William Reitmeier: We delivered on initiatives that drove significant increases in profitability and that coupled with sufficient capital allocation resulted in industry, leading returns on invested capital we fortify the balance sheet and most significantly we generated exponential increases in returns for our shareholders now.

Speaker Change: Now before I hand, it off to Michael I'd like to reflect briefly on 2023.

Joseph William Reitmeier: It was another year of exceptional performance while strengthening the foundation for the future by investing in our people, sustaining industry-leading innovation, and enhancing our capabilities to better serve our customers. Now, while I'm extremely proud of my time with such a great organization that has accomplished so much, I take even greater pride knowing that I'm leaving an extremely talented and seasoned team that is very well positioned both strategically and financially for long-term success. I'd like to wrap up my comments with a sincere thank you to all the Lennox employees. Thank you, our valued customers, the investment community, and other stakeholders for your partnerships over the years. I'll now hand it over to Michael, who will take you through the details of Lennox's financial performance and outlook. Michael, take it away!

Michael Quenzer: Another year of exceptional performance, while strengthening the foundation for the future by investing in our people.

Michael Quenzer: Sustaining industry, leading innovation and enhancing our capabilities to better serve our customers.

Michael Quenzer: Now while I'm extremely proud of my time with such a great organization that has accomplished so much I take even greater pride, knowing that I'm, leaving an extremely talented and seasoned team that is very well positioned both strategically and financially for long term success.

Michael Quenzer: I'd like to wrap up my comments with a sincere. Thank you to all Lennox employees are valued customers the investment community and other stakeholders to your partnerships over the years I'll now hand, it over to Michael who will take you through the details of Onex's financial performance and outlook, Mike will take it away.

Michael Quenzer: Thank you. Thank you, Joe. Good morning, everyone.

Michael Quenzer: Thank you Joe Good morning, everyone. Please turn to slide six.

Michael Quenzer: Please turn to slide six. As Alok mentioned earlier, 2023 has been a record year, and the fourth quarter was no exception. Core revenue, which excludes our revenue operations, was $1.1 billion, up 7% as price and mix throughout the year-over-year improvement. The Johnson Segment Profit increased $44 million at $69 million of price and mixed benefits were partially offset by inflation and investment in SG&A distribution. Total adjusted segment margin was 15.9%, 320 basis points higher than for his prior year. For the fourth quarter, corporate expenses were $30 million, a decrease of $3 million. Our fourth-quarter tax rate was 20%, and diluted shares outstanding were $35.8 million compared to $35.6 million in the prior-year quarter.

As Luc mentioned earlier 2023 has been a record year in the fourth quarter was no exception core revenue, which excludes our revenue operations was $1 1 billion up 7% as price and mix drove the year over year improvement.

Michael Quenzer: Jonathan segment profit increased $44 million $69 million of price and mix benefits were partially offset by inflation and investment in SG&A and distribution total adjusted segment margin was 15, 9% up 320 basis points versus prior year for the fourth quarter corporate expenses were $30 million a day.

Michael Quenzer: Kris a $3 million.

Michael Quenzer: Our fourth quarter tax rate was 20% and diluted shares outstanding were $35 8 million compared to $35 6 million in the prior year quarter.

Michael Quenzer: The fourth quarter achieved record levels of revenue, segment profit, and adjusted earnings per share, which grew by 41% to $3.63. Now, let's shift our focus to slide seven and review the financial results of our home comfort solution segment, formerly referred to as the residential segment. The left graph shows revenue grew 1% to a record $709 million in the fourth quarter. This segment benefited from a favorable mix of higher efficiency products and effective pricing execution. This was partially offset by volume decline. Although unit sales volumes for the segment declined by 5%, our direct-to-contractor sales volumes remain stable, signaling a resilient consumer demand landscape. Unit sales volumes through independent distribution distribution channels declined more than 20% driven by continued industry destock. Home Comfort Solutions profit decreased approximately 4% to $115 million, and segment margin also experienced a decline of 70 basis points to 16.2%. The decrease was attributed to a $9 million decrease in sales volumes and a $25 million impact from inflation and investments in distribution and sales.

Michael Quenzer: The fourth quarter achieved record levels of revenue segment profit and adjusted earnings per share, which grew by 41% to $3 63.

Michael Quenzer: Let's shift our focus to slide seven and review the financial results of our home comfort solutions segment, formerly referred to as our residential segment.

Michael Quenzer: The left graph shows revenue grew 1% to a record $709 million in the fourth quarter.

Michael Quenzer: We benefited from favorable mix of higher efficiency products and effective pricing execution. This was partially offset by volume declines.

Michael Quenzer: Although unit sales volumes for the segment declined by 5% our direct to contractor sales volumes remained stable signaling a resilient consumer demand landscape.

Michael Quenzer: Unit sales volumes through independent distribution distribution channels declined more than 20% driven by continued industry destocking.

Michael Quenzer: Home comfort solutions profit decreased approximately 4% to $115 million and segment margin also experienced a decline of 70 basis points to 16, 2%.

The decrease was attributed to a $9 million decrease in sales volumes and $25 million impact from inflation and investments in distribution and selling.

Michael Quenzer: Moving on to slide eight, we will now review the performance of our Building Climate Solutions segment, formerly referred to as the Commercial Segment. This segment continues to consistently deliver outsized performance each quarter, resulting in another quarter of record revenue and profit. Revenue was $390 million in the quarter, up 19%. Combined price and mix were up 11%, and volume was up 5%. Building Climate Solutions' profit was 91 million, or up 98%, and segment margin expanded 930 basis points to 23.2%. These results were primarily driven by price and sales volume gains. The team's execution of several self-help initiatives aided in the recovery of previously depressed profit margins. These initiatives include price correction. Enhanced Factory Productivity and Strengthened Supply Chain Resiliency. The AES acquisition also played a role in the growth during the quarter. The integration is progressing smoothly.

Michael Quenzer: Moving on to slide eight we will now review the performance of our building climate solutions segment, formerly referred to as the commercial segment.

Michael Quenzer: The segment continues to consistently deliver outsize performance each quarter, resulting in another quarter of record revenue and profit revenue was $390 million in the quarter up 19% combined price and mix were up 11% and volume was up 5%.

Michael Quenzer: Building climate solutions profit was $91 million or up 98% and segment margin expanded 930 basis points to 23, 2%. These results were primarily driven by price and sales volume gains.

Michael Quenzer: The team's execution on several self help initiatives aided in the recovery of previously depressed profit margins. These initiatives include price corrections enhanced factory productivity.

Michael Quenzer: Strength has been supply chain resiliency.

Michael Quenzer: The Aes acquisition also played a role in the growth during the quarter. The integration is progressing smoothly with existing Lennox customers showing interest in the aes full lifecycle value proposition.

Michael Quenzer: Ultimately the fourth quarter continued to the year's momentum and resulted in a strong finish to 2023.

I will now turn to slide nine I will recap the full year <unk> results.

Michael Quenzer: For full year 2023 core revenue, excluding European operations was $4 7 billion up 6%.

Michael Quenzer: Adjusted segment profit increased $180 million at $348 million of price and mix benefits were partially offset by home comfort solutions sales volume declines as well as inflation and investment in SG&A and distribution.

Michael Quenzer: Adjusted segment margin was 17, 9% up 300 basis points versus prior year.

Michael Quenzer: Despite facing volume challenges in the residential end markets inflationary pressures and ongoing investments the home comfort solutions segment achieved.

Michael Quenzer: Revenue and profit growth through successful execution of strategic pricing initiatives and the seamless transition to the new minimum seer standard.

Michael Quenzer: The building climate solutions segment also achieved impressive results in 2023.

Michael Quenzer: The only supply chains and factory productivity played a key role in growing volumes in the second half of the year and pricing execution helped the segment recover previously depressed profit margins from years of high higher supply chain and production costs.

Michael Quenzer: Exceptional execution by both segments resulted in adjusted earnings per share growing to $17 96.

Michael Quenzer: Setting, a new record and representing a 27% increase compared to the prior year.

Michael Quenzer: Moving on to cash flow and capital deployment on slide 10.

Michael Quenzer: Operating cash flow for the quarter was $306 million compared to $132 million in the prior year quarter capital expenditures were $125 million for the quarter, an increase of $91 million compared to the prior year.

Michael Quenzer: Net debt to adjusted EBITDA was one three times down from two times in prior year.

Michael Quenzer: Our approach to capital deployment remains consistent we will prioritize prioritize organic growth investments with strong returns.

Michael Quenzer: Grow dividends with earnings and continue to explore M&A opportunities and supplement with share repurchases when necessary.

Michael Quenzer: Lennox is industry, leading ROIC of 44% reflects our dedication to delivering value to our stakeholders through strategic and targeted investments, we not only aim to maintain our high ROIC, but also aimed to make necessary investments to elevate our performance and competitiveness in the marketplace.

Michael Quenzer: We anticipate the successful completion of our upcoming commercial HVAC factory production is slated to begin mid year, while overhead and wrap up expenses I was known challenges in the first half of 2024, we anticipate the factory will realized productivity benefits in 2025.

Michael Quenzer: This facility pays plays a pivotal role in our sustained growth enhancing our commercial production capacity by 25% by the end of 2024.

Michael Quenzer: It will allow us to better address consumer demand and recapture market share in emergency replacement market now, let's transition to slide 11.

Operator: If you need assistance during your conference call today, please press star zero. Welcome to the Linux 4th Quarter and Full Year 2023 Earnings Conference Call. All lines are currently in a listen-only mode, and there will be a question and answer session at the end of the presentation. You may enter the queue to ask a question by pressing star and one on your phone.

Speaker Change: Here I will provide an overview of our full year financial guidance for 2024 <unk>.

Speaker Change: Here I will provide an overview of our full year financial guidance for 2024 <unk>.

Speaker Change: Anticipating another year of profitable growth.

Speaker Change: On the left provides key growth drivers with revenue expected to increase by approximately 7%.

Speaker Change: Hello, who will provide additional comments on end markets later in the presentation, but sales volumes are expected to remain relatively flat with a slight upward trend from building climate solutions growth and stable home comfort solutions end markets.

Operator: To exit the queue, press star and two. As a reminder, this call is being recorded. I would now like to turn the conference over to Chelsea Poulsen from the Linux Investor Relations team. Chelsea, please go ahead.

Speaker Change: The combination of price and mix is anticipated to contribute to a mid single digit growth in revenue.

Speaker Change: Price increases will sustain margins.

Chelsea Poulsen: Thank you, Shelby. Good morning, everyone. Thank you for joining us this morning as we share yet another quarter of outstanding performance. With me today is CEO Alok Miskara, our new CFO, Michael Kuenzer, and our outgoing CFO, Joe Reitmeier. Alok, Michael, and Joe will share their prepared remarks before we move to the Q&A session. Turning to slide two, 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.

Speaker Change: <unk> cost inflation, and a slight favorable mix as expected due to the 2023 minimum efficiency regulatory change in.

Speaker Change: In addition to the profit drivers.

Speaker Change: Drivers from revenue, we have listed key cost and investment assumptions on the right side of the slide.

Component cost inflation is expected to be up mid single digits, including large increases in our cost to acquire our <unk> refrigerant.

Speaker Change: We expect this to be partially offset by material cost reduction programs.

Speaker Change: We anticipate ramp up cost of approximately $10 million for the new commercial HVAC factory, along with additional costs associated with the refrigerant transition across our home comfort solutions manufacturing facilities.

Chelsea Poulsen: 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.Lenox.com.

Speaker Change: We will continue to invest in information system advancements distribution growth initiatives at projects to improve customer service.

Speaker Change: Additionally, we expect to support growth initiatives by making investments in both sales and marketing.

Speaker Change: While we continue to focus on managing SG&A expenses, we do expect moderate inflation pressure in 2020.

Chelsea Poulsen: Now, please turn to slide three as I turn the call over to our CEO, Alok Mishra. Thank you, Chelsea. Good morning and welcome.

Speaker Change: Our guidance for capital expenditures is approximately $175 million. This includes final spending for the new commercial HVAC factory and the 2025 low Gw's refrigerate transition interest expenses are expected to be approximately $50 million in tax rate is estimated to be between 20%.

Alok Mishra: I'm proud to represent our 13,000 employees as we delivered another full year of record results. We are pleased with our 2023 growth, margin expansion, and, more importantly, cash generation. Our strong results were noteworthy given the unprecedented beef-stalking faced by residential HVAC manufacturers last year. I'm deeply grateful for our employees and our customers, whose hard work, loyalty, and dedication drove the results that we will be discussing today. I would like to begin by highlighting four key messages on slide three. First, we delivered $3.63 in adjusted EPS for Q4, an increase of 41% year over year. Adjusted EPS for the full year was $17.96, a 27% increase year-over-year.

Speaker Change: And 21%.

Speaker Change: All of these guidance items, we expect earnings per share to be within the range of $18 50 per share and $20 per share. Finally, we expect free cash flow to be within the range of 500 million to 600 million with that please turn to slide 12, and I'll turn it back over to Luke Bryan and overview of 2020 for business.

Conditions.

Josh Pokrzywinski: Thanks, Michael.

As we look forward to the coming year. It is important to recognize that while our transformation momentum has he did positive results we.

Josh Pokrzywinski: We are still facing challenges in the end market.

Josh Pokrzywinski: Within our home comfort solutions segment, the health of the consumer will remain a significant driver of demand and greatly influence the repair versus replace dynamic.

Alok Mishra: Our 2023 full-year results were also notable for 6% core revenue growth and a 300 Basis Point Expansion in Adjusted Segment Margin. In addition, our operating cash flow more than doubled compared to prior years.

