Q4 2025 Lennox International Inc Earnings Call

January 28, 2026

The presentation, you may enter the queue to ask a question by pressing star and 1 on your phone to exit the queue press star and 2. As a reminder, this call is being recorded. I would now like to turn the call over to Chelsea. Peon from Linux investor relations, Chelsea, please go ahead.

Speaker #2: Please stand by. Your meeting is about to begin. Welcome to the Lennox Fourth Quarter Earnings Conference Call. All lines are currently in listen-only mode, and there will be a question-and-answer session at the end of the presentation.

Operator: Please stand by. Your meeting is about to begin. Welcome to the Lennox Fourth Quarter Earnings Conference Call. All lines are currently in listen-only mode, and there will be a question-and-answer session at the end of the presentation. You may enter the queue to ask a question by pressing star and one on your phone. To exit the queue, press star and two. As a reminder, this call is being recorded. I would now like to turn the call over to Chelsea Polson from Lennox Investor Relations. Chelsea, please go ahead.

Thank you, Madison. Good morning, everyone. And thank you for joining us. As we share our 2025 fourth quarter and full year results. Joining me today is CEO alok, maskara, and CFO Michael quenzer. Each will share their prepared remarks before we move to the Q&A session.

Turning to slide 2 a reminder that during today's call we will be making certain forward-looking statements which are subject to numerous risks and uncertainties as outlined on this page.

Speaker #2: You may enter the queue to ask a question by pressing star and one on your phone. To exit the queue, press star and two.

We may also refer to certain non-gaap Financial measures that management can fill out of the indicators of underlying underlying business performance.

Speaker #2: As a reminder, this call is being recorded. I would now like to turn the call over to Chelsey Pulcheon from Lennox Investor Relations. Chelsey, please go ahead.

Please refer to our SEC filings available on our investor relations website for additional details, including a Reconciliation of gaap to non-gaap measures.

Q4 2025 Lennox International Inc Earnings Call

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Lennox International

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Q4 2025 Lennox International Inc Earnings Call

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Wednesday, January 28th, 2026 at 2:30 PM

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Chelsey Pulcheon: Thank you, Madison. Good morning, everyone, and thank you for joining us as we share our 2025 Q4 and full year results. Joining me today is CEO Alok Maskara, and CFO Michael Quenzer. Each will share their prepared remarks before we move to the Q&A session. Turning to slide 2, a reminder that during today's call, we will be making certain forward-looking statements which are subject to numerous risks and uncertainties, as outlined on this page. We may also refer to certain non-GAAP financial measures that management considers relevant indicators of underlying business performance. Please refer to our SEC filings, available on our investor relations website for additional details, including a reconciliation of GAAP to non-GAAP measures. Please note that the results being presented today reflect the FIFO accounting method adopted by the company as of Q4 2025.

Alok Maskara: Thank you, Chelsea. Good morning, everyone. I am pleased with how our team executed throughout 2025, especially given the level of disruption the industry faced. It was a year marked by regulatory changes, softer demand, and broad market headwinds, yet the team remained resilient and delivered solid results. Most notably, we achieved full-year margins above 20% for the first time in our history. This meaningful milestone reflects the structural improvements we have made in our production capacity and operational efficiency. I'm grateful for the continued support of our dealers, distributors, and contractors, whose partnership played an important role in helping us navigate such a difficult year. Their loyalty, along with our team's commitment to excellence, continues to create value for our shareholders. Let's turn to slide 3 for an overview of our Q4 and full year financials.

Alok Maskara: Overall, 2025 was a complex and challenging year, and I'm proud of the team's delivering $23.16 in adjusted earnings per share. This is 2% higher versus last year's comparable, $22.70. Now, let's turn to slide 4 for an overview of end market conditions. 2025 was an eventful year for the North American HVAC industry and Lennox. We safely and timely converted our product portfolio to meet the low GWP requirement. However, the industry volume for residential products declined significantly, primarily impacted by channel destocking. The situation was further complicated by low dealer and consumer confidence, and the lack of housing recovery. On the commercial side, we successfully ramped our emergency replacement growth initiative in several metro regions, while the light commercial HVAC industry declined for 17 consecutive months by December 2025.

Alok Maskara: We are cautiously optimistic that the industry backdrop is going to shift favorably in 2026, as one-step channel destocking is nearly complete and two-step channel destocking is anticipated to be complete in Q2 of this year. In addition, unique challenges from 2025, such as canister shortages, have been addressed, and we expect housing to improve given lower mortgage interest rates. Our internal growth initiatives, such as parts and services growth, commercial emergency replacement coverage, and ductless product penetration, are also expected to accelerate our growth this year. Now, let us turn to slide 5 to review our investments that support our strategy of delivering differentiated performance.... Our confidence in the outlook is reinforced by the strategic investments made over the past several years.

