Q1 2024 Lennox International Inc Earnings Call - Q&A

Operator: The conference is about to begin. If you need any assistance during your conference call today, please press star zero. Welcome to the Lennox First Quarter 2024 Earnings Conference Call.

During your conference today.

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Speaker Change: Welcome to the <unk> first quarter of 'twenty 'twenty four earnings conference call.

Operator: 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 1 on your telephone. To exit the queue, please press Star 2. As a reminder, this call is being recorded, and I would now like to turn the conference over to Chelsey Pulcheon from the Lennox Investor Relations team. Chelsey, please go ahead.

Speaker Change: 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 one on your telephone to extra. Thank you. Please press star two.

Speaker Change: As a reminder, this call is being recorded and I would now like to turn the conference over to Chelsea Paulson from <unk> Investor Relations team Chelsea. Please go ahead.

Chelsey Pulcheon: Thank you, Savannah. Good morning, and thank you for joining us today. We are excited to share our 2024 first quarter results. Joining me are CEO Alok Maskara and CFO Michael Quenzer. Each will share their prepared remarks before we move into the Q&A session. Turning to slide 2, a reminder that during today's call, we will be making certain forward-looking statements that are subject to numerous risks and uncertainties, as outlined in this. We may also refer to certain non-GAAP financial measures that management considers relevant indicators of underlying business performance.

Chelsea Paulson: Thank you Savannah, good morning, and thank you for joining US today, we are excited to share. Our 2024 first quarter results joining me as CEO of local mascara and CFO Michael Cleanser.

Chelsea Paulson: Each will share their prepared remarks before we move into the Q&A session.

Speaker Change: 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.

Unknown Attendee: 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 and non-GAAP measures. The earnings release, today's presentation, and the website archive linked for today's call are available on our Investor Relations website at www.investor. Lennox.com. Now please turn to slide three as I turn the call over to our CEO, Alok Maskara.

Unknown Attendee: We refer to our SEC filings available on our Investor Relations website for additional details, including a reconciliation of all GAAP to non-GAAP measures.

Unknown Attendee: The earnings release today's presentation on the website 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 Hello Mascara.

Alok Maskara: I want to begin by expressing my gratitude to our customers and employees whose loyalty to Lennox helped us deliver strong Q1 results marked by record profit margins. Specifically, I want to extend my appreciation to our dealers, distributors, and key account customers for trusting Lennox to deliver industry-leading HVACR products and solutions across North America. The success of our transformational effort to strengthen our distribution network, elevate the customer experience, advance innovative platforms, execute pricing excellence, and drive productivity can be entirely credited to the unwavering support from our employees and customers.

Mascara: Thank you Chelsea.

Mascara: Good morning.

I want to begin by expressing my gratitude to our customers and employees, whose loyalty to leno helped us deliver strong Q1 results marked by record profit margins.

Alok Maskara: Specifically I want to extend my appreciation to our dealers distributors and key account customers for trusting Linux to deliver industry, leading <unk> products and solutions across North America.

Alok Maskara: The success of our transformational effort to strengthen our distribution network elevate customer experience advanced innovative platforms execute pricing excellence.

Alok Maskara: And drive productivity.

Alok Maskara: Can be entirely credited to the unwavering support from our employees and customers.

Alok Maskara: This successful quarter further demonstrates our ability to maintain our growth momentum, navigate complex end markets, and effectively prepare for the upcoming low-GWP regulatory changes. Now, let's dive into the details of this quarter on slide three, where I would like to highlight four key messages. First, Lennox's core revenue grew 6%, and our adjusted segment margin expanded 157 basis points to 15.9%, resulting in our adjusted earnings per share increasing 23% to $3.47. Additionally, our operating cash usage was $23 million, a significant improvement from 79 million usage in the prior year. Second, home comfort solutions delivered a slight revenue decline alongside moderate EBIT growth.

Alok Maskara: This successful quarter further demonstrates our ability to maintain our growth momentum navigate complex end markets.

Alok Maskara: And effectively prepare for the upcoming LOE GWB regulatory changes.

Alok Maskara: Now, let's dive into the details of this quarter on slide three.

Alok Maskara: To highlight four key messages.

Alok Maskara: Lennox is core revenue grew 6% and our adjusted segment margin expanded 157 basis points to 15, 9%.

Alok Maskara: Factoring in our adjusted earnings per share, increasing 23% to $3 47.

Alok Maskara: Our operating cash usage was $22 million, a significant improvement from $79 million usage in the prior year.

Alok Maskara: Second home comfort solutions delivered a slight revenue decline alongside moderate EBIT growth.

Alok Maskara: With the de-stocking effect on volume, counterbalanced by price and mix, we delivered 30 basis points of margin expansion. And we are all glad to see the de-stocking phase nearing its end. Third, our Building Climate Solutions team delivered record Q1 margins supported by both revenue and profit growth. We remain on track for the opening of our new Salteo Mexico factory in early Q3, which will enable us to fully satisfy customer demand and our growth presence in the emergency replacement market segment.

Alok Maskara: With the Destocking effect on volume counterbalanced by price and mix Redeliver 30 basis point margin expansion.

Alok Maskara: We are all glad to see the Destocking phase nearing its end.

Speaker Change: Hello all.

Speaker Change: We're building climate solutions team delivered record Q1 margin supported by both revenue and profit growth.

Speaker Change: We remain on track for the opening of our new songs to your Mexico factory in early Q3, which will enable us to fully satisfy customer demand and outgrew presence in emergency replacement market segment.

Alok Maskara: Lastly, we are delighted to announce the updated fiscal guidance for this year as the Q1 results give us greater confidence in our earnings per share range. Michael will provide a detailed review of the guidance later in the call.

Speaker Change: Lastly, we are delighted to announce the updated fiscal guidance for this year.

Speaker Change: The Q1 results give us greater confidence in our earnings per share range.

Speaker Change: Michael will provide a detailed review of the guidance later in the call.

Alok Maskara: But for now, let's turn to slide four for more details on the upcoming low GWP refrigerant transition. We are fully prepared and on schedule for the upcoming refrigerant transition. Our product designs, manufacturing processes, and technology engineering have all been finalized. We are currently transitioning our raw material inventory to facilitate the product launches, and we plan to start shipping the new low GWP refrigerant product later this year in time to meet expected demand. We anticipate a price increase of 10 plus percent for the new product line.

Speaker Change: But for now, let's turn to slide four for more details on the upcoming LOE GWB refuge in transition.

Speaker Change: We are fully prepared and on schedule for the upcoming refrigerant transition.

Speaker Change: Our product designs manufacturing processes and technology engineering have all been finalized.

Speaker Change: We are currently transitioning our raw material inventory to facilitate the product launches and we plan to start shipping the new low DWP refrigerant product later this year in time to meet expected demand.

Speaker Change: We anticipate price increase of 10 plus percent for the new product line.

Alok Maskara: During this low-GWP transition, we will face manufacturing headwinds as we convert each production line in our factory. Our approach to reconfiguring our factories will effectively balance production flexibility with cost efficiency. Looking ahead, we foresee 2024 as predominantly an R, Fort, and A refrigerant year.

Speaker Change: During this low DWP transition, we will cease manufacturing headwinds as we convert each production line in our factories.

Speaker Change: Our approach to Reconfiguring, our factories will effectively balanced production flexibility with cost efficiency.

Speaker Change: Looking ahead, we foresee 'twenty 'twenty four is predominantly in our food and eat in FY 'twenty.

Alok Maskara: As we move into 2025, we expect the demand for the new low GWP product to reach approximately half to two-thirds of the end market. This shift in demand will benefit our product mix and also position us favorably to capture market share. Ultimately, we are well prepared and confident in our ability to navigate this transition successfully. Now, please turn to slide five for an overview of our initiative to become a better distributor of HVAC products. As you know, Lennox is a top-tier HVAC distributor in North America, with substantial geographical coverage through over 250 outlets.

Speaker Change: As we move into 2025, we expect the demand for the new DWP Gardner to reach approximately half to two thirds of the end market.

Speaker Change: This shift in demand will benefit our product mix and also position us favorably to capture market share.

Speaker Change: Ultimately, we are well prepared.

Speaker Change: I'm confident in our ability to navigate this transition successfully.

Speaker Change: Now please turn to slide five.

For an overview of our initiatives to become a better distributor of HVA seep gardens.

Speaker Change: As you know Linux is a top tier HVAC distributor in North America with substantial geographical coverage.

Speaker Change: Over 250 outlets.

Alok Maskara: Supported by more than 25 regional distribution centers. Additionally, nearly 45% of Lennox residential sales are now through our digital platform, LennoxPros.com, where our contractor partners also have access to a digital service dashboard for equipment prognosis, diagnosis, and monitoring. We have the opportunity to grow our market share by expanding geographical coverage and improving our share of wallet through a greater focus on parts and accessories. We also have an opportunity to increase dealer loyalty with an improved fill rate and an enhanced customer experience.

Speaker Change: Supported by more than 25 regional distribution centers.

Speaker Change: Nearly 45% of Lennox residential sales are now through our digital platform Lennox pros dot com.

Speaker Change: In our contracted partners also have access to a digital service dashboard for a coupon prognosis diagnosis and monitoring.

Speaker Change: We have the opportunity to grow our market share by expanding geographical coverage and improve our share of wallet through greater focus on parts and accessories.

Speaker Change: We also have an opportunity to increase dealer loyalty with improved fill rate and an enhanced customer experience.

Alok Maskara: The distribution network improvements and the three core changes highlighted on this page will accelerate our growth and increase our margin resilience. First, we have established a decentralized and better aligned organization that is consistent with distribution best practices. As a result, local leaders who have better visibility into local market conditions will have increased autonomy for faster decision making. Furthermore, we have established five regional P&Ls led by experienced leaders who are accountable for both regional sales and stores.

Speaker Change: The distribution network improvements.

Speaker Change: And the three core changes highlighted on this page will accelerate our growth and increase our margin resiliency.

Speaker Change: First we have established a decentralized and better aligned organization that is consistent with distribution and best practices.

Speaker Change: As a result, local leaders who have better visibility into local market conditions will have increased economy for faster decision, making.

Speaker Change: Furthermore, we have established five regional P&L.

Speaker Change: By experienced leaders, who are accountable for both regional sales and stores.

Alok Maskara: In addition, we are building our capabilities in critical areas such as revenue operations, pricing excellence, and distribution management. This is a long-term journey, and we are pleased with the early progress we have seen thus far. Second, to improve the quality of our customer service, we completed a physical distribution network analysis to ensure that we have sufficient growth capacity and an optimal cost structure. We have streamlined and digitized our end-to-end demand and inventory deployment processes, and we are also implementing a modern warehouse management system throughout Lennox.

Speaker Change: In addition, we are building our capabilities in critical areas, such as revenue operations pricing excellence and distribution management.

Speaker Change: This is a long term journey and we are pleased with the early progress we have seen desktop.

Speaker Change: Second to improve the quality of our customer service, we completed a physical distribution network analysis to ensure that we have sufficient growth capacity and optimal cost structure.

Speaker Change: We have streamlined and digitize our end to end demand and inventory deployment processes and we are also implementing a modern warehouse management system to work in house.

Alok Maskara: It will take us a few years to fully realize the benefit of these changes, but thus far, we are pleased with the recent trend in our fulfillment rate. Third, we have created customer charters for our businesses and have established net promoter score practices across the company. This allows us to collect feedback and set numerical goals around our customer interactions. We are delighted with the improvements we are seeing in our Net Promoters course and know that this is an investment that will continue to yield results over the long term.

Speaker Change: It will take us a few years to fully realize the benefit of these changes, but thus far we are pleased with the recent trend in our fulfillment rate.

Speaker Change: Third we have created customer charter for our businesses and have established net promoter score practices across the company.

Speaker Change: This allows us to collect feedback and set numerical goes around our customer interactions.

Speaker Change: We are delighted with the improvements we are seeing in our net promoter scores and.

Speaker Change: Know that this is a commitment that will continue to yield results over the long term.

Alok Maskara: To summarize, we are becoming a technology-enabled distributor, and we are investing in talent and resources to support this growth opportunity. While there are early signs of promising results, this is a multi-year endeavor that will accelerate growth and promote margin resiliency. Now, I will hand the call over to Michael, who will take us through the details of Q1 financial performance. Thank you, Alok.

Speaker Change: To summarize we are becoming a technologically enabled distributor and we are investing in talent and resources to support this growth opportunity.

While there are early signs of promising results.

Speaker Change: This is a multiyear endeavor that will accelerate growth and promote margin resiliency.

Speaker Change: Now, let me hand, the call over to Michael who will take us through the details of Q1 financial performance.

Unknown Attendee: Thank you Luke good morning, everyone. Please turn to slide six expanding onto looks earlier comments I'm excited to share our Q1 results, which not only reflect a strong start to the year, but also highlight record first quarter margins and an impressive 23% growth in adjusted earnings per share.