Josh Pokrzywinski: We are mindful of consumer sentiment, especially in an election year and we will continue to track macro data for early indicators.

Josh Pokrzywinski: It is important to point out we have not yet noticed any meaningful shift from replace to repair.

Josh Pokrzywinski: EPA rulings have also introduced an element of uncertainty.

Alok Mishra: Second, we continue to invest wisely in manufacturing capacity, distribution optimization, technology transitions, and growth initiatives while maintaining our industry-leading ROIC of 44%. Third, while end market uncertainties linger, our transformation momentum sets a strong foundation and gives us confidence in our 2024 EPS guidance range of $18.50 to $20. Fourth, given the robust progress on the self-help transformation plan, we are pleased to increase our previously announced 2026 financial goals. Now, please turn to slide four for more details on the 2023 Self-Help Accomplishment.

Josh Pokrzywinski: Regarding industry inventory levels.

Josh Pokrzywinski: After our $4 54 be transition, we do not anticipate a large pre buy due to inventory fatigue in the channel and the increased cost of carrying inventories.

However, we do expect distributors to normalized inventory levels. This year as the channel returns to its usual ordering patterns.

Josh Pokrzywinski: We also expect ongoing benefits of the strategic pricing initiatives and potential share opportunity as Linux historically win share during regulatory transitions.

Josh Pokrzywinski: Turning our attention to building climate solutions.

Josh Pokrzywinski: Solid demand in 2024.

Josh Pokrzywinski: The data we have from a national account services business.

Josh Pokrzywinski: No that rooftop units each passed their historical averages and will need to be replaced soon.

Alok Mishra: In 2023, Lenox experienced significant success during the first phase of our self-help transformation plan. Our strategic initiatives allowed us to effectively navigate these talking challenges, which demonstrated our resilience and exceptional execution. This phase laid a solid foundation for future growth and positioned us to capitalize on further growth opportunities. We accelerated growth by strengthening our distribution muscle to better serve our existing customers, attract new customers, and increase our share of wallet from HVAC dealers. We are investing in our sales and stores teams to create greater alignment, accountability, and autonomy for improving the customer experience. To ensure resiliency, we implemented pricing excellence initiatives to recover margins from previously depressed levels, as many long-term key account contracts, which were signed before the recent inflationary period, came up for renewal. We also achieved higher factory output, enhanced productivity, and an optimized product mix. Together, these measures contributed to the overall margin expansion and strengthened our margin resiliency. Finally, to ensure consistent execution, we implemented a balanced scorecard-based operating system, which we refer to as the Lenox Unified Management System.

Josh Pokrzywinski: 2024 demand may be impacted if key accounts delay installs pending new our 454 beef product availability.

And markets May also faced challenges related to softening commercial new construction and project delays.

Josh Pokrzywinski: Ultimately our outlook for 2024 remains cautiously optimistic.

Josh Pokrzywinski: Dolby acknowledged the complexities of the market conditions in the coming year.

Josh Pokrzywinski: We trust that our proactive strategies focused on driving topline growth expanding our margins and consistently executing on our initiatives will continue to propel linux towards enhancing customer experience and shareholder value.

Josh Pokrzywinski: On the next slide I will go into more depth on each of the strategies as it relates to 2024.

Josh Pokrzywinski: On slide 13, I want to take a moment to revisit our sales transformation plan.

Josh Pokrzywinski: Which has been steering our current success.

Josh Pokrzywinski: As a reminder, this plan is structured around three phases over the next several years.

Josh Pokrzywinski: Now, let's dive into the specifics of our actions for 2024.

Josh Pokrzywinski: We will transition from the initial phase to the growth acceleration phase.

This year as pivotal as it sets the stage for the next wave of growth through strategic investments and focused actions.

First we are investing in our sales force to expand customer touch points enhancing the overall customer experience through digital innovations and anticipating improved output from our new commercial HVAC factory.

Alok Mishra: This system was instrumental in driving accountability and ensuring alignment with our strategic goals to accelerate revenue growth and expand margins. We also simplified our portfolio with the sale of the European businesses and improved our total life cycle value proposition with the recent AES acquisition. On the next slide, I will share more about how we fine-tuned our internal engine to ensure the success of the transformation plan and accelerate growth throughout the journey. FlyFive shows the five components that fueled Linux's success in 2023 and are building momentum that will continue to power Linux's bright future. At the heart of our transformation is our unwavering commitment to our vision and mission, which set the true north direction for everything we do.

Josh Pokrzywinski: Additionally, we aim to increase the attachment rate for parts and accessories, ensuring the holistic experience for our customers.

Josh Pokrzywinski: Second we are committed to driving resilient margins.

Josh Pokrzywinski: This involves maintaining pricing excellence leveraging greater productivity from volume recovery.

Josh Pokrzywinski: Realizing material cost reduction and reaping the mix benefits of transitioning to the new <unk> hundred 54 B product.

Josh Pokrzywinski: These actions collectively fortify our financial position and solidify our sustainable competitive advantage.

Josh Pokrzywinski: Lastly, we will leverage the Lennox unified management system to streamline our operations and set clear priorities.

Josh Pokrzywinski: Our focused strategy invest.

Josh Pokrzywinski: Investment in heat pump crude and enhancement to our distribution network further exemplify our commitment to consistent management execution.

Alok Mishra: Aligning our efforts towards a shared goal and moving outwards. The strategy to great will deliver accelerated growth, resilient margins, execution consistency, an advanced technology portfolio, and talent and culture that help us win every day. Next is the commitment to our customer charters. Emphasizing our dedication to always being a partner of choice by delivering exceptional customer experiences and quality solutions. Another crucial element to our outstanding performance was the implementation of our Linux Unified Management System.

2024 is a year of purposeful actions that will propel us into the growth acceleration phase.

Josh Pokrzywinski: Lay the groundwork for our journey into the expansion phase.

Josh Pokrzywinski: I am confident that with our collective dedication and strategic approach. We are not just following our plan we are shaping our future success.

Josh Pokrzywinski: Now please turn to slide 14 for an update on our long term financial goals.

Josh Pokrzywinski: It has been just over a year since we introduced our 2026 goes.

Josh Pokrzywinski: And are confident that our execution is ahead of schedule, even though market uncertainties persist.

We are pleased that burden climate solutions has achieved record margins and at home comfort solutions demonstrated margin resiliency, even while facing significant volume headwinds.

Alok Mishra: We are utilizing balanced scorecards to drive accountability, integrating standard processes and best practices, and aligning operating cadence for efficiency. This represents our commitment to a unified approach that enables Lenox to shift into a higher gear and outperform competition. Lastly, our core values and guiding behaviors serve as the foundation of our high-performance growth culture with a passion for improving the customer experience. Last year, we rolled out nine guiding behaviors that improved the team's focus on critical behaviors such as positive engagement and sustainability.

Josh Pokrzywinski: With this year's achievements, we recognize the need to adjust our long term goals.

Josh Pokrzywinski: To better reflect our current positions.

Josh Pokrzywinski: For 2026, we are now targeting revenue of $5 $4 billion to $6 billion.

Josh Pokrzywinski: With total company target margins.

Josh Pokrzywinski: Range of 19% to 21%.

Josh Pokrzywinski: Our free cash flow conversion target is approximately 90% as we complete the necessary investments to support our growth.

Josh Pokrzywinski: We are increasing the long term target for whom comfort solutions to a range of 20% to 22% or less.

Alok Mishra: These five components not only helped us build momentum on a self-help transformation this year but also act as a springboard to continue our long-term journey of growth and expansion. Before we move into the detailed financial section, allow me a few moments to express my gratitude to our outgoing CFO, Joe Reitmeier. I am thankful for Joe's years of service to Lenox, and I'm especially grateful that he stayed with us to train me, the new CEO, and to oversee a smooth transition to a new CFO, Michael Kuenzer. Now, for the last time, on an earnings call, let me hand the call over to Joe. Thank you, Luke.

Josh Pokrzywinski: And building climate solutions to a range of 22% to 24% Rois.

Josh Pokrzywinski: Now for a wrap up please turn to slide 15 for the reasons I continue to believe that <unk> is a great investment opportunity.

Josh Pokrzywinski: Lennox operates and growth end markets.

Josh Pokrzywinski: And margins demonstrates execution consistency and service customers through advanced technology and high performance talent.

The final reason, we remain confident in our.

Josh Pokrzywinski: Our ability to deliver strong results are.

Josh Pokrzywinski: First we will continue to make strategic growth investments to improve our go to market effectiveness and support consumer demand.

Joseph William Reitmeier: And greetings to everyone joining us this morning as we announce Lennox's record-setting performance and outlook. I've had the pleasure and privilege of serving as Lenox's Chief Financial Officer during a period of transformation and record-setting achievement. Portfolio changes enabled a more intense focus on our key North American end markets, and the team introduced new and innovative solutions.

Josh Pokrzywinski: Second.

Josh Pokrzywinski: Our margins remain a focus.

Josh Pokrzywinski: We continue to evaluate our pricing strategy.

Josh Pokrzywinski: Implement innovative solutions to increase productivity.

Josh Pokrzywinski: <unk> optimized our direct to dealer network.

Hurt by leveraging the Lennox unified management systems.

Josh Pokrzywinski: Our teams will be able to streamline processes leverage best practices and consistently deliver strong results.

Joseph William Reitmeier: We delivered on initiatives that drove significant increases in profitability and that, coupled with efficient capital allocation, resulted in industry-leading returns on invested capital. We fortified the balance sheet, and, most significantly, we generated exponential increases in returns for our shareholders. Now, before I hand it off to Michael, I'd like to reflect briefly on 2023.

Josh Pokrzywinski: The fourth aspect reflects our continued technology advancements that insured Lennox will remain at the forefront of innovative solutions for our customers.

Josh Pokrzywinski: Finally.

Josh Pokrzywinski: The introduction of a guiding behavior enhance our team's focus on core values and fortified our high performance culture.

Joseph William Reitmeier: It was another year of exceptional performance, sustaining industry-leading innovation and enhancing our capabilities to better serve our customers. Now, while I'm extremely proud of my time with such a great organization that has accomplished so much, I take even greater pride knowing that I'm leaving an extremely talented and seasoned team that is very well positioned both strategically and financially for long-term success. I'd like to wrap up my comments with a sincere thank you to all Lenox employees, our valued customers, the investment community, and other stakeholders for your partnership over the years. I'll now hand it over to Michael, who will take you through the details of Lenox's financial performance and outlook. Michael, take it away!

Josh Pokrzywinski: Our refreshed.

Josh Pokrzywinski: Our performance incentive structure.

Josh Pokrzywinski: <unk> aligned the talent of our team and the interest of our stakeholders.

Speaker Change: Allow me to wrap up by saying, thank you to each of our <unk>.

Speaker Change: Dedicated employees and valued customers I.

Speaker Change: I am proud for what we were able to accomplish this past year.

Speaker Change: And I am looking forward to the promising future that lies ahead of Linux.

Speaker Change: As our best days are still ahead of us.

Speaker Change: Thank you.

Speaker Change: We'll now be happy to take questions.

Speaker Change: Easy questions can go to Michael and I and the harder questions should go to Joe Reitmeier.

Michael Kuenzer: Thank you. Thank you, Joe. Good morning, everyone.

Speaker Change: Okay.

Speaker Change: Operator, let's go to Q&A.

Michael Kuenzer: Please turn to slide six. As Loke mentioned earlier, 2023 has been a record year, and the fourth quarter was no exception. Core revenue, which excludes our revenue operations, was $1.1 billion, up 7% as price and mix throughout the year-over-year improvement. The Johnson Segment Profit increased $44 million at $69 million of price and mixed benefits were partially offset by inflation and investment in SG&A distribution. Total adjusted segment margin was 15.9%, 320 basis points higher than for his prior year. For the fourth quarter, corporate expenses were $30 million, a decrease of $3 million.

Speaker Change: Thank you at this time, if you would like to ask a question. Please press the star and one on your Touchtone phone.

You may remove yourself from the queue at any time by pressing star to once again that is star one to ask a question.

Speaker Change: We will pause for a moment to allow questions to queue.

And we'll take our first question from Jeff Hammond with Keybanc capital markets.

Hey, good morning, everyone, Joe look forward to seeing in Cleveland look me up.

Jeff Hammond: Just Jeff just on a just on margins.

Michael Kuenzer: Our fourth-quarter tax rate was 20%, and diluted shares outstanding were $35.8 million compared to $35.6 million in the prior-year quarter. The fourth quarter achieved record levels of revenue, segment profit, and adjusted earnings per share, which grew by 41% to $3.63. Let's shift our focus to slide seven and review the financial results of our Home Comfort Solutions segment, formerly referred to as the residential segment. The left graph shows revenue grew 1% to a record $709 million in the fourth quarter.

Jeff Hammond: Yes, I'm just trying to think about the puts and takes that you've got some.

Profit Incrementals on the left of Slide 11, and then you talked about a number of headwinds I'm just wondering if you could put in.

Jeff Hammond: A finer point on just overall incrementals embedded in the guide and maybe how to think you know more more five point.

Jeff Hammond: How much this refrigerant inflation.

Jeff Hammond: Manufacturing efficiencies are going to cost similar to how you did for the factory ramp up costs. Thanks.

Jeff Hammond: So on the left hand side, you can see our contribution margins and then the right hand side is the increase related to rate for card losses as well as investments you have to join this two together to really see the full impact, but we do expect some margin improvement for the enterprise next year. When you look at those two combined.