We are cautiously optimistic that the industry backdrop is going to shift favorably in 2026, as one-step channel destocking is nearly complete and two-step channel destocking is anticipated to be complete in Q2 of this year. In addition, unique challenges from 2025, such as canister shortages, have been addressed, and we expect housing to improve given lower mortgage interest rates. Our internal growth initiatives, such as parts and services growth, commercial emergency replacement coverage, and ductless product penetration, are also expected to accelerate our growth this year. Now, let us turn to slide 5 to review our investments that support our strategy of delivering differentiated performance.... Our confidence in the outlook is reinforced by the strategic investments made over the past several years.

Alok Maskara: Since 2022, we have deployed an incremental $300 million to broaden our capabilities, streamline our operations, and strengthen our competitive position. These investments are now embedded in how we run the business and are reflected in our financial statements. At the same time, the benefits they unlock are only beginning to materialize and will continue to build as we move forward. We focus first on elevating front-end excellence to create a more efficient and responsive operating model. As part of this effort, we have expanded and reorganized our sales team to ensure alignment around pricing and improve coordination across the organization. This approach gives our teams clearer priorities and strengthens the connection between how we engage with customers and how we generate profitable growth.

Since 2022, we have deployed an incremental $300 million to broaden our capabilities, streamline our operations, and strengthen our competitive position. These investments are now embedded in how we run the business and are reflected in our financial statements. At the same time, the benefits they unlock are only beginning to materialize and will continue to build as we move forward. We focus first on elevating front-end excellence to create a more efficient and responsive operating model. As part of this effort, we have expanded and reorganized our sales team to ensure alignment around pricing and improve coordination across the organization. This approach gives our teams clearer priorities and strengthens the connection between how we engage with customers and how we generate profitable growth.

Alok Maskara: We also expanded our portfolio through joint ventures that increase our share of wallet and allow us to offer more comprehensive solutions to customers. In addition, our AI-enabled tools and updated e-commerce platform are making it easier to do business with Lennox by improving our dealers' quote, order, and receive support. Operationally, we have made meaningful progress. Our expanded distribution facilities enable a hub-and-spoke network designed to improve speed, reliability, and fill rates. We enhance this with new IT systems for warehouse and transport management that reinforce network priority and efficiency. On the manufacturing side, we doubled the square footage dedicated to our commercial operations, completed a major product redesign to meet regulatory requirements, and continue to advance our heat pump portfolio for long-term electrification trends. Looking ahead, we will continue to invest strategically to support future growth.

We also expanded our portfolio through joint ventures that increase our share of wallet and allow us to offer more comprehensive solutions to customers. In addition, our AI-enabled tools and updated e-commerce platform are making it easier to do business with Lennox by improving our dealers' quote, order, and receive support. Operationally, we have made meaningful progress. Our expanded distribution facilities enable a hub-and-spoke network designed to improve speed, reliability, and fill rates. We enhance this with new IT systems for warehouse and transport management that reinforce network priority and efficiency. On the manufacturing side, we doubled the square footage dedicated to our commercial operations, completed a major product redesign to meet regulatory requirements, and continue to advance our heat pump portfolio for long-term electrification trends. Looking ahead, we will continue to invest strategically to support future growth.

Michael Quenzer: Thank you, Alok. Good morning, everyone. Please turn to slide 6. As Chelsea mentioned, we updated our 2024 and September year-to-date results to reflect the change from LIFO to FIFO inventory counting. The appendix includes quarterly adjustments for both 2024 and 2025. Overall, adopting FIFO increased our 2024 full year EPS by approximately $0.12 and raised EPS for the first three quarters of 2025 by approximately $0.55. Full year, full year 2025 EPS impact was approximately $1. We've also included a page in the appendix outlining the rationale for this change, which is driven by three key benefits. First, FIFO simplifies our accounting processes by eliminating the need to track detailed inventory layers. Second, it aligns cost increases more closely with the timing of price realization.

Michael Quenzer: Third, FIFO is the predominant method used by industry peers and better reflects the physical flow of goods. Moving to our quarterly results. Overall performance can be attributed to ongoing destocking, softer than expected residential end markets, along with better cost productivity in response to inflation. We continue to execute well on price, cost, and expense management. This helped limit EBIT declines to 16%, despite a 23% decrease in sales volumes. Please turn to slide 7 for our Q4 performance in the Home Comfort Solutions segment. In our Q3 earnings call, we noted that end markets would remain challenging. The actual conditions in the Q4 were slightly worse than anticipated. Organic volumes were down 32%, driven by continued destocking across both one-step and two-step channels. Using warranty registrations, we developed a model to estimate units held in the channel.