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

Michael Quenzer: Please turn to slide 6. Expanding on Alok's earlier comments, I'm excited to share our Q1 results, which not only reflect a strong start to the year but also highlight record first quarter margins and an impressive 23% growth in adjusted earnings per share. Core revenue was $1 billion, up 6% as price gains and revenue from the AES acquisition were the main drivers of year-over-year improvement. The adjusted segment profit increased $25 million, where most of the growth came from $40 million of price and mixed benefits.

Unknown Attendee: Core revenue was $1 billion up 6% as price gains in revenue from the Aes acquisition were the main drivers of year over year improvement.

Unknown Attendee: Adjusted segment profit increased $25 million for most of the growth came from $40 million of price and mix benefits.

Michael Quenzer: This was partially offset by continued inflation and investment in SG&A and distribution. Total adjusted segment margin was 15.9%, up approximately 160 basis points versus prior year. Corporate expenses were $24 million, which included $3 million of expenses previously considered non-core adjustments.

Unknown Attendee: This was partially offset by continued inflation and investment in SG&A and distribution.

Unknown Attendee: Adjusted segment margin was 15, 9% up approximately 160 basis points versus prior year.

Unknown Attendee: Corporate expenses were $24 million, which includes $3 million of expenses previously considered noncore adjustments beginning of 'twenty 'twenty. Four we will include certain previously categorized noncore adjustments in our adjusted earnings.

Michael Quenzer: Beginning in 2024, we will include certain previously categorized non-core adjustments in our adjusted earnings. This approach aims to reduce recurring or immaterial adjustments, which improves our overall quality of earnings reported. Our adjusted earnings will continue to exclude the effects of business divestitures and significant non-recurring items such as restructuring programs.

Unknown Attendee: This approach aims to reduce recurring are immaterial adjustments, which improves our overall quality of earnings reported.

Unknown Attendee: Our adjusted earnings will continue to exclude the effects of business divestitures and significant nonrecurring items such as restructuring programs.

Michael Quenzer: Our first quarter tax rate was 19.4%, and diluted shares outstanding were $35.8 million compared to $35.6 million in the prior year quarter. Now, let's direct our attention to slide 7, where we can review the financial performance of our Home Comfort Solution Set. Revenue declined 1% to $681 million in the first quarter.

Unknown Attendee: Our first quarter tax rate was 19, 4% and diluted shares outstanding were $35 8 million compared to $35 6 million in the prior year quarter.

Speaker Change: Now lets direct your attention to slide seven where we can review the financial performance of our home comfort solutions side.

Revenue declined 1% to $681 million in the first quarter the volume in our two step distribution channel continues to feel the effects of industry Destocking and was down mid teens.

Michael Quenzer: The volume in our two-step distribution channel continues to feel the effects of industry destocking and was down mid-team. However, our direct-to-contractor sales volumes were up low single digits with solid growth in the new construction channel as new home building starts have rebounded. Price yield was 3%, an improvement from the 2% price yield we earned in the second half of 2023, reflecting our successful execution of pricing initiatives in the quarter. The Home Comfort Solution segment profit increased $1 million to $112 million, and segment margin also experienced approximately 30 basis points of growth to 16.6%.

Speaker Change: Our direct to contractor sales volumes were up low single digits with solid growth in the new construction channel as new homebuilding starts have rebounded.

Speaker Change: Price yield was 3% an improvement from the 2% price yield we earned in the second half of 2023, reflecting our successful execution of pricing initiatives in the quarter.

Speaker Change: The home comfort solutions segment profit increased $1 million to $112 million and segment margin also experienced approximately 30 basis points of growth to 16, 6%.

Michael Quenzer: Although pricing initiatives are progressing well, results are still impacted by inflation, as well as the ongoing investments in distribution and sales. Overall, given the challenging conditions in the end market, we are proud of our execution to increase profit margins, even with volume and mixed headwinds. We are prepared to launch the new low GWP product in the coming months and ensure the new product pricing material maintains gross margins.

Speaker Change: Although pricing initiatives are progressing well results are still impacted by inflation as well as the ongoing investments in distribution and sales.

Speaker Change: Overall, given the challenging conditions in the end market. We are proud of our execution to increase profit margins, even with volume and mix headwinds. We are prepared to launch the new low GW P product in the coming months and ensure that new product pricing material maintained gross margins.

Michael Quenzer: Turning to slide 8 in our Building Climate Solutions segment, which delivered another strong quarter. Building Climate Solutions revenue was up an impressive 21% this quarter, propelled by 7% volume growth and our best performance in many years. Combined price and mix were up 8%, and revenue from our AES acquisition contributed 6% revenue growth in the quarter. Building Climate Solutions' profit grew by $28 million, or 56%, and segment margin expanded 480 basis points to 21%. These results were primarily driven by price and sales volume gains.

Speaker Change: Turning to slide eight and our building climate solutions segment that delivered another strong quarter.

Speaker Change: The building climate solutions revenue was up an impressive 21% this quarter propelled by 7% volume growth and our best performance in many quarters combined price and mix were up 8% and revenue from our Aes acquisition contributed 6% revenue growth in the quarter.

Speaker Change: Building climate solutions profit grew by $28 million or <unk>, 56% and segment margin expanded 480 basis points to 21%.

Speaker Change: These results were primarily driven primarily driven by price and sales volume gains.

Michael Quenzer: Our profit results also reflect a $2 million headwind for our new Saltillo, Mexico factory ramp-up. However, despite ongoing production and supply chain challenges, unit production volume from the Stuttgart, Arkansas factory shows steady improvement. Additionally, we are excited for product output from the new Saltillo factory in early Q3 and will launch our new low GWP product in early 2025. We continue to be impressed by the Building Climate Solutions team's strong efforts in executing initiatives that pave the way for achieving our long-term targets.

Speaker Change: Our profit results also reflect a 2 million dollar headwind for our new Saltillo, Mexico factory ramp up expenses.

Speaker Change: Despite ongoing production and supply chain challenges unit production volume from the Stuttgart, Arkansas factory showed steady improvement.

Speaker Change: Additionally, we are excited for product output from the new cell T. A factory in early Q3 and will launch our new low gw's product in early 2025.

Speaker Change: We continue to be impressed by the building climate solutions teams strong efforts in executing initiatives to pave the way for achieving our long term targets. If you'll now turn to slide nine I will review, our cash flow performance and capital deployment strategies.

Michael Quenzer: If you will now turn to slide nine, I will review our cash flow performance and capital deployment strategy. Operating cash flow use in the quarter was $23 million compared to $79 million in the prior year quarter.

Speaker Change: Operating cash flow used in the quarter was $23 million compared to $79 million in the prior year quarter capital expenditures were $30 million for the quarter, a decrease of $5 million compared to the prior year.

Michael Quenzer: Capital expenditures were $30 million for the quarter, a decrease of $5 million compared to the prior year. Later in 2024, we anticipate temporary increases in working capital as we ramp up our new Saltillo, Mexico factory and prepare for the transition to the new low GWP product. Concurrently, the team is focused on improving processes and generating efficiencies in both accounts payable and accounts receivable. Both items are reflected in our full-year free cash flow guidance and long-term cash conversion target.

Speaker Change: Later in 2024, we anticipate temporary increases in working capital as we ramp up our new CTO, Mexico factory and prepare for the transition to the new low GWB product concurrently the team is focused on improving processes and generating efficiencies in both accounts payable and accounts receivable both items are.

Speaker Change: <unk> and our full year free cash flow guidance and long term cash conversion targets.

Michael Quenzer: Our commitment to high ROAC drives strategic and targeted investments that enhance our performance and competitiveness in the market. As previously mentioned, the new Saltillo factory and the transition to the new refrigerant products are proceeding as planned and showing positive progress. We also continue to look at bolt-on M&A opportunities that align closely with their overreaching company strategy. Net debt to Adjusted Evo was 1.4 times, down from 2.1 times in the prior year.

Speaker Change: Our commitment to high or OSC drive strategic and targeted investments that enhance our performance and competitiveness in the marketplace. As previously mentioned the new cell T O factory and the transition to the new refrigerant products is proceeding as planned and showing positive progress.

Speaker Change: We also continue to look at bolt on M&A opportunities that align closely with our overreaching company strategy.

Speaker Change: Net debt to adjusted EBITDA was one four times down from two one times in the prior year.

Michael Quenzer: Our approach to capital deployment remains consistent. We prioritize capital expenditure investments with strong returns, grow dividends with earnings, continue to explore M&A opportunities, and supplement with share repurchases when necessary. Additionally, we are committed to maintaining our investment grade rating. Turning to slide 10, let's review the 2024 full-year guide.

Speaker Change: Our approach to capital deployment remains consistent we prioritize capital expenditure investments with strong returns grow dividends with earnings continue to explore M&A opportunities and supplement with share repurchases when necessary. Additionally.

Speaker Change: Additionally, we are committed to maintaining our investment grade rating.

Speaker Change: Turning to slide 10, let's review the 'twenty 'twenty four full year guidance.

Michael Quenzer: Our outlook on revenue provided during our last conference call remains unchanged as first quarter trends performed as expected. As a reminder, I will re reiterate a few revenue guidance. The table on the left highlights full-year revenue growth factors. Total company revenue is projected to increase by approximately 7%. We also expect stable sales volumes with a slight increase from building climate solutions and flat for home comfort. Price and Mix are expected to drive a mid-single-digit revenue growth, where price increases will ensure we remain price-cost positive.

Speaker Change: Our outlook on revenue provided during our last conference call remains unchanged as first quarter trends performed as expected.

Speaker Change: As a reminder, I will read reiterate a few revenue guidance points.

Speaker Change: Table on the left highlights full year revenue growth factors total company revenue is projected to increase by approximately 7%.

We also expect stable sales volumes with a slight increase from building climate solutions and flat for home comfort solutions.

Speaker Change: Price and mix are expected to drive a mid single digit revenue growth where price increases will ensure we remain price cost positive.

Michael Quenzer: As a result of our strong first quarter profit performance, we are also revising our full year earnings per share guidance to $19 to $20 from the previously guided range of $18.50 to $20. Our free cash flow guidance remains unchanged at $500 to $600 million.

Speaker Change: As a result of our strong first quarter profit performance. We're also revising our full year earnings per share guidance to $19 to $20 from the previously guided range of $18 50 to $20.

Speaker Change: Our free cash flow guidance remains unchanged at $500 million to $600 million.

Michael Quenzer: Most product and other cost assumptions also remain. Component cost inflation is anticipated to be in the mid single digits, including large increases in our cost to acquire our R410A refrigerant and recent inflation in commodity prices. We expect this cost inflation to be partially offset by material cost reductions. We anticipate ramp-up costs of approximately $10 million for the new Saltillo, Mexico factory, along with approximately $5 to $10 million associated with the refrigerant transition across our home comfort solutions manufacturing.

Speaker Change: Those product and other cost assumptions also remained unchanged component cost inflation is anticipated to be up mid single digits.

Speaker Change: Clearly large increases in our cost to acquire our <unk> refrigerant and recent inflation in commodity prices. We expect this cost inflation to be partially offset by material cost reduction programs, we anticipate ramp up costs of approximately $10 million for the new sell to your Mexico factory, along with approximately $5 million to $10 million associated.

Speaker Change: With our refrigerant transition across our home comfort solutions manufacturing facilities.

Michael Quenzer: SG&A expenses are expected to increase in the year, the result of both inflationary pressures and investments. Our investments are focused on resources to improve customer service, information system advancements, and distribution growth initiatives. We will also be making investments in both sales and marketing to support our long-term growth target. Capital expenditures remain unchanged at $175 million, interest expense is still expected to be approximately $50 million, and our tax rate is expected to be approximately $20 million. With that, please turn to slide 11, and I'll turn it back to Alok for an overview of NMARC. Thank you, Michael.

Speaker Change: SG&A expenses are expected to increase in the year. The result of both inflationary pressures and investments.

Speaker Change: Estimates are focused on resources to improve customer service information system advancements and distribution growth initiatives. We will also be making investments in both sales and marketing to support our long term growth targets.

Speaker Change: Capital expenditures remain unchanged at $175 million.

Speaker Change: Interest expense is still expected to be approximately $50 million and our tax rate is expected to be approximately 20%.

Speaker Change: With that please turn to slide 11, and I'll turn it back to look for an overview of end markets.

Speaker Change: Michael.

Alok Maskara: On slide 11, I will share our outlook on the end markets for both segments, which align with the full year guidance that Michael just went through. Within our Home Comfort Solutions segment, we have started to see a rebound in residential new construction, signaling consumer health resilience. Nevertheless, we continue to closely monitor the repair versus replace dynamic amidst macro uncertainty. We are pleased to see distributor inventory return to near normal levels.

Unknown Attendee: On slide 11, I will share our outlook on the end markets for both segments.

Unknown Attendee: It's aligned with our full year guidance that Michael just went through.

Unknown Attendee: Within our home comfort solutions segment, we have started to see a rebound in residential new construction signaling consumer health resiliency.