Michael Kuenzer: This segment benefited from a favorable mix of higher-efficiency products and effective pricing execution, although this was partially offset by volume decline. Although unit sales volumes for the segment declined by 5%, our direct-to-contractor sales volumes remain stable, signaling a resilient consumer demand landscape. Unit sales volumes through independent distribution channels declined more than 20% driven by continued industry destock.

Jeff Hammond: Our component costs are a big piece of our cost of gets older nearly 45% of them Refrigerants also gonna go up significantly so most of that pricing should be there to maintain our current gross margins and then we'll get a bit of leverage on the volume and a little bit of leverage on the acquisition as well, but overall, we do expect margins to be up just.

Michael Kuenzer: Home Comfort Solutions' profit decreased approximately 4% to $115 million, and segment margin also experienced a decline of 70 basis points to 16.2%. The decrease was attributed to a $9 million decrease in sales volumes and $25 million impact from inflation and investments in distribution and selling. Moving on to slide eight, we will now review the performance of our Building Climate Solutions segment, formerly referred to as the Commercial segment. The segment continues to consistently deliver outsized performance each quarter, resulting in another quarter of record revenue and profit. Revenue was $390 million in the quarter, up 19%.

Not 300 basis points like we saw in 2023.

Yes.

Speaker Change: Okay and then.

Speaker Change: Can you just talk about your inventory destock process with respect to your company owned distribution and just.

Speaker Change: Dependent channel.

Speaker Change: Where are you at or what are they telling you in terms of how much more to go on destock.

Speaker Change: Sure I'll take that Jeff.

Jeff Hammond: Good morning on our own internal.

I always think we can get more working capital improvements, but I think we are reaching a level, especially given the upcoming <unk> transition, but I think the levels are going to be relatively flat, we might have to build up some towards the second half of 2024 and that's embedded in the guide just to ensure a smooth transition on the independent channel.

Michael Kuenzer: Combined price and mix were up 11%, and volume was up 5%. Building Climate Solutions' profit was $91 million, or up 98%, and the segment margin expanded 930 basis points to 23.2%. These results were primarily driven by price and sales volume gains. The team's execution of several self-help initiatives aided in the recovery of previously depressed profit margins. These initiatives include price correction and enhanced factory productivity. Strengthens Supply Chain Resiliency. The AES acquisition also played a role in the growth during the quarter. The integration is progressing smoothly, with existing Linux customers showing interest in the AES full lifecycle value proposition.

Jeff Hammond: I mean honestly the Destocking in Q4 was more than we expected.

Jeff Hammond: And we do think theres going to be some destocking happening in Q1, especially on product line.

Jeff Hammond: Whether thats impact of weather in all we don't know, but I think from overall.

Jeff Hammond: We do expect some destocking bleeding into Q1, but remain confident that by second half or Q2.

Jeff Hammond: Independent channel distribution, Destocking will be largely behind us, especially as the distributors get ready for <unk> transition and the EPA ruling allows them.

Jeff Hammond: Some sell through in 2024 as well so lots of moving pieces.

Michael Kuenzer: Ultimately, the fourth quarter continued the year's momentum and resulted in a strong finish to 2020. If you will now turn to slide 9, I will recap the full year Linux results. For full year 2023, core revenue, excluding European operations, was $4.7 billion, up 6%. The adjusted segment profit increased to $180 million as $348 million of price and mixed benefits were partially offset by home comfort solutions, sales volume declines, as well as inflation and investment in SG&A distribution. Total adjusted segment margin was 17.9%, up 300 basis points from the first prior year, despite facing volume challenges in the residential end markets, inflationary pressures, and ongoing investment. Home Comfort Solutions that I went and achieved.

Jeff Hammond: But we've embedded all of that in the guide yes.

Okay, great. Thanks, guys.

Jeff Hammond: And we'll take our next question from Nigel Coe with Wolfe Research.

Nigel Coe: Thanks, Good morning, and congratulations Joe enjoy your retirement.

Nigel Coe: So I'm not sure whether it's a tough question or not but.

Nigel Coe: Just on the I think maybe on the back of Jeff.

Nigel Coe: Kind of a question of Incrementals, you've got price mix as a 90% incremental margin.

So just wondering how that plays into the mid single digits component inflation math, So I'm, maybe I'm just asking Jeff a question again, but if you just see mid single digit contribution from price mix with an iPad, an incremental you get to sort of a three to $4 EPS tailwind is that how you're thinking about it.

Michael Kuenzer: Revenue and profit growth through the successful execution of strategic pricing initiatives and the seamless transition to the new minimum SEER standard. The Building Climate Solutions segment also achieved impressive results in 2023. Healing supply chains and factory productivity played a key role in growing volumes in the second half of the year, and pricing execution helped the segment recover previously depressed profit margins from years of higher supply chain and production. Exceptional execution by both segments resulted in adjusted earnings per share growing to $17.96, setting a new record and representing a 27% increase compared to the prior year. Moving on to cash flow and capital deployment on slide two, operating cash flow for the quarter was $306 million compared to $132 million in the prior year quarter.

Jeff Hammond: Yeah I mean.

Jeff Hammond: It has to do is look at it it's predominantly price price drops to a 100% theres a little bit of mix that we'll get from the carryover benefit from the minimum share transition so that will kind of drop through at 30%. When you blend. The two together you kind of get to the 90.

Then that then cover some of the cost Inflations, we have on the right hand side, where we think our components are going to be up significantly both from the normal inflation mid single digits as well as the refrigerant, so that kind of offsets a lot of that which maintains your gross margins and then thereafter, we start to make investments in distribution and SG&A.

Jeff Hammond: We still see overall operating margins improving.

Jeff Hammond: Maybe a little less than 50 basis points within the guide okay.

Speaker Change: If I could add to that and I just keep in mind the factory inefficiencies both from the startup in South Korea, the commercial factory and farther into a conversion, but thats fairly massive transformation. We have to do every line has to be redone.

Michael Kuenzer: Capital expenditures were $125 million for the quarter, an increase of $91 million compared to the prior year. Net debt to adjusted EBITDA was 1.3 times, down from two times in the prior year. Our approach to capital deployment remains consistent. We will prioritize organic growth investments with strong returns. Grow Dividends with Earnings and continue to explore M&A opportunities and supplement with share repurchases when necessary. Lennox's industry-leading ROYC of 44% reflects our dedication to delivering value to our stakeholders. Through strategic and targeted investments, we not only aim to maintain our high ROIC but also aim to make necessary investments to elevate our performance and competitiveness in the marketplace. We anticipate the successful completion of our upcoming commercial HVAC factory, and production is slated to begin mid-year.

Speaker Change: The factory shutdown, so we baked in all of that so I understand your question. It just we got we baked in all of those inefficiencies in our guide.

Speaker Change: I get it although I understand that now and then just on the components inflation of mid single digits, and we talk to some of them appear motor manufacturers.

Speaker Change: Somebody exchange suppliers and it doesn't feel like the targeting mid single digit price increases.

Speaker Change: And then trying to enforce so just curious.

Speaker Change: Why are you, saying that a mid single digit price inflation and then maybe just talk about the off with 10, a what your expectations are in terms of that.

Speaker Change: That commodity inflation in 'twenty 'twenty four.

Speaker Change: Sure first of all if you give me the list of all those people that were telling you that we can go and negotiate you there okay.

Speaker Change: On that.

Love to get that Nigel but not most easily some of it comes down to the starting point in some cases on components. We did have long term contracts that are coming up for renewal. So EMEA escaped.

Michael Kuenzer: While overhead and wrap-up expenses pose known challenges in the first half of 2024, we anticipate the factory will realize productivity benefits in 2025. This facility plays a pivotal role in our sustained growth, enhancing our commercial production capacity by 25% by the end of 2024. It will allow us to better address consumer demand and recapture market share in the emergency replacement market. Now, let's transition to slide 11.

Speaker Change: Escaped some of the inflation in the past the other things you're going to see in the <unk> I mean, the spot pricing the contract pricing and where we are still a lot of moving pieces.

Speaker Change: But based on the production corridor reduction from EPA, we fully expect that have baked in inflation on <unk>.

Speaker Change: And overall the normal inflation is lower than before but it has not gone away.

Speaker Change: SG&A in any of the factors. So we've built all of that and as we looked at what's going to happen in 2024 for us when we do continue to see inflation in components, especially if our long term contracts come up for renewal.

Michael Kuenzer: Here I will provide an overview of our full-year financial guidance for 2024, another year of profitable growth. The chart on the left provides key growth drivers, with below we will provide additional comments on end markets later in the presentation, but sales volumes are expected to remain relatively flat, with a slight upward trend from building climate solutions growth and stable home comfort solutions and markets. The combination of price and mix is anticipated to contribute to a mid-single-digit growth in revenue. Price increases will sustain margins amid continued cost inflation, and a slight favorable mix is expected due to the 2023 minimum efficiency regulatory change. In addition to the profit drivers from revenue, we have listed key costs and investment assumptions on the right side of the slide.

Speaker Change: Alright, I'll email does supply a few offline okay. Thanks a lot.

Speaker Change: Thanks, guys.

Speaker Change: And we will take our next question from Tommy Moll with Stephens, Inc.

Good morning, and thank you for taking my questions.

Tommy Moll: Hi, Tony.

Tommy Moll: I wanted to start on price mix in your outlook.

Tommy Moll: For the year mid single digit contribution can you give us any sense of the phasing there I presume, it's going to contribute a little bit more to growth in the back half versus the second half.

Tommy Moll: And then if you think about what's the art of the possible here over the next two years look I think in the past you've said, 15%, 15% plus is a good bogey to use for for where we'll land by the end of 2025, but I Wonder if you could just refresh us there and are you any more or less confident on that outlook.

Michael Kuenzer: Component cost inflation is expected to be up mid-single digits, including large increases in our cost to acquire our 410A refrigerator. We expect this to be partially offset by the material cost reduction program. We anticipate ramp-up costs of approximately $10 million for the new commercial HVAC factory along with additional costs associated with the refrigerant transition across our home comfort solutions manufacturing facility.

Speaker Change: Yeah. So I'll first answer the price here, we see that most of us starting to build in through Q2, Q3, and Q4 as we announced in Q1. It will take a look but it's hard to get that new price increase but in Q1 is where youll see the carryover benefit on the mix side from the minimums seer product will get the full year benefit of that.

Michael Kuenzer: We will continue to invest in information system advancements, distribution growth initiatives, and projects to improve customer service. Additionally, we expect to support growth initiatives by making investments in both sales and marketing. While we continue to focus on managing SG&A expenses, we do expect moderate inflationary pressure in 2020. Our guidance for capital expenditures is approximately $175 million. This includes final spending for the new commercial HVAC factory and the 2025 low GWP refrigerant transit. Interest expense is expected to be approximately $50 million, and the tax rate is estimated to be between 20% and 21%.

Speaker Change: Thank you.

Speaker Change: And I think Tommy on the overall, we stick to the 10% to 15% total pricing impact by 2025.

Tommy Moll: A large part of that is going to happen in 2025 as they can at 54 products starts getting launched towards the tail end or second half of this year. So we will see a lot more of that benefit next year. Then they will see this year, which is unfortunate because we can see some of the manufacturing inefficiencies this year as we transition to <unk>.

<unk> from 410 to $4 54 B.

Tommy Moll: A lot more of the benefits coming through.

Tommy Moll: Well this year.

Tommy Moll: Next year is when we start seeing those benefits, but our view and outlook has not changed on that and is glad to see that.

Michael Kuenzer: Incorporating all of these guidance items, we expect earnings per share to be within the range of $18.50 per share and $20 per share. Finally, we expect free cash flow to be within the range of $500 million. With that, please turn to slide 12, and I'll turn it back over to Alok for an overview of 2024 business conditions. Thanks, Michael. As we look forward to the coming year, it is important to recognize that while our transformation momentum has yielded positive results, we are still facing challenges in the end market. Within our Home Comfort Solutions segment, the health of the consumer will remain a significant driver of demand and greatly influence the repair versus replace dynamic. We are mindful of consumer sentiment, especially in an election year, and will continue to track macro data for early indicators. However, it is important to point out that we have not yet noticed any meaningful shift from replace to repair.

Others in the industry are also now catching up to that dynamic because of the extra cost of sensors and extra cost controls.

Tommy Moll: Extra cost that we're going to do as we look into <unk> capacity compressors. There's just a lot of extra cost that we must offset.

Tommy Moll: Okay.

Speaker Change: Good to hear and wanted to follow up with the question on M&A. There's another participant in the market that's talked about potentially turning loose of some assets begs. The question just about your appetite for M&A at this point or any any insight you might share there.

Speaker Change: Sure I expected that to be one of the first question I was surprised it was a third question on the call today.

Speaker Change: Doug.

Doug: Listen I'll start by saying a few things right first of all in the past even before my time.

Doug: And now it has been very clear that if there is an industry consolidation opportunity <unk> will like to participate and we are specifically named our company that we would like to participate.

Alok Mishra: EPA rulings have also introduced an element of uncertainty regarding industry inventory levels. Ahead of the R454B transition, we do not anticipate a large pre-buy due to inventory fatigue in the channel and the increased cost of carrying inventory. However, we do expect distributors to normalize inventory levels this year as the channel returns to its usual ordering pattern. We also expect ongoing benefits of the strategic pricing initiatives and potential share opportunity as Lenox historically wins share during regulatory transitions. Turning our attention to building climate solutions, we predict solid demand in 2024. With the data we have from our National Account Services business, we know that rooftop units are aged past the historical averages and will need to be replaced soon.