Third, FIFO is the predominant method used by industry peers and better reflects the physical flow of goods. Moving to our quarterly results. Overall performance can be attributed to ongoing destocking, softer than expected residential end markets, along with better cost productivity in response to inflation. We continue to execute well on price, cost, and expense management. This helped limit EBIT declines to 16%, despite a 23% decrease in sales volumes. Please turn to slide 7 for our Q4 performance in the Home Comfort Solutions segment. In our Q3 earnings call, we noted that end markets would remain challenging. The actual conditions in the Q4 were slightly worse than anticipated. Organic volumes were down 32%, driven by continued destocking across both one-step and two-step channels. Using warranty registrations, we developed a model to estimate units held in the channel.

Michael Quenzer: This analysis shows inventory levels have largely normalized in the one-step channel, while destocking in the two-step channel is expected to continue into Q2. Mix and price realization remained resilient, which helped manage volume decrementals. Product costs were a $29 million headwind, driven by inflation and unfavorable absorption due to lower production in the quarter. Disciplined actions resulting in a $19 million SG&A reduction partially offset the higher product costs. Please turn to slide 8 for an overview of the Building Climate Solutions segment. BCS delivered another strong quarter, with organic sales growth in down markets and continued margin expansion. Revenue grew 8% as favorable mix and pricing actions offset lower organic sales volumes. The completed acquisition contributed approximately 7% revenue growth. Light commercial industry shipments remained below normal levels, but strong execution in emergency replacement and national accounts limited organic volume declines to mid-single digits....

This analysis shows inventory levels have largely normalized in the one-step channel, while destocking in the two-step channel is expected to continue into Q2. Mix and price realization remained resilient, which helped manage volume decrementals. Product costs were a $29 million headwind, driven by inflation and unfavorable absorption due to lower production in the quarter. Disciplined actions resulting in a $19 million SG&A reduction partially offset the higher product costs. Please turn to slide 8 for an overview of the Building Climate Solutions segment. BCS delivered another strong quarter, with organic sales growth in down markets and continued margin expansion. Revenue grew 8% as favorable mix and pricing actions offset lower organic sales volumes. The completed acquisition contributed approximately 7% revenue growth. Light commercial industry shipments remained below normal levels, but strong execution in emergency replacement and national accounts limited organic volume declines to mid-single digits....

Michael Quenzer: Like HCS, product cost headwinds reflected absorption pressure and the timing of inflation expense recognition under FIFO. With that, let's move to slide 9 to review the full year performance for Lennox. Overall, 2025 was a challenging year from an end market standpoint, with channel destocking, R-454B canister shortages, slowing new system adoption, and tariff-driven inflation. Despite these headwinds, we executed well. We expanded profit margins to a record 20.4% and delivered more than $75 million in cost productivity, while continuing to invest in long-term growth. Please turn to slide 10 for cash flow and capital deployment. Free cash flow for 2025 was $640 million, above our prior guidance of $550 million. The team's focus on strong collections and disciplined payments helped partially offset temporary elevated inventory levels.

Like HCS, product cost headwinds reflected absorption pressure and the timing of inflation expense recognition under FIFO. With that, let's move to slide 9 to review the full year performance for Lennox. Overall, 2025 was a challenging year from an end market standpoint, with channel destocking, R-454B canister shortages, slowing new system adoption, and tariff-driven inflation. Despite these headwinds, we executed well. We expanded profit margins to a record 20.4% and delivered more than $75 million in cost productivity, while continuing to invest in long-term growth. Please turn to slide 10 for cash flow and capital deployment. Free cash flow for 2025 was $640 million, above our prior guidance of $550 million. The team's focus on strong collections and disciplined payments helped partially offset temporary elevated inventory levels.

Michael Quenzer: FIFO inventory levels increased by $300 million compared to December 2024, partially to support key growth initiatives in commercial emergency replacement, Samsung ductless products, and improved equipment fulfillment. We also have about $200 million more inventory than is seasonally typical, which will remain slightly elevated in Q1, but is aligned to meet Q2 peak demand. This inventory management strategy will create some additional absorption headwinds in Q1, but minimizes the disruption on our factory employees and suppliers. During 2025, we repurchased $482 million of shares and deployed $545 million on bolt-on acquisitions and joint venture investments, all supported by a strong balance sheet that continues to enable repurchases, disciplined M&A, and healthy leverage profile.

FIFO inventory levels increased by $300 million compared to December 2024, partially to support key growth initiatives in commercial emergency replacement, Samsung ductless products, and improved equipment fulfillment. We also have about $200 million more inventory than is seasonally typical, which will remain slightly elevated in Q1, but is aligned to meet Q2 peak demand. This inventory management strategy will create some additional absorption headwinds in Q1, but minimizes the disruption on our factory employees and suppliers. During 2025, we repurchased $482 million of shares and deployed $545 million on bolt-on acquisitions and joint venture investments, all supported by a strong balance sheet that continues to enable repurchases, disciplined M&A, and healthy leverage profile.