Unknown Attendee: Nevertheless, we continue to closely monitor the repair versus replace dynamic amidst macro uncertainties.

Unknown Attendee: We are pleased to see distributor inventory returned to near normal levels.

Alok Maskara: However, the introduction of new low-GWP refrigerant products and pending EPA updates on component manufacturing cut-off dates does add inventory management ambiguity for dealers and distributors. With that said, we anticipate that most of this year's sales will still come from R410A products with limited adoption of the new R454B product towards the end of this year. Transitioning to the Building Climate Solutions segment, we expect a deceleration in new construction accompanied by potential project delays.

Unknown Attendee: However, the introduction of new low DWP refrigerant product and pending EPA updates on component manufacturing cutoff dates.

Unknown Attendee: Does add inventory management ambiguity for dealers and distributors.

Unknown Attendee: With that said, we anticipate that most of this year's sales will still come from our Fortinet products with limited adoption of the new <unk> hundred 54, b product towards the end of this year.

Transitioning to the building climate solutions segment.

Unknown Attendee: Expect deceleration in new construction accompanied by potential project delays.

Alok Maskara: However, order rates and backlog remain strong, driven by pent-up replacement demand. Insights from our National Account Services team highlight a significant upcoming need for replacements, as well as increased interest in our new creditor-to-grave services. Our market share prospects in the BCS segment will be driven by volume from the new Salteo Mexico factory and our expansion in the emergency replacement market. We are also securing additional wins in national accounts with our new integrated offerings made possible due to the AES acquisition. Overall, our outlook for this year remains cautiously optimistic.

Unknown Attendee: However, order rates and backlog remains strong driven by pent up replacement demand.

Unknown Attendee: Insights from our National account services team highlight a significant upcoming need for replacements as well as increased interest in our new creative to <unk> services.

Unknown Attendee: Our market share prospects in the Vcs segment will be driven by volume from the new <unk> Mexico factory.

Unknown Attendee: And our expansion in the emergency replacement market.

Unknown Attendee: We are also securing additional wins in national accounts with our new integrated offerings.

Unknown Attendee: Made possible due to the Aes acquisition.

Unknown Attendee: Overall, our outlook for this year remains cautiously optimistic.

Alok Maskara: Given Lennox's track record of success during regulatory transitions, we anticipate benefiting from new product pricing and potential market share gain. We acknowledge that the market remains uncertain, but we are confident in our proactive strategies aimed at driving growth, optimizing margins, and delivering exceptional value to our customers and shareholders. We do this by focusing on controllables and action items that we can control. Now, please turn to slide 12.

Unknown Attendee: Given Linux his track record of success during regulatory transitions, we anticipate benefit from new product pricing and potential market share gain.

Unknown Attendee: We acknowledge that the market remains uncertain, but we are confident in our proactive strategies aimed at driving growth optimizing margins and delivering exceptional value to our customers and shareholders. We do this by focusing on controllable and action items that we can drive.

Unknown Attendee: Now please turn to slide 12.

Alok Maskara: As a recap, Lennox operates in growth and mature markets, has resilient margins, demonstrates execution consistency, and serves its customers through advanced technology and high-performance talent. The five reasons we remain confident in Lennox being a great investment opportunity are: First, we will continue to make strategic growth investments to improve our go-to-market effectiveness and support customer demand. Second, 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.

Unknown Attendee: As a recap.

Unknown Attendee: Linux operates and growth end markets hazardous Lillian margins demonstrates execution consistency and serves its customers to advanced technology and high performance talent.

Unknown Attendee: The final reason, we remain confident in Lennox be a great investment opportunity.

Unknown Attendee: Yes.

Unknown Attendee: First we will continue to make strategic growth investments to improve our go to market effectiveness and support customer demand.

Unknown Attendee: Second margins remain our focus as we continue to evaluate our pricing strategy implement innovative solutions to increase productivity and optimize our direct to dealer network.

Alok Maskara: Third, by leveraging the Lennox Unified Management System, our teams will be able to streamline processes, leverage best practices, and consistently execute our strategy. Fourth, our continued technological advancement will enable Lennox to remain at the forefront of innovation for our customers. Finally, our team's focus on core values and guiding behaviors is the foundation of a high performance culture. Our pay-for-performance incentive structure further aligns the talents of our team with the interests of our shareholders.

Third by leveraging the Linux unified management system, our teams will be able to streamline processes.

Unknown Attendee: Average best practices and consistently execute our strategy.

Fourth our continued technological advancement will enable <unk> to remain at the forefront of innovation for our customers.

Unknown Attendee: Finally, our teams focus on core values and guiding behaviors is the foundation of our high performance culture.

Unknown Attendee: Our pay for performance incentive structure further aligns the talents of our team with the interest of our shareholders.

Alok Maskara: Allow me to wrap up by saying thank you to each of our dedicated employees and valued customers. I'm proud of all that we have been able to accomplish, and I'm looking forward to the promising future that lies ahead of Lennox, as our best days are still ahead. Thank you. Savannah, we'll be happy to take your questions.

Allow me to wrap up by saying, thank you to each of our dedicated employees and valued customers.

Unknown Attendee: I am proud of all that we have been able to accomplish and I'm looking forward to the promising future that lies ahead of Linux.

Unknown Attendee: As our best days are still ahead of us.

Speaker Change: We'll be happy to take your questions now Savannah, let's go to Q&A.

Operator: Of course, and at this time, if you'd like to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question, and we will pause for a moment to allow questions to queue. And our first question will come from Tommy Moll on behalf of Stevens. Please go ahead.

Savannah: Of course and at this time, if you'd like to ask a question. Please press star one on your telephone keypad.

Speaker Change: You may remove yourself from the queue at any time by pressing star two.

Savannah: Once again that is star one to ask a question and we will pause for a moment to my questions. Thank you.

Savannah: And our first question will come from Tommy Moll with Stephens.

Thomas Allen Moll: Please go ahead.

Thomas Allen Moll: Good morning, and thank you for taking my question. Good morning, Tommy.

Thomas Allen Moll: Good morning, and thank you for taking my questions.

Thomas Allen Moll: Good morning, Tommy.

Alok Maskara: Alright, I wanted to start with a follow-up on the comments you made regarding strengthening the distribution network. You gave us a lot to think about. There are, I think, nine different points on the slide that you introduced.

Thomas Allen Moll: Look I wanted to start with a follow up on the comments you made regarding strengthening the distribution network you gave us a lot to think about.

Thomas Allen Moll: There are I think nine different point on the slide that you introduced you clarified it's a multiyear effort so.

Thomas Allen Moll: You clarified that it's a multi-year effort, so that's all very helpful context. And my question there is, if you were to focus our attention on this year and where we should look for early signs of progress, where would you focus us? And to what extent can you quantify or frame some of the investments, whether in personnel, technology, or elsewhere behind those efforts? Thank you.

Speaker Change: So all very helpful context, and my question. There is if you were to focus our attention on this year.

Speaker Change: And where are we should we should look for early signs of progress.

Speaker Change: Where would you focus us and to what extent can you quantify or frame some of the investments whether in personnel technology or elsewhere behind those efforts. Thank you.

Alok Maskara: Thanks, Tommy. So on the investment side, as you see, our Q1 SG&A is up year over year. And so a large part of the investments that we're talking about are already in our numbers. Among the, this is a classic McKinsey training exercise, right? There are three buckets of three, hence you get to nine.

Speaker Change: Thanks, Tommy Sunday investment side as you see our Q1 SG&A is up year over year.

Speaker Change: Large part of the investments that you're talking about are already in our numbers aren't already in our guidance among.

Tommy: Among the antibody does the classic Mckinsey training rate the three buckets of three and so you'll get to nine but that I blame on my Mckinsey background not anything as.

Alok Maskara: But that I blame my McKinsey background, not anything else. The two things I would focus on would be both around our customers in terms of fulfillment rate and our net promoter score, which are both early indicators of market share gain. And we are seeing solid progress on that. The third thing we'll point out is pricing excellence, which is kind of embedded in there, but you see that in our numbers anyway. The first two, we don't talk about publicly, but that's what I monitor internally in a significant amount of detail, looking at where our NPS is and where our fulfillment rate is.

Tommy: The two things I would focus on would be boot around our customers in terms of fulfillment rate.

Tommy: Our net promoter score which helped both.

Tommy: Indicators.

Tommy: Early indicators of market share gain.

Tommy: And we are seeing solid progress in that.

Tommy: Third thing, we would point out is pricing excellence, which is kind of embedded in there, but do you see that in our numbers anyway.

Tommy: First to we don't talk about publicly but thats, what I monitor internally and significant amount of detail looking at Where's, our NPS and various efforts to admit rate.

Thomas Allen Moll: That's helpful. Thank you, Alok. For a follow up, I wanted to ask this one probably goes to Michael for a couple of clarifications on the raised EPS guidance. Unknown Speaker Michael, can you just refresh us on the seasonality here? Is 50-50 still the right way to think about it for the first half, the second half, and then related points you mentioned. Any additional detail you could provide, especially if you could just give us a bogeyman for what you're assuming for the year would be helpful.

Speaker Change: That's helpful. Thank you look for a follow up I wanted to ask this one probably goes to Michael for a couple of clarifications on the raise EPS guidance.

Speaker Change: Mid point, Michael can you just refresh us on the seasonality here is 50 50 is still the right way to think about it for first half second half and then related point you mentioned.

Speaker Change:

Unknown Attendee: Our convention regarding the corporate expense and what is versus isn't included there.

Unknown Attendee: Any additional detail you could provide especially if you can just give us a bogey for what you're assuming for the year would be helpful. Thank you.

Michael Quenzer: Thank you.

Unknown Attendee: Yep, so on the seasonality from the revenue perspective.

Michael Quenzer: So on the seasonality from the revenue perspective, we already mentioned that from a revenue perspective, Q1 is about 20% of the year; first half is about 50%, and second half is about 50%.

I already mentioned that we think from a revenue perspective Q1 is about 20% of the year first asked about 50% second half is about 50% of that is from a revenue perspective.

Michael Quenzer: That's from a revenue perspective. And then on the items that we've now included in corporate, previously we had some items for asbestos litigation, environmental expenses, unique litigation. So these are kind of just small, immaterial, noisy items that were somewhat recurring, and it was about 25 cents of items last year that we've now moved into our adjusted earnings this year.

Unknown Attendee: And then on the items that we've now included in corporate it previously we had some modest risk fastest litigation environmental expense unique litigations. So these are kind of just small immaterial note noisy items that were somewhat recurring and it was about 25 cents of items last year that we've now moved into adjusted earnings this year.

Thomas Allen Moll: So that would be it. Thank you. Thank you. Thank you. All right. Sorry, go ahead, Tommy. I was going to say, Michael, so that would be a 25 cent unfavorable item from last year to this year. Am I hearing you correctly?

Unknown Attendee: So that would be so let me if I could just piggyback off.

Speaker Change: Correct, Sorry go ahead Tony.

Tony: Yes, I was going to say, Michael but so that would be a 25 cent unfavorable item from last year to this year am I hearing you correctly.

Michael Quenzer: Yeah, if those expenses are generally flat, which we think they are, yeah, it's about a 25% headwind.

Tony: If those expenses are generally flat, which we think they are.

Speaker Change: Yes, it's about a 25% headwind.

Alok Maskara: Okay, I got it. Sorry, Alok.

Tony: Okay got it sorry Luca.

Thomas Allen Moll: Yeah, Tommy, I think we did that just to improve the quality of our earnings. I mean, these items are small, and they have become more recurring. And we think we should only exclude one-time items, extraordinary items. So this was just a bit of a cleanup. As Michael came into the role, we thought this was a good opportunity. Okay, these items, which had all become recurring for the past many years.

Luca: Yeah, Tommy I think we did that just to improve the quality of our earnings I mean these items are small it became more recurring and we think we should only exclude one time items extraordinary items. So this was just a bit of a cleanup as Michael came into the role. We thought this was a good opportunity to take these items, which had become recurring for past many years.

Tony: Yeah.

Alok Maskara: Got it. Thank you very much. I'll turn it back.

Speaker Change: Got it. Thank you very much I'll turn it back.

Speaker Change: Yes.

Speaker Change: And our next question will come from Jeff Hammond with Keybanc.

Operator: And our next question will come from Jeff Hammond with KeyBank.

Jeffrey David Hammond: Hey, good morning, guys.

Jeffrey David Hammond: Hi, guys.

Jeffrey David Hammond: Um, just maybe just talk to me about residential, you know, you call it negative mix; I want to understand what's going on there. What do you see on repair replace, because we noted in our checks, you know, kind of a discernible change more recently. And just, you know, as we go into the selling season, given kind of a weaker 4q1q, kind of what's the, the lean on, you know, industry volumes for the year.

Jeffrey David Hammond: Just maybe just talk to me about residential you called out negative mix I want to understand what's going on there what are you seeing on repair replace because we noted in our checks.

Jeffrey David Hammond: Discernible change more recently and just you know as we go into the selling season.