Speaker Change: That came on so let me just confirm that that view has not changed.

Speaker Change: We still believe that if there is an opportunity that <unk> will be a participant in that.

Speaker Change: Overall.

Speaker Change: When I look at it industry consolidation is good for quite a few reasons as we look at increased regulations as we look at dealer consolidation I think we can better serve our customers feel better look at technology to come to the consumer I think it gives us the right kind of investments that we can make to succeed so.

Speaker Change: I think it is going to be good.

Speaker Change: I would like to participate as and when things become clear and available.

Speaker Change: I don't want to comment specifically on any specific.

Speaker Change: And that can accompany in the news, but all I can tell you is that.

Speaker Change: We don't have to do this I mean, we are very confident in our own standalone strategy as well.

Speaker Change: We have sufficient scale to compete we are gaining share in respective segments. We have very good technology team and a great path forward. So I think that's kind of the balanced outlook on that is if there is an opportunity we would like to participate but we're also very confident on where we are positioned.

Alok Mishra: 2024 demand may be impacted if key accounts delay installs pending new R454B product availability. End markets may also face challenges related to softening commercial new construction and project delays. Ultimately, our outlook on 2024 remains cautiously optimistic. Do we acknowledge the complexities of market conditions in the coming years? We trust that our proactive strategies focused on driving top-line growth, expanding our margins, and consistently executing on initiatives will continue to propel Lenox towards enhancing the customer experience and shareholder value. On the next slide, I will go into more depth on each of these strategies as it relates to 2024. On slide 13, I want to take a moment to revisit our self-help transformation plan, which has been driving our current success.

Speaker Change: Yes.

Speaker Change: Thanks, Luke I appreciate the insight and I'll turn it back.

Speaker Change: Thanks Tommy.

Speaker Change: And we will take our next question from Julian Mitchell with Barclays.

Julian Mitchell: Hi, good morning.

Julian Mitchell: Thanks, Joe for all the help.

Julian Mitchell: Maybe.

Julian Mitchell: Our first question on the sort of.

Julian Mitchell: Cadence of earnings through the year as it can be kind of tricky looking at just pre COVID-19 seasonality apply or has something changed and we have the nuance of the Mexican plants in the refrigerant change. So are we assuming it's a kind of sort of you know.

Julian Mitchell: 50, 50 split first half versus second half earnings and then Q1 always seasonally low.

Julian Mitchell: And maybe just starting out the year with weak home comfort.

Alok Mishra: As a reminder, this plan is structured around three phases over the next several years. Now, let's dive into the specifics of our actions for 2024, where we will transition from the initial phase to the growth acceleration phase. This year is pivotal as it sets the stage for the next wave of growth through strategic investments and focused action. First, we are investing in our sales force to expand customer touch points, enhancing the overall customer experience through digital innovations, and anticipating improved output from a new commercial HVAC factory. Additionally, we aim to increase the attachment rate for parts and accessories, ensuring a holistic experience for our customers.

Julian Mitchell: Volume.

Speaker Change: Yes, I think I'd look at the revenue seasonality is it kind of 50, 50, Q2, and Q3 should be pretty similar kind of 30% of of the year. Each and then you have kind of Twentyish on Q1 and Q4 on the revenue guide that's similar to what we saw in 2023.

Speaker Change: Thanks, very much and then.

Speaker Change: If we're thinking about.

Speaker Change: Yes.

Speaker Change: The split within home comfort solutions for the year as a whole in terms of volumes how wide.

Speaker Change: Like vacation should they be in the direct to contract versus independent distribution, just trying to understand kind of how quickly that delta.

Narrows.

Speaker Change: After being very significant in the fourth quarter.

Alok Mishra: Second, we are committed to driving resilient margins. This involves maintaining pricing excellence, leveraging greater productivity from volume recovery, realizing material cost reduction, and reaping the mixed benefits of transitioning to the new R454B product. These actions collectively fortify our financial position and solidify our sustainable competitive advantage. Lastly, we will leverage the Linux Unified Management System to streamline our operations and set clear priorities.

Speaker Change: Sure I think overall, we expect that to get even by 2025.

Independent channel or the current.

Speaker Change: Distribution channel, we fully expect because the comps and the cost of inventory.

Speaker Change: The appropriate level increase in sales versus last year, we're not sure of the timing on when that stock given the comps and everything else, but we do think inventory levels and order patterns normalize and we will see a bounce back in our sales to the Chinese.

Speaker Change: Irrespective of what happens from the channel to the dealer.

Speaker Change: The dealer side, we were pleased with the resiliency that we saw although volumes are down they were better than most of us expected.

Alok Mishra: A focused strategy, investment in heat pump growth, and enhancement to our distribution network further exemplify our commitment to consistent management execution. 2024 is a year of purposeful actions that will propel us into the growth acceleration phase and lay the groundwork for our journey into the expansion phase. I am confident that with our collective dedication and strategic approach, we are not just following a plan; we are shaping our future success. Now, please turn to slide 14 for an update on a long-term financial goal. It has been just over a year since we introduced our 2026 goals, and we are confident that execution is ahead of schedule, even though market uncertainties persist. We are pleased that Building Climate Solutions has achieved record margins and that Home Comfort Solutions demonstrated margin resiliency even when facing significant volume headwinds. With this year's achievements, we recognize the need to adjust our long-term goals to better reflect our current position. For 2026, we are now targeting revenue of $5.4 billion to $6 billion, with a total company target margin of 19% to 21%. Our free cash flow conversion target is approximately 90% as we complete the necessary investments to support our growth.

Speaker Change: And that resilience it gives us comfort going into 2024.

Speaker Change: And we expect.

Speaker Change: Baked in sort of flat to down numbers on that.

Going into 2024, just because of all the chatter around repair replace interest rate election year.

Speaker Change: So far did not turn out to be true when we want to make sure. We put all of that and you guys decide assumptions.

Speaker Change: I'm showing that you can decide how you look at it as we focused on what we control.

Speaker Change: We know where we're going to win share through the transition and we are recovering our service levels nicely.

Speaker Change: That's helpful. Thank you.

Speaker Change: And we'll take our next question from Noah Kaye with Oppenheimer.

Noah Duke Kaye: Alright. Thanks.

Noah Duke Kaye: Essentially the one what drove the rebranding of the segments any functional difference to be aware of.

Noah Duke Kaye: No no folks sell different things to be aware of.

Noah Duke Kaye: Simplified from three to two we had some internal confusion going on between business unit named <unk> segment name. So we embarked on a new branding, which I guess the positive message overall <unk>.

Noah Duke Kaye: <unk>, we have not focused on.

Noah Duke Kaye: Building, our brand with dealers and consumers and they were just different confusion going on we simplified our websites we have huge investments in improving our customers' experience.

Producing new technology updating you on our E mail accuracy in our Linux Dot com. It is part of a big rebranding exercise. It was just about time.

Alok Mishra: We are increasing the long-term target for home comfort solutions to a range of 20% to 22% ROS and building climate solutions to a range of 22% to 24% ROS. Now, for a wrap-up, please turn to slide 15 for the reasons I continue to believe that Lenox is a great investment opportunity. You know, Linux operates in growth and markets, has resilient margins, demonstrates execution consistency, and serves its customers through advanced technology and high-performance talent.

Noah Duke Kaye: <unk> residential segment from business unit, but I wouldn't read anything more to it besides just simplifying our internal nomenclature.

Noah Duke Kaye: And better reflecting what we do.

Noah Duke Kaye: Because what was called commercial also had tiny brito refrigeration in there. So I do think the new names better reflect what we do and are more consistent with our.

Noah Duke Kaye: New branding guidelines.

Noah Duke Kaye: Okay.

Noah Duke Kaye: You talked about in your prepared remarks.

Noah Duke Kaye: Significant effort over this past year.

Noah Duke Kaye: Around the culture, you mentioned implementing more pay for performance.

Alok Mishra: The five reasons we remain confident in our ability to deliver strong results are: First, we will continue to make strategic growth investments to improve our go-to-market effectiveness and support customer demand. Second, our margins remain a focus as we continue to evaluate our pricing strategy, implement innovative solutions to increase productivity, and optimize our direct-to-dealer network. Third, by leveraging the Lenox Unified Management System, our teams will be able to streamline processes, leverage best practices, and consistently deliver strong results.

Noah Duke Kaye: Can you highlight what some of those major changes were functionally in terms of pay for performance what types of metrics, you're trying to incent people towards.

Noah Duke Kaye: The timing of when you did those and how you might expect that to impact.

Noah Duke Kaye: <unk> performance as we get into 'twenty quarter.

Speaker Change: Sure, let's start with the Mi and the highest level on the executive staff. So last year was the first year, where our short term incentives had a growth component revenue component to it so with 20% of our sharp STI now come from growth.

Speaker Change: And that just changed the mindset just to give an example, but lets take it down to a few levels embedded really matters. So if you think about sales incentive and compensation it used to be the other way around because only on revenue are not enough on profits and margins. So as we talked about accountability autonomy.

Alok Mishra: The fourth aspect reflects our continued technological advancements that ensure Lenox will remain at the forefront of innovative solutions for our customers. Finally, the introduction of our guiding behavior has enhanced our team's focus on core values and fortified our high performance culture. Our refreshed pay-for-performance incentive structure further aligns the talents of our team and the interests of our stakeholders. Allow me to wrap up by saying thank you to each of our dedicated employees and valued customers. I am proud of what we were able to accomplish this past year, and I'm looking forward to the promising future that lies ahead of Lenox, as our best days are still ahead of us. Thank you. We will now be happy to take questions. Easy questions can go to Michael and I, and the harder questions should go to Joe Reitmeier.

Speaker Change: And in deploying all of that in the sales force. We are now measuring our sales team more on profits more like a distributor would measure them.

Speaker Change: Or is it purely on revenue so that's going to have to switch on the most.

Speaker Change: Most senior level more focus on growth.

Speaker Change: On the street level more focus on profitability and profit margins.

Speaker Change: And that's a long journey because you know you can change these things overnight, especially if they're being seeped into the culture for many many years, but we are pleased with the early results.

Speaker Change: And fully prepared for the long term journey as we add technology.

Speaker Change: Finance scorecards and metrics driven behavior versus the storytelling behaviors, sometimes weeks to get there.

Speaker Change: Very helpful. Thank you.

Operator: Operator, let's go to Q&A. Thank you. At this time, if you would like to ask a question, please press the star and one on your touchtone phone. You may remove yourself from the queue at any time by pressing star 2.

Speaker Change: And we'll take our next question from Joe Ritchie with Goldman Sachs.

Joe Ritchie: Hey, guys. Good morning, and thank you jail for everything and have a great great retirement.

Joe Ritchie: Thank you Joe.

He's got a bit the myeloma space.

Jeff Hammond: Once again, that is the star and one to ask a question. We will pause for a moment to allow questions to queue, and we'll take our first question from Jeff Hammond with KeyBank Capital Markets. Hey, good morning, everyone.

Joe Ritchie: Yeah.

Joe Ritchie: Yeah.

Joe Ritchie: He said well deserved.

Joe Ritchie: So my question is for <unk> and Michael.

Speaker Change: It sounds like the implied <unk> guide is above where consensus is today and consensus is towards the high end of your full year guidance for the year. So I'm just trying to understand kind of like the conservatism that might be baked in to the low versus the high end. So any any color you want to provide there would be helpful.

Jeff Hammond: Joe, I look forward to seeing you in Cleveland. Look me up. Just on margins. I'm just trying to think about the puts and takes that you've got some, you know, profit incrementals on the left of slide 11. And then you talk about a number of headwinds.

Speaker Change: Sure I'll start and then Michael will jump it because we really did not consider consensus was giving guidance. If you don't give guidance by quarter, but here's what we did right. We laid out the volume assumptions on page 11. So you can look through that and that kind of brackets are lower than the high end all on the volume assumptions.

Michael Kuenzer: I'm just wondering if you could put a finer point on just overall incrementals embedded in the guide and maybe how to think, you know, more, more fine points on how much this refrigerant inflation, you know, manufacturing efficiencies are going to cost similar to how you did for the factory ramp-up cost. Yeah. So on the left-hand side, you can see our contribution margins. And then on the right-hand side is the increase related to rates for cost as well as investment. So you have to join those two together to really see the full impact.

Speaker Change: As we look at it Q1 is going to be a little weird because we get more mixed benefits as Michael said earlier, because last year, we still had.

Speaker Change: <unk> products.

Speaker Change: Some of the price increases go into effect in February for US as you saw along with the other competition. So you've got only half a quarter benefits on that.

Michael Kuenzer: But we do expect some margin improvement for the enterprise next year when you look at those two combined. Our component costs are a big piece of our cost of goods sold. They're nearly 45%.

Speaker Change: And seasonality will be similar to what we have seen unless there are any unusual weather patterns. So honestly with respect tons of time looking at quarter over quarter. We were just thinking of the longer term, where we're focused and drive that Michael what would you add to that.

Michael Kuenzer: And then refrigerant is also going to go up significantly. So most of that pricing should be there to maintain our current gross margins. And then we'll get a bit of leverage on the volume and a little bit of leverage on the acquisition as well. But overall, we do expect margins to be up, just not by 300 basis points like we saw in 2023. OK, and then

Michael Quenzer: We obviously don't give quarterly guidance, but generally when you look at the seasonality that should play out as we just talked about maybe a little bit more destocking as low talked about through the distributor business in Q1, and then starting to revert back up thereafter.

Michael Quenzer: But and then a little better production out of the commercial factory, maybe a little better volumes in Q1 for commercial as well.

Alok Mishra: Can you just talk about your inventory destock process, you know, with respect to, you know, your company-owned distribution and just on the independent channel? Where are you at or what are they telling you in terms of how much more to go on D-Stock? Sure. I'll take that, Jeff. Good morning.

Speaker Change: Got it Okay. That's helpful and I guess a lot of it.

Speaker Change: Just a follow up question to <unk>.

Speaker Change: M&A, maybe just remind everybody what your what your criteria for M&A would be in is if youre looking for.

Speaker Change: Potential deals in the space.

Speaker Change: What is your kind of appetite.

Alok Mishra: On our own internal, you know, I always think we can get more working capital improvements, but I think we are reaching a level, especially given the upcoming A2L transition, where I think the levels are going to be relatively flat. We might have to build them up some towards the second half of 2024. And that's embedded in the guide just to ensure a smooth transition. On the independent channel, you know, I mean, honestly, the destalking in Q4 was more than we expected.

Speaker Change: Take a broader internationally versus versus with the footprint that you have today, which is which is predominantly U S.

Speaker Change: I mean, I think from our perspective, we like where we are positioned let's start that like we think we are positioned in attractive market that happens to be in North America, but it could be somewhere else when what we look forward as attractive end markets, where we can win where we can succeed.

Speaker Change: We can generate the appropriate returns I don't think we exited Europe because of Europe, we exited because the margin profile was weak and we didn't think we were positioned to win there.

Alok Mishra: And we do think there's going to be some de-stalking happening in Q1, especially on product line access. Whether that's the impact of weather and all we don't know, but I think overall, we do expect some de-stalking bleeding into Q1, but remain confident that by the second half or Q2, you know, independent channel distribution de-stalking would be largely behind us. Especially as the distributors get ready for a transition and the EPA ruling allows them to sell through in 2024 as well, so lots of moving pieces. But we've embedded all of that in the guide.

Speaker Change: So.

Speaker Change: I don't want to make any specific.

Comment and rule anything in or out at this stage, but we will look at those things as how does it benefit our shareholders our repositioned to when.

Speaker Change: Does it create attractive opportunities for us versus share buyback at the end of the day, we have done very well and we'll continue to do well based on share buyback.

Speaker Change: We're going to look for markets, where we are positioned to win.

Alok Mishra: Okay, great. Thanks, guys. And we'll take our next question from Nigel Coe with Wolf Research. Thanks, good morning, and congratulations, Joe. Enjoy your retirement.

Speaker Change: Okay, great. Thank you guys.

Speaker Change: Yes.

Speaker Change: And we'll take our next question from Damian Cross with UBS.

Damian Cross: Hey, good morning, everyone.

Damian Cross: Good morning, David.

Nigel Coe: I'm not sure whether this is a tough question or not, but just on the back of Jeff's, you know, kind of question about incrementals, you've got price mix as a 90% incremental margin. So just wondering, you know, how that plays into the mid-single-digit component inflation math. So maybe I'm just asking Jeff's question again, but if you just see a mid-single-digit contribution from price mix with 9% incremental, you get to sort of a $3 to $4 EPS tailwind. Is that how you're thinking about it? Yeah, I mean, what you have to do is look at its predominantly price, which drops to 100%.

Damian Cross: Good morning look I wanted to ask you about your commercial outlook for this year you spoke to a lot of the pent up demand in the older installed base.

Damian Cross: Your.

Guiding the building comfort volume to up low singles could you, maybe just kind of parse that out.

Damian Cross: How youre thinking about planned replacement versus emergency in new construction.

Speaker Change: Sure. So I would tell you it's.

Speaker Change: Maybe a tale of two halves that it's quite a few moving pieces, but lets talk.

Speaker Change: Right.

Speaker Change: I mean, our order rate remains strong our backlog order doesn't matter, but in the short term backlog remains solid.

Michael Kuenzer: There's a little bit of mix that we'll get from the carryover benefit from the minimum share transition. So that will kind of drop through at 30%. When you blend the two together, you kind of get to 90%.

Speaker Change: Our sales team is pretty excited and we see no impact.

Michael Kuenzer: But then that then covers some of the cost inflation we have on the right hand side, where we think our components are going to be up significantly, both from the normal inflation rate of mid single digits, as well as the refrigerant. So that kind of offsets a lot of that, which maintains your gross margins. And then thereafter, we start to make investments in distribution and in SG&A, and we still see overall operating margins improving. I think it's maybe a little less than 50 basis points within the guide.

Speaker Change: Any other things that we read about whether it's Abi index and all that we do see some projects moving to the right.

Speaker Change: So we are a bit cautious as we go into it.

Speaker Change: We also as we talked about key accounts and a lot of enthusiasm around the <unk> hundred 54, b product and are somewhat concerned that maybe towards mid to late this year.

Speaker Change: Might say well I'll just wait for the <unk> hundred 54, b versus take the existing project. So that's kind of baked into us we looked at the guy.

Michael Kuenzer: Okay. And I think if I could add to that, Nigel, keep in mind the factory inefficiencies, both for the startup of the commercial factory in Saltier and for the E2M conversion, but that's a fairly massive transformation we have to do. Every line has to be redone.

Speaker Change: But different competing factors just to go back to it pleased with the correct order rate. Please with the current backlog please with our production output.

Speaker Change: Cited about just talk to your factory, even adding more toward output because we remain supply constrained versus demand constrained and they just wanted to reflect some of the noise slash what we see in the future is going construction and any weird air pocket that could come in if you look at 450 fuel transition.

Michael Kuenzer: We'll have people here at the factory shut down. So we baked in all of that. So I understand your question, it's just we baked in all of those inefficiencies in our. I get it. Oh, no. I understand that now.

Michael Kuenzer: And then just on the component inflation of mid-single digits, you know, we talked to some of the motor manufacturers, some of the heat exchange suppliers, and it doesn't feel like they're targeting mid-single digit price increases in 2024. So just curious, you know, where you're seeing that, you know, mid-single digit price inflation. And maybe just talk about the R410A, what your expectations are in terms of that commodity inflation in 2024. Joe Ritchie, Jeffrey Sprague, Deepa Raghavan, Jeffrey Sprague, Deepa Raghavan, Joe Ritchie, But based on the production quota reduction from EPA, we fully expect and have baked in inflation on 410A.

Speaker Change: Okay, great. Thank you.

Speaker Change: And.

Speaker Change: I guess just thinking about the overall industry outlook I know you said you think consolidation.

Speaker Change: It could be a good thing for the market.

Speaker Change: But you are expecting to kind of gain share I guess, one of my observations coming out of the ASR.

Speaker Change: It does feel like there's a bigger push in the U S. By some of these overseas players.

Speaker Change: I'm wondering if you're perhaps seeing any income increase.

Speaker Change: Competition are expected to maybe see some overtime.

Speaker Change: Okay.

Speaker Change: We saw that too and I'm, sorry, I missed you with EHR ratio, but like I went to all the booths and it was impressive on some of the overseas glass and the amount of money spent on the booth.

Alok Mishra: And overall, you know, inflation is lower than before, but it's not gone away, whether it's SGA or any of the factors. So we built all of that in as we looked at what's going to happen in 2024 for us. But we do continue to see inflation in components, especially if our long-term contracts come up for renewal. Great. I'll email those supplies to you offline, okay?

Speaker Change: The amount of money they spend in the booth was.

Speaker Change: Correlated to the market share in U S. It's probably more reflects their aspirations for the future.

Speaker Change: I think the overseas players have done very well it comes too many splits and vrs.

Speaker Change: But if it comes through traditional unitary products I think very few if any of them had any success.

Speaker Change: That's where the core U S market remains very very different.

Speaker Change: I know you know mini splits and all are still in single digits market share overall and had a tough year in 'twenty three.

Alok Mishra: Thanks a lot. And we'll take our next question from Tommy Moll with Stephen Zink. Good morning, and thank you for taking my question. Bye, Joey.

Speaker Change: So, but listen we are one of the only a VIP only unaffiliated player in U S. So we look at the international players bolt is a threat and as an opportunity.

Speaker Change: To be able to work with them to drive our joint market share in some areas, but we also look at it as a threat. So that's what we will look at it.

Tommy Moll: I wanted to start on price mix and your outlook for the year's mid-single-digit contribution. Can you give us any sense of the phasing there? I presume it's going to contribute a little bit more to growth in the back half versus the second half. And then if you think about what's the art of the possible here over the next two years, Elok, I think in the past you've said 15%, 15% plus is a good bogeyman to use for where we'll land by the end of 2025. But I wonder if you could just refresh us there and say whether you are any more or less confident about that outlook? Yes, so I'll first answer on the price.

Speaker Change: And but we were pleased with the interest we are getting on our hour and all new products that could EHR IV, we're pleased with.

Speaker Change: People excited about new production capacity, adding the emergency replacement products that we displayed and just general energy from our sales team on how robust the activity was it one of the highest attendance AHRI show attacks.

Speaker Change: Makes me more optimistic.

Speaker Change: On the economy than what I read in the newspapers.

Makes sense I appreciate that color best of luck.

Michael Kuenzer: We see that mostly starting to build in through Q2, Q3, and Q4. As we announced in Q1, it'll take a little bit of time to get that new price increase, but in Q1 is where you'll see the carryover benefit on the mixed side from the minimum SEER product. We'll get the full year benefit of that.

Speaker Change: And once again to ask a question. Please press star one.

Speaker Change: Take our next question from Deane Dray with RBC capital markets.

Deane Michael Dray: Thank you and good morning, everyone.

Alok Mishra: I think, Tommy, on the overall, we stick to the 10 to 15 percent total pricing impact by 2025. A large part of that is going to happen in 2025 as R54 products start getting launched towards the tail end or second half of this year. So we will see a lot more of that benefit next year than they will see this year, which is unfortunate because we'll see some manufacturing inefficiencies this year as we transition our line from 410 to 454B. But a lot more of the benefits coming towards the tail half of this year or early next year is when we start seeing those benefits. But our view and outlook have not changed on that, and I was glad to see that others in the industry are also now catching up to that dynamic. Because there's extra cost for sensors, there's extra cost for controls, there's extra cost that we're going to do as we look at the heat exchanger capacity, compressors, there's just a lot of extra cost that we must offset.

Deane Michael Dray: <unk>, maybe you could just expand on the comment.

Deane Michael Dray: The discussion on the new refrigerant.

Deane Michael Dray: Look I think you said youre not expecting.

A pre buy and I think you added the term there might be some inventory fatigue, just it's an interesting concept maybe you can expand on that please if I heard that correctly.

Speaker Change: Sure Hey, Adam and historically these transitions had a lot of <unk> biopharm, the independent channel, but because of the confusing EPA rulings that came out and sort of November December I think the channel is just a little concerned about the landing of obsolete products.

Speaker Change: Since they see them.

Speaker Change: Being pretty bad they may not feel the need higher interest rate works in that environment as well and the overall given how much inventory people were holding because of the CEO transition just two years ago because of the COVID-19 disruption a year ago. Some of the distributors are just working with us and saying why don't do you manage that for us.

Alok Mishra: Good to hear. I wanted to follow up with a question on M&A. There's another participant in the market that's talked about potentially turning loose of some assets. Begs the question just about your appetite for M&A at this point, or any insight you might share there. Sure. I expected that to be one of the first questions.

Speaker Change: Make sure your lead times are low and I can get it quickly and may not want to spend.

Speaker Change: Housing space.

Speaker Change: And as you build up now, but let's say if you are wrong.

Speaker Change: We will have upside in 'twenty, four and downside at 25, I mean over two year period, it normalizes anyway.

Speaker Change: So we will be prepared.

Alok Mishra: I'm surprised it was the third question on the call today. Listen, I'll start by saying a few things, right? First of all, in the past, even before my time... Lenox has been very clear that if there is an industry consolidation opportunity, Lenox would like to participate. And we have specifically named out companies that we would like to participate in if that came up. So let me just confirm that that view has not changed. We still believe that if there's an opportunity, you know, Lenox would be a participant in that. Overall, when I look at it, industry consolidation is good for quite a few reasons. As we look at increased regulations, as we look at dealer consolidation, I think we better serve our customers, and we better look at technology to reach the consumer. I think it gives us the right kind of investments that we can make to succeed. So, I think it's going to be good.

Speaker Change: People decide to have a pre buy but based on as we were looking at it we just said let's <unk>.

Speaker Change: Not baked any of that.

Speaker Change: Alright, Thats great context, I appreciate that and then second question just on the longer term targets the.

Speaker Change: Free cash flow at 90%. It seems like you are under promising there because this is not a capital intensive business.

Speaker Change: You should be by from our perspective closer to 100, and I know you've had a big capex push over the near term, but are you baking in more capacity expansion in that free cash flow conversion, but it just it just seems light versus what your potential is.

Speaker Change: That slide went through so many changes over the past 48 hours.

Speaker Change: We tried to give a range, we tried but listen if you're starting the year and you've got $175 million of Capex youre not going to reach 100, and a three year period right. I mean, just where we are below the long term I think we will get 200, if that some investments the.

Alok Mishra: We would like to participate as and when things become clear and available. I don't want to comment specifically on any specific company or news, but all I can tell you is that we don't have to do this. I mean, we are very confident in our own standalone strategy as well.

Speaker Change: The other main drivers as we grow revenue you could have net working capital of growth with that revenue.

Speaker Change: Capex should be closer to depreciation by 2025% in 2026, that's mostly related to just growing working capital with the revenue growth.