Jeffrey David Hammond: Given kind of a weaker <unk> kind of what's the.

Jeffrey David Hammond: Building on <unk>.

Jeffrey David Hammond: Kind of industry volumes for the year.

Alok Maskara: Sure, if I can start on the mix for the first part, the mix that we are referring to is just residential new construction, which was subdued last year is now coming back. And we said, then that's a lower margin to us compared to replacement. So that's kind of the mixed impact we were calling out that we've noticed on the repair versus replacement. I think the jury is still out.

Speaker Change: Sure if I can start on the mix for the first time.

Speaker Change: Mix that you are referring is residential new construction, which was subdued last year is now coming back and.

Speaker Change: And VSAT, that's lower margin to us compared to replacement. So that's kind of a mix impact we were calling out that we've noticed.

Speaker Change: On the repair versus replacement I think the jury's still out I mean, our radio China tax we've talked to our dealers kind of depends on which part of the country in which dealer we haven't noticed any significant change in <unk>.

Alok Maskara: I mean, I've read your channel checks, we've talked to our dealers, and it kind depends on which part of the country and which dealer we haven't noticed any significant change in part sales versus equipment sales. But we probably won't be the first one to notice that anyway. There'll be other distributors who call that out, but our dealers remain pretty robust and optimistic about the life of the equipment where repair may not be the most economical way to move forward. So I haven't noticed anything, but we mentioned that as a call out because that's clearly a possibility as consumer health might get worse.

Speaker Change: Our sales force is equipment sales, but we probably won't be the first wanted to note is that any way there'll be other distributors will call that out.

Speaker Change: But our dealers remained pretty robust.

Speaker Change: Really optimistic on overall the life of the equipment repair it may not be the most economical way to move forward. So I haven't noticed anything but.

Speaker Change: Mentioned that as a call out because thats clearly a possibility as consumer health it might get worse.

Jeffrey David Hammond: Okay, and then just on the refrigerant transition pricing, I think you called it out in the presentation greater than 10. I think you'd been saying 10 to 15. Is anything really changed there? You know, other than maybe, you know, timing of when you get that. And then just, you know, what are you seeing from 410A refrigerant prices, you know, that might drive pricing changes this year? Sure. So if he'

Speaker Change: Okay, and then just on the refrigerant transition pricing and I think you called out in the presentation greater than 10. Thank you had been saying, 10% to 15 is there anything really change there.

Speaker Change: Other than maybe you know timing of when you get that and then just what are you seeing from four tena refrigerant prices.

Speaker Change: It might drive pricing changes this year.

Speaker Change: Sure. So on the first one on the 454 pricing nothing has changed last year.

Alok Maskara: Sure. So if we take the first one, the 454 pricing, nothing has changed. Last year, we may not have been clear enough, but I think we talked a few times that we said it would be about 15% over two years. So that increased pricing was for 24 and 25. And we may have made that statement in 23. Nothing has really changed, because the fourth part of the price increase is already in process. We implemented price increases in mid Q1. And we're going to see that impact. So the remaining is 10%. So just want to clarify that nothing has changed. It was just over two years ago. Now we're talking about one year.

Speaker Change: We may not have been clear enough, but I think we talked few times that we had said it will be about 15% over two years.

Speaker Change: That increased pricing was 424 and 25 and we may have made that statement in 23, nothing has really changed because the fourth part of the price increases already.

Speaker Change: In process, we implemented price increases mid Q1, and we're going to see that impact. So the remaining is 10%. So I just want to clarify that nothing has changed just over two years now we are talking about one year.

Alok Maskara: Unfortunately, pricing, I think the picture is mixed. I think to be fair, the actual Fortinet pricing ramp-up is less than we expected, and it's almost flat. But we think that's still going to move. And from our perspective, you know, that hasn't changed our price on the end product that we are selling.

Speaker Change: Fortinet pricing I think the picture is mixed I think to be fair. The actual fortinet pricing ramp up is less than we expected and it's almost flat.

Speaker Change: But we think that's still going to move and from our perspective that hasnt changed.

Speaker Change: Price.

Speaker Change: The end product that we're selling this year.

Operator: And next, we have a question from Ryan Merkel with William Blair.

Speaker Change: Okay. Thanks.

Speaker Change: And next we have a question from Ryan Merkel with William Blair.

Ryan James Merkel: Hey everyone, congrats on the quarter. Thanks, Ryan. Thanks, man.

Ryan James Merkel: Hey, everyone congrats on the quarter.

Ryan James Merkel: Thanks, Ryan Thanks, Ryan.

Ryan James Merkel: Yeah look I wanted to also ask on the Hol, just the 50% to 60% and 25 from Hol just why is that the right number and then can you clarify is the price increase.

Alok Maskara: Yeah, Alok, I wanted to also ask about the A2L, just the 50 to 60% in 25 from A2L, you know, just why is that the right number? And then, can you clarify the price increase of 10%? Is that both residential and commercial or, you know, is commercial potentially a little bit less?

Ryan James Merkel: The 10% is that both resi and commercial or commercial.

Speaker Change: Potentially a little bit less.

Alok Maskara: Well, first, I'll answer the price increase. We think it's probably going to be both in the same ballpark of 10%, if not higher. Both products need significant investments in the factory and some of the sensors and the compression technology. And then why do we think it's 50 to 65%?

Speaker Change: Well, so first I'll answer on the price increase we think it's probably going to be both in that same ballpark of 10% if not higher bold products need significant investments in the factory and some of the sensors and the compression technology.

Speaker Change: And then why we think it's 50% to 65% I mean, what we're seeing is that youre going to have a bit of a carryover into next year from our <unk> systems that are able to be sold next year that were built this year and you also have within the EPS guidance that you can sell components into next year. So we think those two combined are going to be.

Alok Maskara: I mean, what we're seeing is that you're going to have a bit of a carryover into the next year from our 410A systems that are able to be sold next year that were built this year. And then you also have, within the EPA guidance, that you can sell components into the next year. So we think those two combined are going to be 35 to 40% of the market next year, and then the balance would be new adoption of the 454B refrigerant product.

Speaker Change: 35% to 40% of the market next year and then the balance would be new adoption of the 454 B refrigerant product.

Ryan James Merkel: Got it. Okay, that's helpful.

Speaker Change: Got it okay. That's helpful.

Michael Quenzer: And then I also wanted to ask about Resi and just trends. So down two for volume in the first quarter, but I realized there was some destock. I think March with the weather wasn't great. Are you just thinking Resi volumes are up low single digits? Is that the right cadence the rest of the way?

Speaker Change: And then I also wanted to ask on <unk> and just trends for <unk>.

Speaker Change: <unk> two for volume in the first quarter, but I realize there's some destock I think march but the weather wasn't great are you just thinking <unk> volumes are up low single digits is that the right cadence the rest of the way.

Michael Quenzer: Yeah, if you kind of look at our applied guidance, you had a balance of the year would be kind of low single digits, it's a little stronger on the indirect than the sell-through side, but the balance kind of flat to slightly slide up slightly for the rest of the year.

Speaker Change: Yes, if you kind of look at our implied guidance here the balance of the year would be kind of up low single digits, a little stronger on the indirect than the sell through side, but balanced kind of flat to slight up slightly up for the rest of the year.

Michael Quenzer: And that's mostly for indirect, the comps get much easier in Q2, and we are seeing the end of destocking.

Speaker Change: And thats, mostly for indirect comps get much easier starting Q2, and we are seeing the end of Destocking.

Ryan James Merkel: Great. All right. Thanks.

Speaker Change: Great Alright. Thanks.

Operator: And next, we will hear from Joe Trichy of Goldman Sachs. Please go ahead.

Speaker Change: Thanks.

Speaker Change: And next we will hear from Joe Ritchie with Goldman Sachs. Please go ahead.

Joseph Alfred Ritchie: Hey, good morning, guys. So maybe, yeah, maybe I'll just kind of start with just the M&A appetite question, just given there are some assets out there that could be coming to market soon, just based on what's been publicly disclosed. So talk a little bit about your appetite currently and what you're looking for in potential M&A transactions going forward.

Joseph Alfred Ritchie: Hey, good morning, guys.

Joseph Alfred Ritchie: So maybe maybe not.

Joseph Alfred Ritchie: Yes, maybe I'll just kind of start.

Joseph Alfred Ritchie: Yes.

Joseph Alfred Ritchie: The M&A appetite question, just given Kevin there are some assets out there that could be coming to market. Soon just based on what's been publicly disclosed so talk a little bit about your appetite currently and what Youre looking for in.

Joseph Alfred Ritchie: Potential M&A transactions going forward.

Alok Maskara: Sure. I mean, we read the same articles that you guys read. I do follow JCI pretty closely, but that's mostly because my good friend Jim Lucas is now the investor relations leader there. And I like Jim a lot.

Joseph Alfred Ritchie: Sure.

Joseph Alfred Ritchie: <unk>.

Speaker Change: Same articles that you guys read I do follow.

Speaker Change: I pretty closely but that's mostly because my good friend, Jim Lucas is now the investor relation leader, there and I'll ask Jim Malone.

Alok Maskara: But if you think from our perspective, nothing has really changed compared to when we talked about it in Q1. And just to kind of reemphasize that, especially as regulatory changes accelerate, you need more scale to be successful. You know, from our perspective. We have been public in the past about the interest in this asset that is rumored to be on sale. And that hasn't changed either.

Speaker Change: But if you think from our perspective, nothing has really changed compared to when we talked about it in Q1, and just to kind of reemphasize that.

We believe industry consolidation is good, especially as regulatory changes accelerate even more scale to be successful.

From our perspective.

Speaker Change: We have been public in the past about the interest for this assay that is rumored to be on sale and that hasnt changed either what we're very focused on is making sure. We execute appropriately we have a very strong path ahead of us.

Alok Maskara: What we are very focused on is making sure we execute appropriately. We have a very strong path ahead of us. You know, our three-year plan is going to create significant value, and we have kind of talked about our long-term targets. There's so much opportunity for us to become a better distributor, improve our commercial volume through the new factory, work on pricing excellence on an ongoing basis, and gain share as we successfully execute through the refrigerant changes.

Speaker Change: Our three year plan, that's going to create significant value.

Speaker Change: Kind of got to model long term targets, there's so much opportunity for us to become a better distributor improve our commercial volume through the new factory working through pricing excellence on an ongoing basis and gain share as we successfully execute through the refrigerant changes and we have.

Alok Maskara: And, you know, we have a huge pipeline of bolt-on opportunities as well. So while we can talk about any specific process, we have sufficient scale to compete. And we feel we are in a very good position to evaluate opportunities as they combine.

Speaker Change: A huge big pipeline of bolt on opportunities as well.

Speaker Change: So while we can.

Speaker Change: Talk about any specific process, we have sufficient scale to compete and we feel we are in a very good position any new evaluate opportunities as they come by.

Speaker Change: Yeah.

Alok Maskara: That's super helpful, Alok. Thank you.

Speaker Change: Got it.

Speaker Change: Super helpful. Thank you my follow up question, maybe for Michael just going back to that seasonality.

Joseph Alfred Ritchie: My follow-up question, maybe for Michael, just going back to that seasonality comment that you made. Just curious, as you kind of think of just the cadence for 2Q specifically, you guys, it seems like de-stocking is coming to an end. You know, shouldn't the seasonality be, you know, slightly better this year? Because you're kind of lapping de-stocking comps. Any commentary around that would be helpful.

Unknown Attendee: Seasonality comment that you made just curious as you kind of think of just the cadence for Q2, specifically.

You guys. It seems like Destocking is coming to an end.

Unknown Attendee: Sitting in the seasonality be slightly better this year, because you're kind of you're kind of lapping destocking comps if any any commentary around that would be helpful.

Michael Quenzer: Yeah, I think there's still some uncertainty, though, in the end markets on the sell through. I think we're trying to watch, you know, weather in Q2. It's cold here in Dallas. We'll see where it goes for the rest of the quarter. So I think there are some concerns about where the weather could go. But I think that 50% of the sales in the first half still seems appropriate.

Speaker Change: Yes, I think there's still some uncertainty though in the end markets on the sell through I think we were trying to watch whether within Q2.

Speaker Change: Cold here in Dallas, we'll see where it goes for the rest of the quarter. So I think there are some concerns on where weather could go but I think that 50% of the sales in the first half still seems appropriate.

Alok Maskara: Yeah, and we don't want to call it out, whether for revenue upside or downside. You know, I'm new to the industry, and whenever I worry about whether my business leaders will be in it for longer terms, they just wait till next week, and their concerns might go away. Still early in the quarter, though May and June make up a significantly bigger portion of our sales than April.

Speaker Change: Yeah, well, we don't want to call out therefore revenue upside or downside.

Speaker Change: I'm, new to the industry and whenever I worry about weather.

Speaker Change: Business leaders, who have been here for longer terms that hey, just wait till next week and have concerns might go away.

Speaker Change: Still early in the quarter May and June makeup.

Speaker Change: Significantly bigger portion of our sales in April.

Speaker Change: Makes sense thanks, guys.

Speaker Change: Yes.

Michael Quenzer: makes sense. Thanks, guys.

Speaker Change: Our next question will come from Damian Cross with UBS.

Operator: Hey, good morning, everyone. Thanks for all the details thus far. I just have to ask a little, so, you know, we...

Unknown Attendee: Hey, good morning, everyone and thanks for all the detail thus far.

Unknown Attendee: I just have to ask them so.

Unknown Attendee: Hey, good morning. So you know we've been hearing about the end of this destocking for a few quarters now.

Alok Maskara: Well, we've been wrong before, so we have to keep that in mind as I answer the question.

Unknown Attendee: What's driving your confidence that this is the last time, we're going to hear about this as a headwind in the quarter.

Unknown Attendee: Yes.

Alok Maskara: You know, we talked about earlier it ending by Q4, and then in Q4, we got a sense, and we signaled that it's likely going to continue in Q1. As we look at leading indicators, so things such as coils, you know, we make universal coils, and when we sell those, those are typically the canary in the coal mine in terms of first to go down and first to go up. So when I look at those product lines that went down first in sales, we send them coming back up, and we had a pretty good march on those product lines, and, in addition, conversations with our distributors.

Speaker Change: While we have been wrong before so we've got to keep that in mind as I answered the question.

Speaker Change: We talked about earlier it ending by Q4, and then Q4, we got a centenary Cigna there is likely going to continue in Q1.

Speaker Change: As we look at leading indicators, so things such as <unk>.

Speaker Change: <unk>.

Speaker Change: Universal coils, and when we sell goes.

Speaker Change: Those are typically the Canary in the coal mine in terms of <unk> to go down and forced to go up so when I look at those product lines went down <unk> sales recently coming back off and we had a pretty good March in both product lines and in addition conversations with our distributors to do it with the two data points.

Alok Maskara: So those would be the two data points, but listen, this is. We were wrong before. So maybe we'll be wrong again. But I think this time we have much more data that's supposed

Speaker Change: And this is.

Speaker Change: We will run before so maybe it would be wrong again, but I think this time, we have much more data that supports it.

Alok Maskara: Got it. Makes sense. Appreciate that. And then you guys have talked a little bit about, you know, stable, still solid orders in BCS. Did you maybe just... Give us a sense for what you're seeing, different end markets, maybe national accounts versus marriage and seed replacement, how that's kind of unpacked, and how you're thinking about kind of bulk to bill going forward.

Speaker Change: Got it makes sense I appreciate that.

Speaker Change: Then you guys have talked a little bit about stable still solid orders and BCS.

Speaker Change: Could you maybe just.

Speaker Change: Give us a sense for what youre seeing different different end markets, maybe national accounts versus marriages replacement, how thats kind of unpack.

Speaker Change: And how youre thinking about kind of book to Bill going forward.

Alok Maskara: Sure. If you think about our presence, remember, we don't do things like office buildings and large multi-story apartment complexes. So from that perspective, our exposure to those areas, which we see were slowing last year and continue to be slow, is limited. We are more in single-story buildings and in national accounts, whether it be large big boxes of any type and others.

Speaker Change: Yes.

Speaker Change: Sure. If you think about our presidents remember or we don't do things like office buildings in large multi storey apartment complex so from that perspective our.

Speaker Change: Our exposure to those areas, which we see we're slowing last year and continue to be slow is limited we are more than in single storey building national accounts, whether it'd be <unk>.

Speaker Change: A large big box sales of any type I know others. The replacement demand is what.

Alok Maskara: The replacement demand is kind of exciting, and that's what we are seeing really good momentum on. As long as supply constraints are behind us, lead times are normalizing across the industry, and folks are more willing to put in the investments, especially given the energy and carbon savings they're going to get out of the new. But on emergency replacement, our share has dropped so low that the market trends really don't matter to us.

Kind of exciting and Thats, what we are seeing really good momentum on as lot of the supply constraints are behind US lead times are normalizing across the industry and folks are more willing to put in the investments, especially given particularly energy and carbon savings you're going to get out of the new equipment.

Speaker Change: On.

Speaker Change: Emergency replacement our share has dropped so low that the market trends really don't matter to us I mean, it's all about share gain and we are making good progress getting back into our traditional dealers are traditional accounts and we'll make a lot more progress in the second half of the year, Brian Our second factory gets up and running.

Alok Maskara: I mean, it's all about share gain, and we are making good progress getting back into our traditional dealers, our traditional accounts. And we'll make a lot more progress in the second half of the year when our second factory gets up and running. So that's kind of behind what we talked about in terms of overall trend replacement, which is the vast majority of our sales continues to be strong. And that's driving strong order rates.

Speaker Change: So that kind of behind what we talked about in terms of overall trend replacement, which is vast majority of our sales continues to be strong and that's driving strong order rates.

Alok Maskara: Thank you. I'll pass it along. Best of luck.

Speaker Change: Thank you I'll pass it along best of luck.

Thanks.

Operator: And our next question will come from Noah Kaye with Oppenheimer. Please go ahead.

Speaker Change: And our next question will come from Noah Kaye with Oppenheimer. Please go ahead.

Noah Duke Kaye: Good morning, thanks for taking the questions. I just wanted to unpack a little bit more the price mix outlook for the balance of the year across segments. Mathematically implied more of a dollar benefit in the residential segments, but it sounds like that is primarily just the price increases, less so than mix, but would appreciate color on that, as well as some kind of color on the commercial side, what drives price mix for the balance of the year.

Noah Duke Kaye: Good morning, and thanks for taking the questions.

Noah Duke Kaye: Just wanted to unpack a little bit more of the price mix.

Noah Duke Kaye: Outlook for the balance of the year across segments.

Noah Duke Kaye: Mathematically implied more of a dollar benefit in the resi segment.

Noah Duke Kaye: It sounds like that is primarily just the price increases.

Noah Duke Kaye: Less so than than mix, but would appreciate color on that as well as kind of a color on the commercial side, what drives price mix for the balance of the year.

Michael Quenzer: Yeah, so within the quarter, we had a pretty good price yield of 3%, but that was only a partial yield for some of the price increases that we announced in February and into March. So we're going to see a little bit more carryover and pickup on the pricing side. Also, don't expect the new construction mix to continue like it did in Q1.

Speaker Change: Yeah, so within the quarter, we had pretty good price yield of 3%, but that was only a partial yields for some of the price increases that we announced in February and into March. So we're going to see a little bit more carryover and pick up on the pricing side also don't expect the new construction mix to continue like it did in Q1, so as we think.

Michael Quenzer: So we think that that will moderate later in the year, and then we'll also start to see some of that carryover benefit from minimum efficiency products as we get to the second half of this year. Maybe late in the year, a very minor favorable mix for the 454B products, not really much within the guide. But overall, it's just continued pricing within HCS. On the BCS guide, it's a similar story where we're lapping some really big price increases that we did last year.

Speaker Change: That will moderate later in the year and then we'll also start to see some of that carryover benefit from the minimum seer efficiency products.

Speaker Change: We get to the second half of this year, maybe late in the year of very minor favorable mix for the <unk> hundred 50, <unk> products not really much within the guide, but overall, it's just continued pricing within HCS on.

Speaker Change: On the BCS got it.

Speaker Change: <unk> story, where we're lapping some really big price increases that we did last year. So you see a lot more of that in the first quarter that will moderate in the later quarters. This year as we get some of the price increases that we announced in that segment as well.

Michael Quenzer: So you can see a lot more of that in the first quarter that will then moderate in the later quarters this year as we get some of the price increases that we announced in that segment as well.

Noah Duke Kaye: Perfect, thanks Michael. And then I really appreciate you guys taking a view on what the mix will look like on the refrigerant side next year. Is it possible to quantify how much of a working capital headwind that is for this year? Because you're obviously going to have to build that inventory, certainly for the direct channel, before the cutoff date.

Speaker Change: Perfect. Thanks, Michael and then really appreciate you guys, taking a view on what the mix will look like on the refrigerant side next year.

Speaker Change: Is it possible to quantify how much of a working capital headwind.

Speaker Change: That is for this year, because youre, obviously going to have to build that inventory necessarily for the direct channel.

Speaker Change: Before the cutoff date.

Michael Quenzer: Yeah, there's two things that we're focused on at Working Capital this year. It's inventory builds.

Speaker Change: Yes, there's two things that we're focused on working capital. This year its inventory build the first is some additional raw materials to help transition to the new building climate solutions factory in Mexico.

Michael Quenzer: The first is some additional raw materials to help transition to the new Building Climate Solutions Factory in Mexico, so that's a piece of it. But then the other side of it is going to be to do a pre-build for some R410A systems on the residential side, depending on end market demand and how that's going to carry into next year. And also, in the BCS segment, we can continue to build R410A unitary rooftops through the end of this year, and then we have three years to sell that.

Speaker Change: Piece of it and then the other side of it is going to be to do a pre build for some of our <unk> systems on the residential side dependent on end market demand and how that's going to carry into into next year and then also on the BCS segment is that we can continue to build for 10, a unitary rooftops through the end of this year and then we have three years to sell that.

Michael Quenzer: So we want to make sure we have sufficient R410A demand to cover a few years of continued volume for the next year or so on the BCS product. So that all adds up to about $50 million of inventory that we're going to have to add this year.

Speaker Change: So we want to make sure we have sufficient for 10, a demand too to cover a few years.

Speaker Change: Continued volume for the next year or so.

Speaker Change: ECS product.

Speaker Change: That all adds up to about $50 million of inventory that we're going to have to add this year.

Noah Duke Kaye: Okay, perfect. Hey, thanks for the call, Eric. Great execution. See you guys in a couple weeks. Thanks.

Speaker Change: Okay perfect. Thanks for the color great execution. So you guys in a couple of weeks.

Speaker Change: Thanks.

Operator: Our next question comes from Brett Linzey with Mizzouho.

Speaker Change: Our next question comes from Brett Linzey with Mizuho.

Brett Logan Linzey: I wanted to come back to the building segment and, you know, really think about a way to dimension the new commercial capacity coming online. How does that ramp up in terms of revenue or units produced, and how should the factory utilization levels phase through the second half and then into the next?

Brett Logan Linzey: Hey, good morning, all.

Brett Logan Linzey: Hey, Brett.

Brett Logan Linzey: I wanted to come back to the building segment.

Brett Logan Linzey: Really second thinking about a way to dimension, the new commercial capacity coming online.

How does that ramp up in terms of revenue or units produced and how should the factory utilization levels phase through the second half and then into next year.

Alok Maskara: You know, we from the units produced have internal targets, but we haven't shared that externally. So we don't want to go there.

Speaker Change: We from a units produced we have internal targets, but we haven't shared that externally. So I don't want to go there I mean over the long term, we did talk about that we got enough square footage to double the capacity.

Alok Maskara: I mean, over the long term, we did talk about that we have got enough square footage to double the capacity. We think that will happen over five years or more. So think of maybe, perhaps, like, you know, at max 20% capacity slowly ramped up, one line at a time. I think that's kind of one way to think about it. But clearly, we'll be prudent; we'll look at market conditions, and in some cases, we can obviously move and balance production between the existing factory and the new factory. That could be one way to look at it, but we haven't put in enough machines in the ground to double the full capacity.

Speaker Change: We think that happens over five years or more so think of maybe perhaps max 20% capacity slowly ramped up.

Speaker Change: One line at a time, so I think that's kind of one way to think about it but clearly we'd be prudent we will look at market conditions and in some cases, we can obviously move.

Speaker Change: Moving balance production between the existing factory and the new factory. So that's one way to look at it but we haven't put in.

Speaker Change: Machines into ground to double the full capacity quite enough space to do that but we'll put those investments at their demand materializes.

Brett Logan Linzey: Okay, that makes sense. And then just want to come back to the forecast on the composition of the new refrigerant products next year. I guess as the old refrigerant supply is reduced, is it reasonable to think the pricing on the legacy units also needs to step up again next year as you're, you know, dealing with less supply?

Speaker Change: Okay got it makes sense and then just wanted to come back to the forecast on the composition of the new refrigerant products next year I guess is the old refrigerant supply is reduced is it reasonable to think the pricing on the legacy units also needs to step up again next year as you're dealing with less supply.

Michael Quenzer: Yes, as we always do, we'll come out with a new price increase next year on the 410A systems. And depending on where the cost of that gas goes up, which we expect to go up significantly, it could also have a pretty large increase similar to the 454B product. But we're monitoring that, and there will be another price increase on that next year for that 35% of the demand.

Speaker Change: Yes.

As we always do we'll come out with a new price increase next year on the <unk> systems, and depending where the cost of that gas goes up which we expect to go up significantly. It could also have a pretty large increase similar to the 450 <unk> product, but we're monitoring that and there will be another price increase on that next year for that.

Speaker Change: 35% of the demand.

Michael Quenzer: And also keep in mind the manufacturing inefficiencies associated with manufacturing the older 410A units because the volume is going to go down, and the factory is going to be more complex at a higher cost.