Alok Mishra: We have sufficient skills to compete, we are gaining share in respective segments, we have a very good technology team and a great path forward. So I think that's kind of the balanced outlook on that is there is an opportunity, we would like to participate, but we're also very confident on where we are positioned ourselves. Thanks a lot. I appreciate the insight, and I'll turn it back. Thank you for having me.

Speaker Change: What's the working capital that should help your working.

Speaker Change: Working capital sales target associated with that 90%.

Speaker Change: Upper teens, 15% to 20% like it's higher on our track Margo lower on the indirect side.

Speaker Change: The range is fine.

Margo: Yes, yes.

Margo: Overall.

Speaker Change: Well listen I mean, one thing is our cash flow, we don't do any adjustments right. I mean, this is always the checkbook balances.

Julian Mitchell: Thank you. Thank you. And we'll take our next question from Julian Mitchell with Barclays. Hi, good morning, and thanks, Joe, for all the help. Maybe just a first question on the sort of, you know, cadence of earnings through the year as it can be kind of tricky looking at, you know, does pre-COVID seasonality apply, or has something changed? And we have the nuances of the Mexican plant and the refrigerant change. So are we assuming it's a kind of sort of, you know, 50-50 split, first half versus second half earnings, and then Q1, you know, always seasonally low, and maybe you're starting out the year with weak home comfort? Yeah, I think I'd look at the revenue seasonality, kind of 50-50. Q2 and Q3 should be pretty similar, kind of 30% of the year each, and then you have kind of 20-ish on Q1 and Q4 on the revenue guide. That's similar to what we saw in 2023. Thank you very much.

Speaker Change: Great I appreciate all that color.

Speaker Change: Okay.

Speaker Change: And we'll take our next question from Ryan Merkel with William Blair.

Ryan Merkel: Hey, everyone nice quarter I had two questions first on the fourth quarter in terms of weather.

Ryan Merkel: Big of an impact with the mild winter and did you see any lift with the cold snap in January and then my second question is just on the cadence of commercial margins. It sounds like it might be up slightly year over year as the first half sort of down a little in the second half is up a little bit just any help.

Ryan Merkel: Yeah.

Speaker Change: Sure I'll, let Michael answer the second one and then I'll come back at the first ones to Micromanage go ahead, yes. So on the commercial margins you will see a little bit of a headwind, though on the factory ramp up in the first half, but we will get the benefit of the mix and a little bit of volumes, let's it should kind of neutralize each other so overall margins should be up in commercial but I think there'll be kind of flattish throughout the year with those two.

Michael Quenzer: Two elements.

Michael Quenzer: Adjusting against each other.

Alok Mishra: And then if we're thinking about, you know, the split within home comfort solutions, you know, for the year as a whole, in terms of volumes, how wide a bifurcation should there be in the direct to contractor versus independent distribution, you know, just trying to understand kind of how quickly that Delta, Narrows, you know, after being very significant in the fourth quarter. I think overall, we expect that to get even by 2025. I mean, in the independent channels or the distribution channels, we fully expect, because of comps and because the inventory gets to the appropriate level, an increase in sales versus last year. We're not sure of the timing on when that starts, given all the competitions and everything else.

Michael Quenzer: And I think the first question on weather I learned early in my career Ryan.

Michael Quenzer: Never ever.

Michael Quenzer: Talk about whether when you have a challenging number set to be delivered with basin. Like you know where we are yes, Q4, we had some of the.

Michael Quenzer: The warmest winter in that did negatively impact our daily order rates and we track. The same things you guys would track on average heating days and cooling days and yes, Q1 with a call Street, we have had a good stock based on as you would expect on the weather.

Speaker Change: But we don't know what tomorrow looks like our February looks like but both of your statements are correct Ryan.

Speaker Change: Got it thank you.

Speaker Change: And we will take our next question from Tim <unk> with Baird.

Tim: Hey, guys. Good morning, Thanks for the.

Tim: The entry here, Joe Congratulations and.

Alok Mishra: But we do think inventory levels and order patterns will normalize, and we will see a bounce back in our sales to the channel, irrespective of what happens from the channel to the dealer. On the dealer side, you know, we were pleased with the resilience that we saw. Although all volumes were down, they were better than most of us expected.

Tim: Think of working with you.

Tim: Just two quick ones for me.

Tim: First is.

Tim: You look at 25.

Tim: Just given the.

Tim: Transition kind of changing from I can't remember, if this EPA or <unk>.

Tim: Allowing the sell through would you expect to still sell through a fair amount of <unk> product next year through your own distribution.

Alok Mishra: And that resiliency gives us comfort going into 2024. And we expect and have baked in sort of, you know, flat to down numbers on that going into 2024. Just because of all the chatter around repair, replace, interest rate, election year, which so far has not turned out to be true. But we want to kind of make sure we put all of that together and let you guys decide. Here are some assumptions that you can decide how you look at them.

Tim: And then just a second question on the kind of longer term mixed benefits from <unk> I think <unk> said, 10% to 15.

Tim: Is that a change from what you said before or is it just kind of some rounding.

Tim: No I think the second one they just got a rounding because we give longer numbers, you'll get some benefit this year as well. So I was trying to portray what 2025 looks like right now that just rounding maybe I should just stop giving ranges and pick a central line like 15.

Alok Mishra: We focused on what we control, and we know we are going to win share through the transition. And we are recovering our service levels nicely. That's helpful.

Speaker Change: There you go.

Noah Duke Kaye: Thank you. And we'll take our next question from Noah Kaye with Oppenheimer. Alright, thanks. Here's a potentially easy one: What drove the rebranding of the segments? Any functional difference to be aware of?

Tim on the first well there is still some uncertainties and EP has not come up with the final rule. They are indicating some rules listen our preference would be not to me.

Tim: It broadens the based on currently the way it's written.

Tim: Ravi before is to make them for any products next year.

Tim: And that would be then impacting that 10% to 15% number because there will be some fortinet products they are going through the factories.

Alok Mishra: No, there is no functional difference to be aware of, you know; we simplified from three to two. We had some internal confusion going on between the business unit name and the segment name. So we embarked on a new branding, which I guess the positive message overall is that, as Lenox, we have not focused on building a brand with dealers and consumers, and there was just different confusion going on. We simplified our websites, and we have made huge investments in improving our customers' experience, introducing new technology, and updating. Even our email addresses are now Lenox.com. So it was part of a big rebranding exercise. It was just about time to differentiate residential segment from business unit, but I wouldn't read anything more into it besides just simplifying our internal nomenclature and better reflecting what we do, like because what was called commercial also had a tiny bit of refrigeration in there, so I do think the new names better reflect what we do and are more consistent with, like, you know, a new branding guideline, Aloka, as you talked about in your prepared remarks

Tim: <unk>.

Tim: Can repair outdoor units using new Fortinet products I know, it's a weird dynamic there so still waiting for some clarity on that.

Tim: Prefer not to make 454 not.

Tim: Before turning to our manufacturing efficiency and other reasons, but we are just at a stage that we got to see how the final rules plays out and how each of the state adopted to.

Speaker Change: Okay. Okay very good good luck on 24, thanks guys.

Speaker Change: Thanks. Thanks.

Speaker Change: We'll take our next question from Jeff Sprague with vertical research.

Jeff Sprague: Thank you good morning, and good luck, Joe two quick ones from me.

Jeff Sprague: Just back to kind of.

Jeff Sprague: M&A, maybe just a little bit of color on where your comfort zone is on leverage.

Jeff Sprague: I think you could just talk about kind of normal leverage targets before but the flex target.

Jeff Sprague: For something bigger that you'd be comfortable to work down from.

Joe: I think when the time is right, we'll have that discussion with the board.

Joe: Put it all together I think from our perspective nothing.

Alok Mishra: You mentioned implementing more pay for performance. Can you highlight what some of those major changes were functionally in terms of paper performance, what types of metrics you're trying to incent people towards, and the timing of when you did those and how you might expect that to impact, you know, behavior and performance as we get into 24? Sure. Let's start with me and the highest level on the executive staff.

Joe: And I would have to be an opportunistic discussion on something that's attractive to the company, but if it's attractive to our shareholders and we need to lever up.

Joe: The key question would be as we get back to our preferred elaborate.

Its range within a year or two I mean, thats, what our focus is going to be so you can do the math backwards right I mean as long as we think.

Joe: Real cash and then we can use that cash to get back to our <unk>.

Alok Mishra: So last year was the first year where our short-term incentive had a growth component or a revenue component to it. So 20% of our short STI now comes from growth. And that just changed the mindset.

Joe: Long term leverage goals with a couple of years I think we could make that work.

Joe: But in general Great rating is important to US right. I mean, we have not been LBO shop or anything else like that we'd maintain investment grade.

Alok Mishra: Just to give an example. But let's take it down to a few levels and where it really matters. So if you think about sales, incentives, and compensation, it used to be the other way around. It was only about revenue or not enough on profits and margins. So as we talked about accountability, autonomy, and in deploying all of that in the sales force, we are now measuring our sales team more on profits, more like a distributor would measure them, versus purely on revenue. So that's kind of the two switch. At the more senior level, more focus on growth, and on the street level, more focus on profitability and profit margins. And that's a long journey because, you know, you can't change these things overnight, especially if they have been seeped into the culture for many, many years.

Speaker Change: Understood and then just on Capex.

Speaker Change: Has the amount of Capex expected for the total program the new plant in otherwise changed I think you were talking about $150 million in Capex for 2024 previously and our now 175.

Speaker Change: I would just kind of getting through a faster maybe you could just provide a little additional color there.

Speaker Change: Yes. The total program is still the same we just have some additional capex that we have in 2024 to prepare for the new refrigerant products investments with tanks.

Speaker Change: New refrigerant lines within the factory that also come in this year.

Speaker Change: Our normal Capex when we're all through this $75 million to $100 million a year.

Speaker Change: Yeah with inflation, probably now closer to 100.

Alok Mishra: But we are pleased with the early results and fully prepared for the long-term journey as we add technology and... finance scorecards and metrics-driven behavior versus the storytelling behavior sometimes used to get there. Very helpful. Thank you. And we'll take our next question from Joe Ritchie with Goldman Sachs. Hey guys, good morning. And thank you, Joe, for everything. Have a great, great retirement. Thank you, Joe. He's got a big smile on his face if you've seen him here, you know. He should, he should.

Speaker Change: Thank you to closer to 100 hundred 10, not 75% to Andre just growth and maintenance built into that drives maintenance might be $75 80.

Speaker Change: To support growth, probably a little more so I would say, it's north of 100.

Speaker Change: Great. Thanks, I'll leave it there.

Speaker Change: We'll take our next question from Steve Tusa with Jpmorgan.

Speaker Change: Okay.

Steve Tusa: Hi, Good morning, guys. Thanks for fitting me in.

Steve Tusa: Thanks, Steve Hello.

Steve Tusa: Yes, I missed you at AHRI I'd say attendance.

Steve Tusa: Of investors was also at a record, which maybe inversely correlated to multiples someday, but we'll see.

Steve Tusa: I'm, sorry, just on Florida.

Steve Tusa: On Friday at a different company booth, but youre holding a good audience I didn't interrupt but.

Joe Ritchie: Well deserved. So my questions for Alok and Michael, it sounds like the implied one-cue guide is above where consensus is today, and consensus is towards the high end of your full-year guidance for the year. So, like, I'm just trying to understand kind of like the conservatism that might be baked in to the low versus the high end. So any color you want to provide there would be helpful.

Steve Tusa: Yes.

Steve Tusa: Yeah, Yeah yeah.

Steve Tusa: Lots of great detail, so that show for sure.

Steve Tusa: Just on the on the price capture dynamics I think you guys had talked about doing some midyear price increases this year Youre capture was in the fourth quarter around 2% could you maybe just talk about how.

Alok Mishra: Sure, I'll start and then Michael will jump in. Guys, we really did not consider consensus giving guidance, and we don't give guidance by quarter. But here's what we did, right? We laid out the volume assumptions on page 11.

Steve Tusa: What types of things you were doing at midyear and what your kind of net realization wasn't how that waterfall works.

Speaker Change: Sure I'll start so I think the overall I'd like to talk about price increases we talked about doing residential new construction price increase in middle of 2023.

Alok Mishra: So you can look through that, and those kind of brackets are the low end and the high end, all on the volume assumption. As we look at it, Q1 is going to be a little weird because we get more mixed benefits, as Michael said earlier, because last year we still had old SEER and new SEER products. Some of the price increases go into effect in February for us, as you saw, along with the other competition, so you get only half the benefits of that, and seasonality will be similar to what we have seen unless there are any unusual weather patterns. So honestly, we didn't spend tons of time looking at quarter over quarter. We were just thinking of the longer term where we are focused and should try that. Michael, what would you add to that?

Speaker Change: That did go ahead as expected.

Speaker Change: And as we looked at the overall drop through that is above what we expected maybe a shade worse than we expect it to be honest and I think that just came out of the mix between residential new construction the seasonality baked in there not a whole lot of RMC gets shipped towards end of Q4 timeframe. So from that perspective that win.

Speaker Change: We expected.

Speaker Change: We have the key account price increases going into effect this year.

Mostly early this year and we know we announced a price increase broader walk into.

Alok Mishra: Yeah, I would just add, we obviously don't give quarterly guidance, but generally, when you look at the seasonality that should play out, as we just talked about, maybe a little bit more destocking, as Alok talked about through the distributor business in Q1 and then starting to revert back up thereafter. But and then a little better production out of the commercial factory, maybe a little better volumes in Q1 for commercial as well. I got it.