Speaker Change: And also keep in mind, the manufacturing inefficiencies associated with manufacturing.

Order for 10 <unk> units because the volume is going to go down to the fact that it's going to be more complex and higher cost for the <unk> that we should expect.

Michael Quenzer: at a higher cost for the 410A that we expect.

Brett Logan Linzey: Got it. I appreciate the color. Great quarter.

Got it I appreciate the color great quarter.

Operator: Our next question will come from Julian Mitchell with Barclays.

Speaker Change: Our next question will come from Julian Mitchell with Barclays.

Julian C.H. Mitchell: Hi, good morning, and thanks for the effort to improve earnings quality. I think most companies are hell-bent on going in the other direction, so thanks for that.

Julian C.H. Mitchell: Hi, good morning, and thanks for the effort to improve earnings quality I think most companies are held been ongoing in the other.

Julian C.H. Mitchell: So thanks for that.

Michael Quenzer: Maybe my first question would be around, you know, the commentary around the sort of second quarter and the first half and so forth. So you've got about a billion and a half sales, I suppose, or thereabouts, dialed in for Q2 based on that 50-50 first half split. You know, when we're thinking about the sort of margin profile, you know, classically we would have had sort of 35, 40% sequential operating leverage in the second quarter, just with the fixed cost absorption and so forth.

Julian C.H. Mitchell: Maybe my first question would be around.

Sure.

Julian C.H. Mitchell: The commentary around the sort of second quarter, and the first half and so forth.

Speaker Change: So you've got about 1 billion and a half sales I suppose or thereabouts dialed in for Mike.

Speaker Change: Q2 based on that 50, 51st half split.

Speaker Change: When we're thinking about.

Speaker Change: The sort of margin profile classically you've had sort of 35, 40% sequential operating leverage in the second quarter, just with the fixed cost absorption and so forth.

Michael Quenzer: I just wondered if that figure would be any different this year, whether because of the, you know, Mexico plant ramp-up, or the phasing of, say, those A2L headwinds of 5 to 10 million that you call out, maybe just any sort of color around how those items play out from here and the sort of second quarter sequential leverage.

Speaker Change: I just wondered if that.

Speaker Change: I figure it would be any different this year.

Speaker Change: Whether because of the mix.

Speaker Change: Mexico plant ramp up or the phasing of say those hol headwinds of $5 million to $10 million that you call out maybe just any sort of color around.

Speaker Change: How those items play out from here and the sort of second quarter sequential leverage.

Michael Quenzer: Yeah, there will be some additional investments they're going to start to make in the second quarter that weren't fully impacted in the first quarter, predominantly around launching the new commercial factory as well as starting to transition to the new 454B product in HCS. Additionally, we had a bit of a one-time benefit in Q1 for margins for warranty adjustments, so that will also kind of not repeat in the next year or the next quarter. But overall, yeah, there will be some cost increases coming into the second and third quarters that weren't in the first quarter.

Speaker Change: Yes, there will be some additional investments are going to start to make in the second quarter that werent fully impacted in the first quarter predominantly Ron launching the.

Speaker Change: The new commercial factory as well as starting to transition to the new 454 b product in HTS.

Speaker Change: Additionally, we had a bit of a one time benefit within Q1 for margins for warranty adjustments that will also not repeated in the next year or the next quarter.

Speaker Change: But overall, yes, there will be some some cost increases coming into the second and third quarters that warrant it within the first quarter.

Michael Quenzer: Got it okay, so still sort of decent leverage but maybe with some some offsets this year specifically.

Speaker Change: Got it okay. So it's still sort of decent leverage, but maybe with some some offsets this year specifically.

Michael Quenzer: Yeah, some ramp-up costs that we're going to need to transition to get the product ready.

Speaker Change: Correct, yes, some ramp up costs that we're going to need to transition to get the product right.

Speaker Change: And then my second question.

Speaker Change: And then circling back to the Vcs Division certainly the the tone I think from a low it seems a little bit more cautious on that new construction aspect and project delays and we see that more broadly in things like the Abi readings.

Michael Quenzer: I think Alok seems to be a little bit more cautious on that new construction aspect and project delays, and we see that more broadly in things like the ABI readings. Maybe to sort of, if you could put a finer point on that, the project delays aspect, is that just an expectation of what could happen later in the year? Maybe any updated thoughts on the education vertical as that lesser tailwind sort of starts to expire?

Speaker Change: Maybe to sort of if you could put a finer point.

Speaker Change: The project delays aspect is that just an expectation of what could happen.

Speaker Change: Later in the year maybe.

Speaker Change: Maybe any updated thoughts on the education vertical is that.

Speaker Change: I guess, a tailwind sort of starts to expire and I guess the thrust of the question is really you had.

Michael Quenzer: And I guess the thrust of the question is really you had, you know, 21% revenue growth in that BCS segment in the first quarter, the year's up 10. Is an implied decline at some point just pure conservatism? Or is there anything we're really seeing on those project delays or the education vertical or something?

Speaker Change: 21% revenue growth in that Vcs segment in the first quarter the year is up 10.

Speaker Change: Is an implied decline at some point just pure.

Speaker Change: Conservatism or is there anything we're really seeing on those project delays or education vertical or something like that.

Alok Maskara: Sure. I guess, Julian, the two biggest factors in that are that we like to be conservative. And second, we had fairly easy comps in Q1 compared to where we were last year. On the demand side, I'll start by saying we remain a manufacturing or production capacity constraints, not a demand constraints. So, keep that in mind as I answer all the other different points here. The new construction and the project push to the right are actually happening right now.

Speaker Change: Sure I.

Speaker Change: Julian the two biggest factors in that we'd like to be conservative and second we had fairly easy comps in Q1 compared to where we were last year.

Speaker Change: On the demand side I'll start by saying, we remain manufacturing or production capacity constrained not demand constrained.

Speaker Change: So keep that in mind as are all the other different points in here.

Speaker Change: The new construction and the project push to the right is actually happening right now now that only impacts 15% to 20% of our sales is about 70% 80% of that is our Santa all replacement, so, but we needed to call that out just.

Alok Maskara: Now, that only impacts 15 to 20 percent of our sales. That's about 75, 80 percent of that is our sales are all replacement. So, but we needed to call that out because it does impact a portion of our sales. But today, it's not an issue because, again, being a supply constraint versus demand constraint continues to hold for us in the education vertical.

Speaker Change: Because it does impact portion of our sales.

Speaker Change: Today, it's not an issue because again being supply constrained we're still demand constrained continues to all for us.

Speaker Change: <unk> vertical yes. It had some benefits last year, we may have left this year, but it's really not a material mover for us nor was it last year. So.

Alok Maskara: Yeah, it had some benefits last year. We may have less this year, but it's really not a material mover for us, nor was it last year. Unknown Speaker The biggest driver of optimism there is the age of units, the units on the rooftop, whether it's a big box and others. They are way beyond their useful life. Many of them are like 18 years old, but their useful life is closer to 14 to 16.

Speaker Change: It really doesn't impact us the biggest driver of optimism there is the age of units the units on the rooftop whether its a big box and others.

Beyond their useful lives. Many of them are like 18 years of useful life is closer to 14 to 16, that's what drives our optimism about order rates and things going forward.

Alok Maskara: That's what drives our optimism about auto rates and things going forward. But the delta that you officially asked for at the beginning, easiercomps, and some conservatism built in because no factory startup goes perfectly, Julian. As you know, factory startups always have some issues here or there, didn't want to get ahead of. That makes sense. Thank you.

Speaker Change: But the delta that officially asphalt the beginning is easier comps in some conservatism baked in because no factory startup goes perfectly Julien as you know factory startups always have some issues here or there. So we just didn't want to get ahead of ourselves.

Speaker Change: That makes sense. Thank you.

Operator: Our next question will come from Joe O'Day with Wells Fargo. Please go ahead.

Speaker Change: Our next question will come from Joe O'dea with Wells Fargo. Please.

Please go ahead.

Joseph Alfred Ritchie: Hi, good morning. Thanks for taking my question. The first question is just related to pricing strategy, and I think both on HCS and BCS, you have sort of engaged with consultants and have implemented, you know, pricing changes as a result. The question is just related to, you know, what inning you're in in that, the degree to which that's complete, the degree to which we see it in the P&L. And as a result, was it a matter of you were pricing below market on the net pricing side of things, and maybe you're above market, just, you know, overall, kind of the outcome of those efforts, sort of where you are, you know, pricing relative to what you see pricing in the market being?

Joseph Alfred Ritchie: Hi, good morning, Thanks for taking my questions.

First question is just related to pricing strategy and I think both on HCS and Vcs, you had sort of engaged with consultants in.

Joseph Alfred Ritchie: Have implemented pricing changes as a result, the question is just related to.

Joseph Alfred Ritchie: What inning, you're in and that the degree to which that's complete the degree to which we see it in the P&L and as a result of what was it a matter of you were pricing below market on a net pricing side of things and maybe your above market just overall kind of the outcome of those efforts.

Joseph Alfred Ritchie: You are pricing relative to what you see pricing in the market being.

Alok Maskara: You know, if it was cricket, I would tell you in the first inning, but since it's baseball, I have to say we're probably in the third or fourth inning of that right now. Where we are is, yes, we were below market price in many of our key accounts where we had signed contracts. After the tornado and before COVID, we did not have inflation clauses in that. So there was definitely a large portion of our sales where we were and, in some cases, still below market. And that it's a multi-step process to get up to the market level, so I think that's a big part of that.

Joseph Alfred Ritchie: If you guys cricket I would tell you in the first inning with since it's based on what I have to say, we are probably in a corridor or turning off that.

Joseph Alfred Ritchie: Where we are is yes, we were below market price and many of our key accounts, where we have signed contracts.

Joseph Alfred Ritchie: After the tornado and pre Covid and we did not have inflation clauses in that so there was definitely a large portion of our sales.

Joseph Alfred Ritchie: Where we were and in some cases still below market and that's it.

Joseph Alfred Ritchie: Multi step process to get up to the market level I think there is a big part of that there is second part of that which is our own.

Alok Maskara: There is a second part of that, which is around giving the local leaders autonomy to an extent to get pricing adjusted. We used to do national pricing. And then we realized there is no such thing as national pricing. You know, pricing in the South is very different from pricing in the North. So we will be able to capture greater pricing excellence just by having more localized pricing, and there's going to be upside to that, working through that.

Joseph Alfred Ritchie: Given the local leaders autonomy to an extent to get pricing adjusted we used to do national pricing and then we realize there is no such thing as national pricing and the.

Joseph Alfred Ritchie: Pricing itself is very different than pricing in the north so we will be able to capture a greater pricing excellence just by having more localized pricing and theres going to be upside on that working through that.

Alok Maskara: The third aspect of pricing is simply around us continuing to capture pricing ahead of inflation, because people think inflation has gone away, and it's not. So as we do price increases, and the fact that we lost margin points during the COVID transition and during the tornado, we need to just work with all our channel partners and customers and make sure we get prices ahead of inflation, not behind inflation. Because inflation continues to impact us, whether it's SG&A or materials or labor, all of that impacts SG&A.

Joseph Alfred Ritchie: One aspect of pricing is simply around us continue to capture pricing ahead of inflation because people think inflation is going away and it's not so as we do price increases.

Joseph Alfred Ritchie: <unk> that we lost margin points during the Colgate transition enduring the tornado we need to just work with all our Chinese partners and customer and make sure. We get price ahead of inflation not behind inflation, because inflation continues to that kind of.

Joseph Alfred Ritchie: Impact us, whether it's SG&A or materials or labor all of that impact SG&A. So those three aspects I would say we're less than halfway complete.

Alok Maskara: So those are three aspects. I would say we are less than halfway complete, but I am pleased with progress so far and especially pleased with some of the price actions we took on key accounts and got them closer to market, but still below market in some cases.

Joseph Alfred Ritchie: Pleased with progress, so far and especially pleased with some of the price actions, we took on key accounts.

Joseph Alfred Ritchie: Got them closer to market, but still below market in some cases.

Joseph Alfred Ritchie: Got it. And then also, just wanted to ask about leverage. And when you think about the M&A opportunity set out there, you talked about a long-term target leverage range of one to one and a half times, but if the right opportunity were to present itself, you know, how, how high are you comfortable taking leverage to pursue that type of opportunity?

Speaker Change: Got it and then also just wanted to ask on on leverage and when you think about the M&A opportunity set out there you talked about a long term target leverage range in the one to one five times, but.

Speaker Change: If the right opportunity were to present itself.

Speaker Change: Now how high are you comfortable taking taking leverage to pursue that type of opportunity.

Michael Quenzer: Yeah, if the right opportunity materialized, we'd go up kind of three, maybe a little over three near term, and then quickly want to get back to that one to one and a half times after that initial increase to above three. But the key is maintaining investment grade ratings.

Speaker Change: If the right opportunity materialize, we'd go up kind of three maybe a little over three near term and then quickly want to get back to that one to one five times after that initial increase to above three but the key is maintaining investment grade ratings. That's the key.

Joseph Alfred Ritchie: Got it. Thanks very much.

Speaker Change: Got it thanks very much.

Operator: And our next question will come from Deane Dray with RBC Capital Markets. Please go ahead.

Speaker Change: Okay.

Speaker Change: And our next question will come from Deane Dray with RBC capital markets. Please go ahead.

Deane Michael Dray: Thank you. Good morning, everyone. Hey, and I appreciate, Alok, that you're not going to use any cricket analogies because I would have no idea what you're talking about.

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

Deane Michael Dray: Finding.

Deane Michael Dray: Hey, and I appreciate that youre not going to use any cricket analogy because I would have no idea what youre talking about.

Deane Michael Dray: Hey, just on that- That's beauty for a few of us. Yes, on the manufacturing line conversion, just give us a sense of this, and clarify. Is that the 5 to 10 million that is in the assumption? And is this in the Mexico facility? And just give us a sense of how disruptive this is to the actual line to change over to the new refrigerants. You know, are you adding some new components? Is your new testing? Is it higher pressurization? Just what, from a technology standpoint and a logistic standpoint, how disruptive might that be?

Deane Michael Dray: [laughter].

Deane Michael Dray: Sure.

Deane Michael Dray: Hey, just a few of these.

Deane Michael Dray: Yes on the manufacturing line conversion.

Deane Michael Dray: Just give us a sense of this the clarify is that the $5 million to $10 million.

Deane Michael Dray: That is in the assumption.

Deane Michael Dray: And is this in the Mexico facility.

Deane Michael Dray: And just give us a sense of how disruptive is this to the actual aligned to changeover to the new refrigerants.

Deane Michael Dray: Are you, adding some new components as your new testing.

Deane Michael Dray: A higher pressurization just yet.

Deane Michael Dray: From a technology standpoint logistics standpoint, how disruptive might that be.

Alok Maskara: Sure. So the two inefficiencies we called out, one is the Saltier Mexico startup inefficiencies. And then we called out five to $10 million of additional inefficiencies on residential for transitioning from 410A to 454B. The change is pretty big. We have to make sure that we are handling appropriately the new refrigerant, which is mildly flammable. So it has a different classification when it comes to DOT regulations. So it requires different piping, different storage, different testing, and different test chambers.

Speaker Change: Sure. So the two inefficiencies we called out one is the <unk>, Mexico startup inefficiencies and then we called out $5 million to $10 million of traditional inefficiencies on residential for transitioning from four eight to $4 54 B.

Speaker Change: The change is pretty big we have to make sure that we have.

Speaker Change: <unk> approve.

Speaker Change: Appropriately the new refrigerant, which is mildly flammable so kind of a different classification when it comes to <unk>.

Speaker Change: The regulation requires different by paying different storage different testing different chambers.

Alok Maskara: A lot of the compressors are new, and the size of the product might change in some cases. So it's a fairly big change. But we're pretty used to it. We're very ready. This is not starting now.

Speaker Change: During the compressors are new the size of the product might change in some cases, so it's a fairly big change, but we're pretty used to it. We are very ready. This is not starting now none of these changes started last year.

Alok Maskara: A lot of these changes started last year. So, for example, the new reference line has already been installed, and the new storage tanks are already in the facility. We are already doing test runs. If we needed to make products today, we would So the inefficiency calls that we called out would simply be lines shutting down for a few weeks while we make all the changes, test the product, and then restart it. That's kind of the core source of an efficient. Most of the investments, and all are already kind of on the

Speaker Change: So for example, the new reference line already been installed and the new storage tanks already in the facility. We are already doing test runs if you needed to make products today reward so.

Speaker Change: The inefficiency costs that we called out would simply be line shutting down for a few weeks, while we make all the changes desktop product. Okay, and then restocking that's kind of the core source of efficiencies, mostly investments in Illinois already kind of on the floor now.

Deane Michael Dray: That's really helpful. Thank you. And then the follow-up question from Michael, and I'll also add my shout out for the quality of earnings. I mean, we had to spend some time this morning to double-check that we weren't missing something. There were no eliminations.

Speaker Change: Yes.

Speaker Change: That's real helpful. Thank you and then the follow up question from Michael and I'll also add my shot out for the quality of earnings I mean, we had to spend some time. This morning to double check that we weren't missing something there were no eliminations and.

Michael Quenzer: And that was the conclusion. I said, oh, my gosh, this is as close to a gap as any company we follow. So thank you. So Chelsey and I were listening to you, Deane, when you told us that at your conference, and we took that as a challenge.

Unknown Attendee: That was the conclusion I said Oh my Gosh. This is as close the gap as any company. We follow so thank you.

Unknown Attendee: Okay.

Speaker Change: We're listening to the Dean when you throw all of that at your conference and we took that as a challenge. So it did start at your conference Randy mentioned after Chumps Eni.

Deane Michael Dray: So it did start at your conference when you mentioned that to Chelsey and me. All right, I appreciate that. So, and then, with all this buildup, I've got more of a mundane question on free cash flow. It's just, you know, first quarter is typically a use, but it was less of a use. Just what are the dynamics there?

Speaker Change: Alright, I appreciate that so.

Speaker Change: And then so that's with all this buildup I've got more of a mundane question on free cash flow.

Speaker Change: So first quarter is typically a use but it was less of a use.

Speaker Change: Just what are the dynamics there and you said you've got some additional inventory build coming where does buffer inventory as we distance ourselves from all of the supply chain issues have you rid yourself of buffer inventory entirely thats still winding down, but some color there would be helpful. Thanks.

Michael Quenzer: And you said you've got some additional inventory build coming. Where does buffer inventory go, you know, as we distance ourselves from all the supply chain issues? Have you read yourself a buffer inventory entirely?

Michael Quenzer: That's still winding down, but some color there would be helpful. Thanks. Yeah.

Michael Quenzer: Yeah, on the raw material side, yeah, our inventories are still higher than we'd like, but they are drifting down better, supply chains are healing, so they are coming down. But we're going to have to grow them a bit for this building climate solutions transition to ramp up that new factory. But overall, raw inventory is getting better. But yeah, we're going to start to grow inventory later this year for the new 410A product, and we're going to start to pre-build and grow some of that in the second half of this year.

Speaker Change: On the raw material side, yeah, our inventories are still higher than we'd like with they are drifting down battery supply chains are healing. So they are coming down, but we're going to have to grow them a bit for this business building climate solutions transition to ramp up that new factory, but overall raws or raw inventory is getting better, but yes, we will.

Speaker Change: We're going to start to grow inventory later this year for the new <unk>.

Speaker Change: Product and we're going to start to.

Speaker Change: Pre build and grow some of that in the second half of this year.

Michael Quenzer: And then another element that we have within the free cash flow guide is that the capex is also going to be a little bit higher in the second half of this year than our normal guide. Normally, we have about 110 million dollars of free capex. It's about 175 million. You can see that there will be more in the second half to complete the ramp-up of the factory and get our transition to the new 454B product ready to go.

Speaker Change: And then.

Speaker Change: And another element that we have within the free cash flow guidance is that the Capex is also going to be a little bit higher in the second half of this year than a normal guide normally we have about $110 million of under 110 million of free cash Capex. It's about 175 million you can see that there's going to be more in the second half to complete the ramp up of the factory and get our transition to the new <unk> hundred 50 <unk> product.

Deane Michael Dray: That's all very helpful, thank you.

Speaker Change: Ready to go.

That's all helpful. Thank you.

Speaker Change: Yep.

Operator: Our next question will come from Nicole DeBlase. Go ahead. Yeah, thanks, good morning, guys.

Speaker Change: Our next question will come from Nicole <unk> with Deutsche Bank. Please go ahead, yes. Thanks.

Thanks, Good morning, guys.

Nicole Sheree DeBlase: Yeah, thanks. Good morning, guys. Thanks for taking my question. I guess the first thing is just on the commercial margins, obviously really, really strong again this quarter. Thinking through all the puts and takes through the rest of the year and how the comp gets a lot harder from 2Q to 4Q, I guess how much conviction do you guys have that you can continue to expand margins year on year through the rest of the year?

Nicole: Good morning.

Yes. Thanks for taking my question I guess first thing is just on the commercial margins, obviously really really strong again this quarter and if there are other puts and takes through the rest of the year and how the comp gets a lot harder through from <unk> I guess, how much conviction do you guys have that you can continue to expand margins year on year through the rest of the year.

Michael Quenzer: Yes, so we continue to do pricing excellence that we've announced up to an 8% price increase in Q1. So we're going to continue to drive price increases, even though it's going to lap some of the comps, which are going to be a little more challenging. Right now, our guide is, you know, volumes kind of flattish up, you know, low single digits on the balance of the year that normally comes with 30% incrementals

Speaker Change: Yes, so we continue to do pricing excellence, we've announced up to 8% price increase in Q1. So we're going to continue to drive price increase even though it is going to lap some of the comps which are going to be a little more challenging right now our guidance volumes kind of flattish to up low single digits on the balance.

Speaker Change: The year that normally comes with 30% Incrementals, so that should help drive our return on sales operating profit margins up higher.

Michael Quenzer: So that should help drive our return on sales, and operating profit margins higher. But then working against that as a little bit of the headwinds that we have to ramp that new factory up. So absent of the factory ramp, we still see margins modestly moving up.

Speaker Change: But then working against that is a little bit of the headwinds that we have to ramp that new factory up.

Speaker Change: So absent of the factory ramp, we still see margins modestly moving up.

Nicole Sheree DeBlase: Okay, I got it. That's helpful.

Speaker Change: Okay got it that's helpful. And then we've seen copper and aluminum costs rising recently can you just refresh us on when that could potentially impact your P&L would that be more of like a 2025 concern at this point or something to focus on thank you.

Michael Quenzer: And then we've seen copper and aluminum costs rising recently. Can you just refresh us on when that could potentially impact your P&L? Would that be more of a 2025 concern at this point or something to focus on? Thank you.

Nicole Sheree DeBlase: Yeah, so we see steel increases that are also starting to come up, that's more immediate, that kind of is not a quarterly lag. Copper and aluminum go through a hedging process, it's kind of an 18 month blended hedging process. So we'll start to see some of that this year, but it will come into next year as well. We'll continue to monitor that, and if it stays elevated, we'll have to see what type of pricing actions later this year we need to take. But definitely, that would be reflective in the new 454B product and the 410A pricing in the next

Speaker Change: Yeah. So we see steel increases that are also starting to come up that's more immediate that kind of is on a quarterly lag the copper and aluminum goes through our hedging process. It's kind of an 18 month blended hedging process. So we'll start to see some of that this year, but it will come into into next year as well, we'll continue to monitor that if it stays elevated we'll have to see what type of pricing.

Speaker Change: Actions later this year, we need to do but definitely that would be reflective in the new 454, B product. If it continues on pricing and <unk> pricing into next year.

Speaker Change: Got it thank you I'll pass it on.

Speaker Change: And our next question will come from Steve Tusa with J P. Morgan.

Unknown Executive: Hi, good morning.

Unknown Executive: Thanks, Steve.

Nicole Sheree DeBlase: Got it. Thank you. I'll pass it on.

Unknown Executive: Can you just help me reconcile some of the price and mix dynamics.

Operator: And our next question will come from Steve Tusa with J.P. Morgan.

Unknown Executive: You guys had put through I believe allied was in Jan one and then the rest of the business maybe in early February I think they were upwards of like 10% price increases.

Unknown Executive: Can you just help me reconcile some of the price and mix dynamics? I mean, you guys had put through, I believe, Allied on Jan 1 and then the rest of the business maybe in early February. I think there were upwards of like 10% price increases. The price was up 3% in the quarter. So maybe just help me reconcile that, and then what basically gets that to accelerate through the rest of the year? Those data points with kind of the mid-single-digit guidance.

Unknown Executive: Price was up 3% in the quarter. So maybe just help me reconcile that and then what what basically.

Unknown Executive: Get that to accelerate.

Unknown Executive: Through the rest of the year I mean, your price mix was basically 1% for the quarter with.

Unknown Executive: With negative mix. So maybe just help me reconcile those.

Unknown Executive: Those data points with kind of the mid single digit guidance.

Michael Quenzer: I'll specifically speak to the pricing. So within the quarter, we only had a partial quarter on the price increase. So we announced on the Lennox brand starting February, so that didn't even fully get all the way through February. So you had about a month on the Lennox side. So that should continue to increase as we go throughout the year on just the normal flow activity on Lennox. And then we also had price increases on some of our large PE and builder contracts that were also partially quartered.

Unknown Executive: Yes.

Speaker Change: Specifically speak to the pricing so within the quarter, we only had a partial quarter on the price increase we announced on the Lennox brand started February so that didn't even before we get all the way through February were seeing about a month of millennium sites. So that should continue to increase as we go throughout the year on just.