Speaker Change: Into effect in February so all the pricing actions that we've talked about is gone as we had expected we remain comfortable on where we are.

Speaker Change: And it's been good to see that the whole industry moving in that direction as well.

Speaker Change: And I guess just on a unit basis your.

Speaker Change: What was the actual revenue for the captive.

Speaker Change: Business in fourth quarter, and what was the.

Joe Ritchie: Okay, that's helpful. And I guess, a little follow-up question on M&A. Maybe just remind everybody what your criteria for M&A would be and if you're looking for, you know, you have potential deals in the space. What is your kind of appetite to go broader internationally versus, versus the footprint that you have today, which is, which is predominantly US?

Speaker Change: Putting parts aside what was the unit volume.

Speaker Change: So that business the captive resin business.

Speaker Change: Yes, total revenue through distributors was down high to mid teens, and then direct was up high single digits for Q4.

Speaker Change: So your unit volume in Q4 for that business was actually up.

Speaker Change: Correct low single digits.

Speaker Change: One last one just on the on the new way to El product. When his first call for you guys and whats your when will you be able to actually ship that product when will the distributors like see the specs in a physical product like what's the what's kind of the schedule of that of that rollout just on the ground.

Alok Mishra: You know, I think from our perspective, we like where we are positioned. So let's start that like, you know, we think we are positioned in an attractive market. That happens to be North America, but it could be somewhere else.

Alok Mishra: I mean, what we look for are attractive end markets where we can win, where we can succeed, where we can generate the appropriate returns. I don't think we left Europe because of Europe. We exited because the margin profile was weak and we didn't think we were positioned to win there. So I don't want to make any specific comments and rule anything in or out at this stage, but we will look at those things as how they benefit our shareholders. Are we positioned to win? Does it create attractive opportunities for us versus shared buyback? At the end of the day, we have done very well and will continue to do well based on the shared buyback. But I mean, we're going to look for markets where we are positioned to win. Okay, great. Thank you, guys. And we'll take our next question from Damien Cross with UBS. Hey, good morning, everyone.

Speaker Change: <unk>.

Speaker Change: Sure. So I think with our key distributors. They are already seeing the spec we already going through the training and all of that first physical product probably comes out in the second half of this year and we will start with sort of the high end products and I think the consumer's appetite for going to our 54 b is going to be more and faster and then we will slowly.

Speaker Change: The transition towards the lower <unk> in the lower end products. So let's start with the hiring towards the middle of the year.

Speaker Change: We are on track or ahead of schedule on each of those things. We don't expect any of our 454, b, but meaningful sale can be pulled on a showcase on a display booths in first half of this year, yes.

Speaker Change: But for somebody to actually place <unk> bye.

Speaker Change: Second half of this year.

Okay, great. Thanks, a lot.

Damien Cross: Morning, David. Morning. Morning, I wanted to ask you about your commercial outlook for this year. You spoke to a lot of pent-up demand and the older installed base. Your, Guiding the Building Comfort Volume to Upload Singles.

Speaker Change: Okay.

Speaker Change: And we'll take our next question from Joe O'dea with Wells Fargo.

Joe Ritchie: Hi, good morning.

Joe Ritchie: On the AR.

Joe Ritchie: Kind of commercial mix can you just talk to how what percentage of the mix was emergency replacement in 2023, and how youre thinking about that stepping up in 2024.

Alok Mishra: Could you maybe just kind of parse that out? How you're thinking about planned replacement versus emergency and new construction. Sure. So I'll tell you, it's maybe a tale of two halves, and there are quite a few moving parts, but let's start with the positives, right? I mean, our order rate remains strong. Our backlog also doesn't matter. But in the short term, our backlog remains solid. Our sales team is pretty excited. And we see no impact of any of the things that we read about, whether it's the ABI index and all that.

Joe Ritchie: Normalized is maybe something like 30%, but I think still on sort of a migration towards normal.

Joe Ritchie: Yes.

Speaker Change: Yes. So you know listen we were close to zero I think we had double digit in 'twenty three in terms of starting to get to emergency replacement barely I would say high single digit double digits.

2023, and that includes both our direct ongoing some through our distribution partners.

Speaker Change: And we still think there's a lot of room ahead, we probably won't move that needle until bill comes in and production in the second half of this year. So I expect us to hover in high single digits low double digits on total retail comes online.

Alok Mishra: You know, we do see some projects moving to the right, so we are a bit cautious as we go into them. We also, as we talk about key accounts, find a lot of enthusiasm around the R454B product and are somewhat concerned that maybe towards mid to late this year, they might say, well, I'll just wait for the 454B versus take the existing product. So that kind of baked into us; we looked at the guide for different competing factors, just to go back to it. I'm pleased with the current order rate, pleased with the current backlog, pleased with our production output, excited about the saltier factory, even adding more to our output because we remain supply constrained versus demand constrained. And they just want to reflect some of the noise slash what we see in the future is slowing construction and any weird air pocket that could come in if you look at the 450 fuel transition.

Got it and then what are your thoughts on when we think about the residential side and the direct demand sounds like trended better than anticipated in 2003.

Speaker Change: Indirect sort of worse and so how do you align those two things as your assessment that channel inventory is just sooner than historical averages.

Speaker Change: Why would direct trend better than indirect destock headwinds trend worse.

Speaker Change: Yes.

Speaker Change: Listen as we talk to our distribution partners and we're very close to them is that the channel inventory.

Speaker Change: <unk> talked and we talk and yes, with the EPA ruling and then everything the tunnel essentially froze.

Speaker Change: Q4, especially they are worried that.

Alok Mishra: Okay, great, thank you, and, I guess just thinking about the overall industry. Alok, I know you said that consolidation could be a good thing for the market, but you're expecting to gain share. I guess one of my observations coming out of the AHR is that it does feel like there's a bigger push in the US by some of these overseas players.

Speaker Change: Why I remember the fear was that you would not be able to sell <unk>, Florida unless it was replacement starting December 22024, So I think that ruling created just freeze mentality in our China, which I'm glad EPA issued some clarification and coming up with final ruling, but you know that.

Speaker Change: Direct business holding up better than we thought it was actually a positive I mean, which means the consumer has been resilient and we will.

Alok Mishra: I'm wondering if you're perhaps seeing any increased competition or expect to maybe see some in the future. You know, we saw that too, and I'm sorry I missed you at the HRI show, but I went to all the booths, and it was impressive, on some of the overseas players, on the amount of money they spent on the booth. I'll tell you, the amount of money they spent in the booth was uncorrelated to market share in the U.S. It probably more reflected aspirations for the future. I think the overseas players have done very well when it comes to mini splits and VRF.

Speaker Change: Please be that resiliency now in.

The CEO of <unk> I also think we gained share so thats something we will watch out Florida numbers normally it's hard to figure out share dynamics right now.

Speaker Change: Given things are unclear on how much of it is us winning share and how much is the fact that we are going direct but I went from numbers that we see I mean, we gained a lot of shares we just need to figure out how much of that is traditionary versus rail and I'll just add on the direct side, we executed very well on the minimum seer transition.

Speaker Change: Got it thank you.

Alok Mishra: But if it comes to traditional unitary products, I think very few, if any, of them have had any success, and that's where the core U.S. market remains very, very different. And I know many splits, and all are still in single-digit market share overall and had a tough year in 23. So, but listen, we are the only unaffiliated player in the U.S.

Speaker Change: We will take our next question from Tom.

Speaker Change: Tom Carter with TD Cohen.

Tom Carter: Hey, good morning, and congrats Joe and Michael.

Tom Carter: Thanks.

Tom Carter: Thank you.

Wanted to ask about the IR ray and how well defined it as in the states in terms of the tax rebate.

Alok Mishra: So we look at the international players both as a threat and as an opportunity, to be able to work with them to drive our joint market share in some areas, but we also look at it as a threat. So that's the way we look at it, and we were pleased with the interest we are getting on our own new products, like at AHRI. People were excited about the new production capacity we're adding, the emergency replacement products that we displayed, and just general energy from our sales team on how robust the activity was. It was the highest attendance AHRI show has had, which kind of makes me more optimistic about the economy than what I read in the newspaper, makes sense. I appreciate the color.

Tom Carter: IRA has become such a topic for the past 12 months with very little to show for it.

Tom Carter: Stop banking on one aspect of IRS, which was through the.

Tom Carter: <unk> tax credits that kind of flowing through in some cases, some states are renewing it on their own.

Tom Carter: I don't think any of US saw the big impact we were expecting from <unk>, but they are starting to see drip Center goes if the government really gets their act together and figured out this whole.

Tom Carter: Income qualification criteria to get the Rfps.

There's no practical way to do it for a dealer right now than I do think Theres upside left.

Tom Carter: We are not counting on it right now, especially given the election year I don't know if the government will put this as a priority to figure that out with the state governments at dealers and how to make that work, but the rest of it got us slowly dripping dripping it soon.

Alok Mishra: That's a lot. And once again, to ask a question, please press star 1. We'll take our next question from Deane Dray with RBC Capital Markets. Thank you. Good morning, everyone.

Tom Carter: Gotcha.

Tom Carter: Given the the.

Tom Carter: Confusion I guess.

Phase in of the.

Deane Michael Dray: Good morning, Dean. Hey, maybe you could just expand on the comment, a lot of discussion about the new refrigerant and, look, I think you said you're not expecting a pre-buy, and I think you added the term there might be... Inventory Fatigue. It's an interesting concept. Maybe you can expand on it, have I heard that? Sure. I mean, historically, these transitions had a lot of pre-buyers from the independent channel. But because of the confusing EPA rulings that came out in sort of November and December, I think the channel is just a little concerned about landing up with obsolete products. And since they see the manufacturers being pretty prepared, they may not feel the need. Higher interest rates work in that environment as well. And overall, given how much inventory people were holding because of the SEER transition just two years ago, because of the COVID disruption a few years ago, some of the distributors are just working with us and saying, "Why don't you manage that for us?" Make sure your lead times are low, and I can get it quickly.

Tom Carter: New refrigerant resin systems in 2005.

Tom Carter: What are your updated thoughts.

Tom Carter: Expectations for pricing.

Tom Carter: Over the next two years average pricing of a policy we've talked about.

Something like 15 for solves also deploying to new levels.

Tom Carter: Do you think thats still valid or.

Tom Carter: Do you think it's lower now, yes, that's still valid.

Tom Carter: No that is still valid I think thats still just working through the entire process.

Tom Carter: Comment earlier.

Tom Carter: It might be getting some of that this year, especially at the <unk> numbers that we talked about this year, but at that number over two years two okay got it.

Tom Carter: Okay.

Tom Carter: And given the.

Tom Carter: The potential slowdown in unitary that you mentioned.

What we're seeing in Brazil have you seen any evidence anywhere in the industry.

Tom Carter: <unk>.

Intensified price competition or is everyone.

So just getting pushing through price and getting that.

Tom Carter: It's more the latter on overall basis, but listen if I speak to one sales person in one corner, David convince me that the intense price competition in their own territory and Thats why they are not meeting their numbers, but if you ignore those individual data points and they look at a broader trend right now the price seems to be sticking across the board.

Alok Mishra: I may not want to spend the warehousing space and the cash to build it up. No, but listen. If you're wrong, we will have upside in 24 and downside in 25. I mean, over a two-year period, it normalizes anyway. So we will be prepared if people decide to have a pre-buy. But based on how we were looking at it, we just said, let's not do any of that. All right, that's great context.

Tom Carter: And it's no accident I mean, our costs have gone up to I mean, if you look at overall margins.

Tom Carter: Expanding nowhere close to what the pricing number we talk about some of these just recovering the cost that we went through.

Deane Michael Dray: I appreciate that. And then, second question, just on the longer term target. The pre-cash flow at 90% seems like you are under-promising there because this is not a capital-intensive business. You should be, from our perspective, closer to 100.

And are continuing to have to burden as we look at higher seer products, new way to well represents better presents the compressors and the labor and material inflation.

Tom Carter: I don't see that going backwards, because manufacturers have to offset the extra cost we are incurring.

Michael Kuenzer: And I know you've had a big CapEx push over the near term, but are you baking in more capacity expansion in that pre-cash flow conversion? It just seems light versus what your potential is. You know, that slide went through so many changes over the past 48 hours; we tried to give a range, but listen, if you're starting the year and you got $175 million in CapEx, you're not going to reach $100 in a three-year period, right? I mean, just where we are. But no, in the long term, I think we'll get to $100 if you have some investments. The other main driver is that as we grow revenue, you're going to have net working capital growth with that revenue. CapEx should be closer to depreciation by 2025 and 2026, but it's mostly related to just growing working capital with revenue growth. What's the working capital sales target? that money, fifteen ten to fifteen percent 20 percent. Higher on the direct model. Lower on the indirect side.

Great and one last one for Michael I, just maybe could you quantify the.

The new facility costs in Q1 and Q2.

Michael Quenzer: Just what are you specifically unabsorbed cost if you will.

Speaker Change: Are you.

Michael Quenzer: Yes, just think about it we have a factory that we're going to start staff with people who are going to get a train we're not going to have very high productive productivity as we build units.

Michael Quenzer: Really we wanted to start to get any absorption until kind of mid to late Q2 do you have all of those ramp up costs. There and then even in the second half as a portion of the $10 million will be lower efficiency, we will start to get some units out but it won't be highly efficient we won't be running at full efficiency until mid 2025, So it's probably going to be more to the front half thing gets better.

As you get into the second half of that $10 million.