Speaker Change: The normal slow activity on <unk> and then we also had price increases on some of our large p/e and builder contracts that also with some of those were also a partial quarter. So youll start to see that also expand later in the year on the mix side, we don't think that the new construction mix is going to continue so that should should help going forward, but.

Michael Quenzer: So you'll start to see that also expand later in the year. On the mix side, we don't think that the new construction mix is going to continue. So that should help going forward, but we're watching it to see if it does. But right now, we're assuming that that mix basically slows down the RNC side.

Speaker Change: We're watching it to see if it does but right now we're assuming that that mix basically slows down that.

Speaker Change: The RNC side.

Speaker Change: So so that mix number that you put in there the mix first sales is a mix driven by type of business like new construction versus.

Michael Quenzer: So that mixed number that you put in there, the mix for sales, is a mix driven by type of business, like new construction versus like replacing. That's what that negative 2% mix reflects.

Speaker Change: Like replace.

Speaker Change: That's what that negative 2% mix reflects.

Speaker Change: Within the quarter correct.

Speaker Change: I didn't have you guys always accounted for it that way I thought that was more about.

Speaker Change: The.

Unknown Executive: Within the quarter, correct? Yep.

Speaker Change: The senior level of the product as opposed to the type of customer you are selling to.

Michael Quenzer: I didn't have you guys always accounted for it that way. I thought that was more about, you know, the, like, the seer level of the product, as opposed to the type of customer you're selling to.

Speaker Change: Well, if you think within that customer it is the sheer level of the product that normally do entry level type products. So it's kind of a mix of both.

Speaker Change: Steve ill turn it the same way now last year, we called out this year, one because that was the largest driver as the going from.

Unknown Executive: Well, if you think within that customer, it is a serial level of the product. They normally do entry-level type products, so it's kind of a mix of both.

Speaker Change: Older <unk> standards to the newer one.

Speaker Change: Mix is always been prototypes and RMC products are part of that mix change.

Michael Quenzer: Steve, why don't we turn it the same way? Last year, we called out CR1 because that was the largest driver as we were going from older standards to the newer one. But for us, the mix has always been product types, and RNC products are part of that mix.

Unknown Executive: Right I guess, but that's not really going to change I guess over the next several quarters right mix should remain.

Unknown Executive: Relatively new construction focused or does that mix change over the next several quarters.

Unknown Executive: Well as new housing starts had gone down in Q1 last year was abnormally low so I think that both stock impacting right. We are comping ourself.

Unknown Executive: Right, I guess, but that's not really going to change, I guess, over the next several quarters, right? Mix should remain, you know, relatively new construction focused, or does that mix change over the next several quarters?

Unknown Executive: The dip that we had last year.

Speaker Change: Got it and then just one last one on commercial what what do you think the market did this quarter I mean, the AHRI data, which is obviously a little more narrow than what some people define as a light commercial market that looked pretty strong you guys had volume that was up I think.

Michael Quenzer: Well, as new housing starts have gone down, I think Q1 last year was abnormally low. So I think that both are impacting, right? We're compensating ourselves out of the dip that we had last year.

Speaker Change: Mid to high single digits.

Speaker Change: What do you think the market did.

And did you guys.

Unknown Executive: Got it. And then just one last one on commercial. What do you think the market did this quarter? I mean, the HRI data, which is obviously a little more narrow than what some people define as a light commercial market, that looked pretty strong. You know, you guys had volume that was up, I think, you know, mid to high single digits. What do you think the market did? And you guys, I guess, how did you perform relative to that in your estimation? Yeah.

Speaker Change: I guess, how did you perform relative to that in your estimation yes.

Speaker Change: Our AHRI reported rooftop units were up more than that 7%, we had some declines in our refrigeration volume within the quarter.

There were taking down some of the gains, but we think we grow faster than the AHRI on rooftops within the quarter when you back some share.

Speaker Change: I think our entire segment and compare it to Michael.

Michael Quenzer: Our AHRI-reported rooftop units were up more than that 7%. We had some declines in our refrigeration volume within the quarter that were taking down some of the gains, but we think we grew faster than AHRI on rooftops within the quarter, winning back some share.

Speaker Change: A portion of our segment get compared to that so we did equal or better than the AHRI data.

Speaker Change: Yeah, Okay, great. Thanks, a lot.

Speaker Change: Thanks.

Speaker Change: Our next question comes from Ghansham Cano with TD Cowen. Please go ahead.

Alok Maskara: Yeah, and if you take our entire segment and compare it to Michael's segment, only a portion of our segment gets compared to that. So we did equal to or better than the HRI.

Speaker Change: Okay.

Ghansham Cano: Yes, thanks, good morning, guys.

Ghansham Cano: Couple of questions.

Ghansham Cano: First I was wondering in April you talked about Destocking in the third party channel coming to an end can you talk about maybe April order trends in that channel and how that might inform your conviction.

Unknown Executive: Yeah. Okay, great. Thanks a lot.

Operator: Our next question comes from Gautam Khanna with TD Cowan. Please go ahead.

Ghansham Cano: Given that we are having to call on towards the end of April.

Gautam J. Khanna: Yeah, thanks. Good morning, guys.

Alok Maskara: I had a couple questions. First, you talked about destocking and the third party channel coming to an end in April. Can you talk about maybe April order trends in that channel and how that might inform your conviction?

Ghansham Cano: Our conviction is.

Ghansham Cano: Already reflective of.

Ghansham Cano: What we're seeing in April so we remain convinced that the destocking is coming to an end.

Ghansham Cano: Do you anticipate that channel will be down in the second quarter still in terms of unit volumes.

Gautam J. Khanna: Yeah, given that we are having a call on towards the end of April, our conviction is already reflective of what we are seeing in April. So we remain convinced that de-stopping is coming to an end.

Speaker Change: No I would expect that the up in unit volume in Q2.

Speaker Change: Okay, and that's irrespective I mean, assuming weathers undertake variable year to year.

Speaker Change: Yes, im going to call out weather, but listen I don't want to get enormous just because I had to wear a sweatshirt and Texas.

Alok Maskara: Do you anticipate that this channel will still be down in the second quarter in terms of unit volume?

In April.

Speaker Change: Gotcha Okay.

Gautam J. Khanna: No, I would expect the channel to be up in unit volume in Q2.

Speaker Change: I was wondering if you could talk about the.

Speaker Change: <unk>.

Speaker Change: Demand do you think youll have as the new Mexican capacity comes online. So maybe if you could talk about.

Alok Maskara: Okay, and that's irrespective, I mean, assuming weather is not a big variable. Yeah, I was going to call out whether

Speaker Change: Customers or business that you may not have been able to accommodate.

Gautam J. Khanna: Yeah, I was going to call out the weather, but listen, I don't want to get nervous just because I had to wear a sweatshirt in Texas, you know, in April.

Speaker Change: On the commercial side.

Speaker Change: So just because obviously where people get concerned about.

Speaker Change: Commercial unitary.

Speaker Change: <unk> starting to soften after a big.

Alok Maskara: I was wondering if you could talk about, you know, the demand you think you'll have as the new Mexican capacity comes online. So maybe if you could talk about customers or businesses that you may not have been able to accommodate, on the commercial side. You know, just because obviously, we're the little people get concerned about commercial unitary demand starting to soften after a big, you know, Right now, COVID, you know, what gives you conviction that you'll be able to fulfill that capacity over time?

Right.

Speaker Change: <unk>.

Speaker Change: What gives you conviction that youll be able to fulfill that capacity overtime.

Speaker Change: Yeah, So listen Great question, Mike There are no certainties, here's what we know and we look at right.

Speaker Change: Our order rates continue to be higher than what we can manufacturer and we are still Tony EMEA business that we.

Speaker Change: We would rather not so just in total the way we are looking at that and that's been going on for two to three years now so but it does certainly tomorrow like mine. That's one second we have made significant investments and preparing our sales team to go out and start adding in some cases, adding back contractor.

Gautam J. Khanna: Yeah, so this is a great question. While there are no certainties, here's what we know and what we look at, right?

Alok Maskara: I mean, our order rates continue to be higher than what we can manufacture, and we are still turning away businesses that we would rather not. So that's just the internal way we are looking at it, and that's been going on for two to three years now. I don't know if it's going to turn suddenly tomorrow. It might, but that's one.

Speaker Change: We had lost and working towards the emergency replacement and Thats part of some of the investments that we've talked about is <unk>.

Speaker Change: Leveraging our core contractors on Lennox dealers to be able to push that emergency replacement market and finally, it's the key accounts and the conversations that we're having with them, especially when it comes to 454 b products because some of them had delayed replacement and one or two replacement with 454 b products because they know.

Alok Maskara: Second, we have made significant investments in preparing our sales team to go out and start adding, in some cases, adding back contractors whom we had lost and working towards emergency replacement. And that's part of some of the investments that we talked about, leveraging our core contractors or Lennox dealers to be able to push that emergency replacement market. And finally, it's the key accounts and the conversations that we are having with them, especially when it comes to 454B products, because some of them have delayed replacement and want to do replacement with 454B products because they know that that refrigerant will be around longer and will have a lower global warming potential rated.

Speaker Change: That.

Speaker Change: That refrigerated to be around longer and will be lower global warming potential rate. So they get some carbon credits for that as well.

Speaker Change: So it's multiple factors in there goes down to our current grades investments we have made in drumming up extra to Mac and lots and lots of conversations with our key accounts to pullback firewood.

Speaker Change: At the same time at home and our current factory is running kind of overcapacity. So in case another.

Speaker Change: Another demand fully doesn't come through we got lots of flexibility in where we produce and what we produce and that flexibility is also super exciting to us and baked into our numbers going forward.

Speaker Change: That's helpful and last one for me on the GCI assets for sale.

Alok Maskara: So there are multiple factors in there, goes down to our current rates, investments we have made in drumming up extra demand, and lots and lots of conversations with our key accounts to pull that forward. But at the same time, you know, my current factory is running kind of over capacity. In case, like, you know, the demand fully doesn't come through, we have lots of flexibility in where we produce and what we produce. And that flexibility is also super exciting to us and baked into our numbers going forward.

Speaker Change: As I've expressed an interest in the York rest of unitary stuff.

Speaker Change: If it were.

Speaker Change: If there were other assets embedded in whatever they are selling is that something you guys would entertain or is that too much complexity for.

Speaker Change: What you ultimately want and therefore not worth pursuing I'm just curious.

Speaker Change: How that casino, where does that then we saw more of it all at once and then you have to divest it sure.

Speaker Change: No that's fair.

Speaker Change: Again, I don't want to comment on.

Speaker Change: The company, but I'll tell you we.

Speaker Change: We are going to be focused on HVAC. I mean, we are an <unk> company and Thats, what we do focused on that and I.

Speaker Change: I don't think thats going to change just because opportunistically something else becomes available and our strategy is working we have the scale, we see a strong pathway ahead for us.

Gautam J. Khanna: That's helpful. And last one for me on the JCI assets for sale. You guys have expressed an interest in the York Resi Unitaries. If it were, If there were other assets embedded in whatever they're selling, is that something you guys would entertain, or is that too much complexity for know what you ultimately want and therefore not worth pursuing? I'm just curious how that works because, you know, I hear that they sell more of it all at one and then Edith DeVos.

Speaker Change: Doing.

Speaker Change: Execution on our business will remain very focused.

Speaker Change: That's north American HVAC, just to be clear correct.

Speaker Change: No I would say we are looking at North American AWAC has been the primary market, we do a lot of exports.

Alok Maskara: No, that's fair. Again, I don't want to comment on other companies, but I'll tell you, we are going to be focused on HVAC. I mean, we are an HVACR company, and that's what we focus on. And I don't think that's going to change just because opportunistically something else becomes available. And our strategy is working. We have the scale. We see a strong pathway ahead for us, just doing like an execution on our current business. But no; we'll remain very focused.

Speaker Change: And the heat pump technology that we use we do get from overseas that we already have one hundreds of millions of sales in that zone.

Okay. Thank you appreciate it guys.

Speaker Change: Okay. Thanks.

Speaker Change: Okay.

Speaker Change: And thank you for joining us today with no further questions. This will conclude the Atlantic 2024 first quarter Conference call. You may disconnect your lines at this time.

Speaker Change: Yeah.

Speaker Change: Okay.

Speaker Change: Okay.

Gautam J. Khanna: And that's North American HVAC, just to be clear, correct? No, I would say we are looking at North American HVAC as being the primary market. We do a lot of exports as well. And the heat pump technology that we use, we do get from overseas, as you know; we already have hundreds of millions of sales in that. Okay, thanks.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: Mhm.

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Speaker Change: Uh-huh.

Speaker Change: Okay.

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Speaker Change: [music].

Alok Maskara: Thank you. I appreciate it, guys.

Speaker Change: Okay.

Operator: And thank you for joining us today. With no further questions, this will conclude the Lennox 2024 first quarter conference call. You may disconnect your lines at this time.

Speaker Change: [music].

Speaker Change: Okay.

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Speaker Change: Sure.

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