Michael Quenzer: Got it but in aggregate for the year, it's $10 million.

Michael Quenzer: Correct.

Speaker Change: With the front end okay. Thank you I appreciate it.

Speaker Change: Okay.

Michael Kuenzer: Yeah, yeah, no, it'll be below 20 overall. But listen, I mean, one thing is our cash flow; we don't make any adjustments, right? I mean, this is the checkbook balance. Great. I appreciate all that, Colin.

Speaker Change: Thank you for joining us today since there are no further questions. This will conclude Linux fourth quarter Conference call. You may disconnect your lines at this time.

Speaker Change: Okay.

[music].

Ryan Merkel: And we'll take our next question from Ryan Merkel with William Blair. Hey everyone, nice quarter. I had two questions.

Alok Mishra: First, on the fourth quarter, in terms of weather, how big of an impact was the mild winter? Did you see any lift with the cold snap in January? And then my second question is just on the cadence of commercial margins. Sounds like it might be up slightly year over year. Is the first half sort of down a little, and the second half is up a little bit? Any help?

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Sure.

Speaker Change: Uh-huh.

[music].

Michael Kuenzer: Sure, I'll let Michael answer the second one, and then I'll come back to the first one. So, Michael Mayer, go ahead. Yeah, so on the commercial margins, we'll see a little bit of a headwind, though, on the factory ramp-up in the first half, but we'll get the benefit of the mix and a little bit of volume, so those should kind of neutralize each other. So, overall, margins should be up in commercial, but I think they'll be kind of flattish throughout the year with those two elements adjusting against each other And I think about the first question on weather. You know, I learned early in my career, Ryan, that never ever talk about weather when you have a challenging number set to be delivered.

Speaker Change: Okay.

Hum.

Speaker Change: Hello, Matt.

Okay.

Yes.

Speaker Change: [music].

Michael Kuenzer: But based on where we are, yes, Q4, we had some of the warmest winter, and that did negatively impact our daily order rates. And we track a lot of the same things you guys will track on average heating days and cooling days. And yes, Q1 with a cold streak, we have had a good start based on, as you would expect, the weather. But we don't know what tomorrow looks like or what February looks like. But Both your statements are correct.

Speaker Change: Yeah.

Speaker Change: Uh huh.

Speaker Change: [music].

Ryan Merkel: Got it. Thank you. And we'll take our next question from Tim Wojs with Baird. Hey guys, good morning.

Timothy Ronald Wojs: Thanks for the good news from Menzies, Derek Bevin, Tamara Sheffield, Marty Lan confirmed, Steve Jones, Ben Ronstein, and Michael Ghan. Transition, you know, kind of changing from, I can't remember if it's EPA or DOA and or DOE, you know, allowing the sale through. Would you expect to still sell through a fair amount of R410A product next year through your own distribution? And then just the 2nd question on the kind of longer-term mixed benefits from A2L, I think Aloki said 10 to 15. Is that a change from what you said before, or is it just kind of some routing? No, I think the second one first.

Alok Mishra: It's just kind of rounding, you know, because we give longer numbers, and we'll get some benefit this year as well. So I'll try to portray what 2025 looks like, right? So it's not just rounding. Maybe I should just stop giving ranges and pick a center line like 15.

Alok Mishra: There you go. Tim, on the first one, there's still some uncertainties, and EPA has not come up with the final rule yet. However, they have indicated some rules.

Alok Mishra: Listen, our preference would be not to make 410A products, but based on the way it's written now, we'll probably be forced to make some 410A products next year. And that would then impact the 10 to 15% number because there will be some Fort Denny products that are going through the factories, and people can repair outdoor units using new 410A products. I know it's a weird dynamic there.

Alok Mishra: So, still waiting for some clarity on that. We would prefer not to make 454, not to make 410A for manufacturing efficiency and other reasons, but we are just at a stage that we've got to see how the final rule plays out and how each state adopts it too. Okay, okay, very good. Good luck on 24.

Alok Mishra: Thanks. We'll take our next question from Jeff Sprague with Vertical Research. Thank you. Good morning and good luck, Joe. Two quick ones from me.

Jeff Sprague: Just back to kind of M&A, maybe just a little bit of color on where your comfort zone is on leverage. You know, I think we've talked about kind of normal leverage targets before, but like, where's the flex target, you know, for something bigger that you'd be comfortable working down from? You know, I think when the time is right, we'll have that discussion with the board and put it all together. I mean, from our perspective, it'll have to be an opportunistic discussion on something that's attractive to the company. But yeah, if it's attractive to our shareholders, and we need to level up, the key question would be, would we get back to our preferred leverage range within a year or two? I mean, that's what our focus is going to be. So you can do the math backward, right?

Alok Mishra: I mean, as long as we think there's real cash, and then we can use that cash to get back to our long-term leverage goals within a couple of years, I think we can do that. But investment grading is important to us, right? I mean, we are not an LBO shop or anything else like that.

Alok Mishra: You know, we maintain investment grade, understood, and then just on CapEx. Has the amount of CapEx expected for the total program, the new plant, and otherwise changed? I think you were talking about $150 million in CapEx for 2024 previously; now we're at $175 million. I was just kind of getting through it faster; maybe you could just provide a little additional color there.

Michael Kuenzer: No, the total program is still the same. We just have some additional CapEx that we have in 2024 to prepare for the new refrigerant products, investments in tanks, and new refrigerant lines within the factory that also come in this year. And normal Capex when we're all through this is 75 to 100 million a year. Yeah, we'll get with inflation probably not closer to 100. Like, yeah, I think it'd be closer to 100, 110, not 75 to 100.

Michael Kuenzer: Just growth and maintenance built into that, right? Maintenance might be 75-80, but to support our growth, we probably have a little more. Great, thanks. I'll leave it there. We'll take our next question from Steve Tusa with J.P. Morgan. Hey, good morning guys, thanks for putting me in.

Steve Tusa: Yeah, I missed you at AHR. I'd say attendance by investors was also at a record, which, you know, may be inversely correlated to multiples someday, but we'll see. I saw you from afar at a different company booth, but you were holding a good audience, so I didn't interrupt. Lots of great details at that show, for sure.

Alok Mishra: Just on the price capture dynamics, I think you guys had talked about doing some mid-year price increases this year. Your capture was in the fourth quarter around 2%. Can you maybe just talk about what types of things you were doing at mid-year and what your kind of net realization was and how that waterfall worked? Sure, I'll start.

Alok Mishra: So I think the overall, as we talked about price increases, we talked about doing a residential new construction price increase in the middle of 2023. That did go ahead as I expected. And as we looked at the overall drop through, that was about what we expected, maybe a shade worse than we expected, to be honest. And I think that just came down to the mix between residential new construction and the seasonality baked in there. Not a whole lot of R&C gets shipped to us in the Q4 timeframe, so from that perspective, that went as we expected.

Alok Mishra: We have key account price increases going into effect this year, mostly early this year, and we know we announced the broader price increase that goes into effect in February. So all the pricing actions that we've talked about are gone as we had expected. We remain comfortable with where we are.

Alok Mishra: And it's been good to see the whole industry moving in that direction as well. Yeah, and I guess just on a unit basis, what was the actual revenue for the captive business in the fourth quarter, and what was the, you know, putting parts aside, what was the unit volume? for that business, the captive resi business.

Alok Mishra: Yeah, so total revenue through distributors was down high to mid-teens, and then the direct was up high single digits for Q4. So your unit volume in Q4 for that business was actually up? One last one, just on the new A2L product.

Alok Mishra: When is the first call for you guys, and when will you be able to actually ship that product? When will the distributors see the specs and the physical product? What's the schedule of that rollout just on the ground, physically? Sure.

Alok Mishra: So, I think with the key distributors, they're already seeing the spec. We're already going through the training and all that. The first physical product probably comes out in the second half of this year.

Alok Mishra: And we will start with sort of the high-end products, where I think the consumer's appetite for going to R54B is going to be greater and faster. And then we will slowly transition towards the lower-seer and the lower-end products. So, we'll start with the higher-end towards the middle of the year. And we are on track or ahead of schedule on each of those things. We don't expect any R454B.

Alok Mishra: For meaningful sales, can we put on a showcase at a display booth in the first half of this year? Yes. But for somebody to actually place a PO and buy would be the second half of this year. Okay, great. Thanks a lot. And we'll take our next question from Joe O'Day with Wells Fargo. Hey, good morning.

Joe Ritchie: On the commercial mix, can you just talk about what percentage of the mix was emergency replacement in 2023 and how you're thinking about that stepping up in 2024? I think normalized is maybe something like 30%, but I think we're still on sort of a migration toward normal. Yeah, so you know, listen, we were close to zero. I think we hit double digits in 23 in terms of starting to get to emergency replacement. Barely, I would say high single digits, double digits in 2023, and that includes both our direct sales and going some through our distribution partners. And we still think there's a lot of room ahead. We probably won't move that needle until Saltier comes in for production in the second half of this year. So I expect us to hover in high single digits, low double digits until Saltier comes online. Got it. And then what are your thoughts on when we think about the residential side, and the direct demand sounds like it trended better than anticipated in 23. Indirect, sort of worse. And so how do you align those two things?

Alok Mishra: Is your assessment that channel inventory is just thinner than historical averages? And you know, why would direct trend better and indirect stock headwinds trend worse? Listen, as we talk to our distribution partners, and we're very close to them, it's not the channel inventory; there was more stuff than we thought. And yes, with the EPA ruling and everything, the channel essentially froze. Q4, especially they're worried that for a while, remember, the fear was that you would not be able to sell Fortinet products unless they were replacements starting December 2024. So I think that ruling created just a freeze mentality in our channel, which I'm glad EPA issued some clarification and came up with the final ruling. But you know, the direct business holding on better than we thought was actually a positive, I mean, which means the consumer is being resilient, and we are pleased with that resiliency. Now, being the CEO of Lenox, I also think we gained share.

Alok Mishra: So that's something we will watch out for as numbers normalize. It's hard to figure out share dynamics right now, given things are unclear on how much of it is us winning share or how much is the fact that we are going direct. But I mean, from the numbers that we see, we gain lots of shares. We just need to figure out how much of that is transitionary versus real. And I'll just add on the direct side: we executed very well on the minimum share transition. Got it. Thank you. We'll take our next question from Gautam Khanna with P.D. Cohen. Hey, good morning, and congrats to Joe and Michael. I wanted to ask about the IRA and how well-defined it is in the states in terms of the tax rebate.

Gautam Khanna: You know, IRA has become such a topic for the past 12 months with very little to show for it. We've kind of stopped banking on it, and one aspect of IRA, which was through the tax credits, that's kind of flowing through in some cases; some states are renewing it on their own. I don't think any of us saw the big impact we were expecting from IRA, but we're starting to see drips and dribbles. If the government really gets its act together and figures out this whole income qualification criteria to get the IRA piece, which there's no practical way to do for a dealer right now, then I do think there's upside left, but we are not counting on it right now, especially given the election year.

Alok Mishra: I don't know if the government will put this as a priority to figure it out with the state governments and dealers and how to make that work, but the rest of it is kind of slowly dripping, dripping in. Got you, and then, given the confusion, I guess, you know, the phase in of the new refrigerant resi systems in 25. What are your updated expectations for price? Over the next two years, you know, average pricing in the past, we've talked about something like 15% off of the 20. Do you think that's still valid or not? Do you think it's lower now? Yeah, that's about it. Now, that's still valid. I think that's still just working through the entire process. And that was a comment earlier as well.

Gautam Khanna: We might be getting some of that this year, especially with the 410A numbers that we talked about this year. But yeah, that number, over two years, is still totally valid. OK. And given the potential slowdown in unitary that you mentioned and what we're seeing in resi, have you seen any evidence anywhere in the industry of intensified price competition, or is everyone... Bill just getting better at pushing through price and getting, You know, it's more the latter on an overall basis. But listen, if I speak to one salesperson in one corner, they will convince me that there is intense price competition in their own territory, and that's why they're not meeting their numbers. But if you ignore those individual data points and you look at a broader trend, right now, the price seems to be sticking across the board. And, you know, it's no accident.

Alok Mishra: I mean, the costs have gone up, too. If you look at the overall margins, margins are expanding nowhere close to the pricing numbers we talk about. Some of it is just recovering the cost that we went through and are continuing to have to burden as we look at higher-sheer products, new A2L refrigerants, better efficiency compressors, and labor and material inflation. So I don't see that going backwards.

Gautam Khanna: The manufacturers have to offset the extra cost we are incurring. Great. And one last one for Michael, I just maybe could you further quantify the new facility costs in Q1 and Q2 and, just like what are you? an unabsorbed class. What are you implying?

Michael Kuenzer: Yeah, just think about it; we have a factory that we're going to start to staff with people, we're going to get them trained, we won't have very high productivity as we build units, and really, we won't even start to get any absorption until kind of mid to late Q2. So you have all of those wrap-up costs there. And then even the second half portion of the 10 million will be lower efficiency. We will start to get some units out, but it won't be highly efficient. We won't be running at full efficiency until mid-2025. So it's probably going to be more in the front half. It gets better as you get into the second half of that 10 million. But in aggregate for the year, it's $10 million.

Gautam Khanna: Correct. With the front end. Okay. Thank you. I appreciate it. Hmm.

Thank you for joining us today. Since there are no further questions, this will conclude Linux's fourth quarter conference call. You may disconnect your lines at this time. Thank you for watching! Thanks for watching! Plotkin. [inaudible] Subs by www.zeoranger.co.uk, © The Bulletproof Executive 2013