Michael Quenzer: Alongside these actions, we also invested $120 million in capital expenditures during 2025 to advance key strategic priorities. Looking ahead to 2026, we plan to invest $250 million in capital expenditures, targeting strong return opportunities across innovation and training centers, digital technology, distribution network optimization, ERP modernization, and AI tools. Please turn to slide 7 as I review our 2026 guidance. We are initiating our full year 2026 guidance, which reflects stabilizing end markets, normalized channel inventories, and contributions from recent acquisitions and joint venture investments. For revenue, we expect total company growth of 6% to 7%. Organic volumes are expected to be down low single digits, net of approximately 1 point of growth from initiatives across parts and accessories, commercial emergency replacement, as well as Samsung ductless and ducted heat pump products.

Alongside these actions, we also invested $120 million in capital expenditures during 2025 to advance key strategic priorities. Looking ahead to 2026, we plan to invest $250 million in capital expenditures, targeting strong return opportunities across innovation and training centers, digital technology, distribution network optimization, ERP modernization, and AI tools. Please turn to slide 7 as I review our 2026 guidance. We are initiating our full year 2026 guidance, which reflects stabilizing end markets, normalized channel inventories, and contributions from recent acquisitions and joint venture investments. For revenue, we expect total company growth of 6% to 7%. Organic volumes are expected to be down low single digits, net of approximately 1 point of growth from initiatives across parts and accessories, commercial emergency replacement, as well as Samsung ductless and ducted heat pump products.

Michael Quenzer: Sales volumes in the first half, especially the first quarter, are expected to be down more than the full year decline, followed by growth in the second half. Combined price and mix are expected to contribute mid-single-digit growth, driven by our 2026 price increase and carryover benefit from 2025 regulatory mix. M&A is expected to contribute mid-single-digit revenue growth, reflecting the full year benefit of recent acquisitions and joint ventures. At the segment level, we expect approximately 2% growth in HCS, reflecting down but improving end markets and a low-single-digit contribution from M&A. For BCS, we expect approximately 15% growth, supported by industry shipments returning to growth, strong emergency replacement, and national account performance, and a high-single-digit contribution from M&A.

Sales volumes in the first half, especially the first quarter, are expected to be down more than the full year decline, followed by growth in the second half. Combined price and mix are expected to contribute mid-single-digit growth, driven by our 2026 price increase and carryover benefit from 2025 regulatory mix. M&A is expected to contribute mid-single-digit revenue growth, reflecting the full year benefit of recent acquisitions and joint ventures. At the segment level, we expect approximately 2% growth in HCS, reflecting down but improving end markets and a low-single-digit contribution from M&A. For BCS, we expect approximately 15% growth, supported by industry shipments returning to growth, strong emergency replacement, and national account performance, and a high-single-digit contribution from M&A.

Michael Quenzer: On costs, inflation is expected to be up approximately 2.5%, reflecting tariff carryovers and moderating price cost pressures. We plan to invest approximately $35 million in additional operating expenses to enhance our customer experience, ERP upgrades for recent acquisitions, and continued expansion of our training and innovation centers. M&A-related amortization is expected to increase by approximately $15 million. Productivity and cost actions are expected to deliver approximately $75 million in savings, driven by material and factory initiatives, distribution network efficiencies, and SG&A productivity. Interest expense is expected to be approximately $65 million, reflecting the impact of our recent M&A activity and share repurchases. We expect a tax rate of roughly 20%. Based on these assumptions, we expect adjusted EPS of $23.50 to $25.

On costs, inflation is expected to be up approximately 2.5%, reflecting tariff carryovers and moderating price cost pressures. We plan to invest approximately $35 million in additional operating expenses to enhance our customer experience, ERP upgrades for recent acquisitions, and continued expansion of our training and innovation centers. M&A-related amortization is expected to increase by approximately $15 million. Productivity and cost actions are expected to deliver approximately $75 million in savings, driven by material and factory initiatives, distribution network efficiencies, and SG&A productivity. Interest expense is expected to be approximately $65 million, reflecting the impact of our recent M&A activity and share repurchases. We expect a tax rate of roughly 20%. Based on these assumptions, we expect adjusted EPS of $23.50 to $25.

Alok Maskara: Thanks, Michael. I want to highlight the progress we have made on our self-help transformation plan, which is now entering its final phase. From 2022 through 2024, the team focused on stabilization and consistent execution. During that period, we reinforced pricing discipline, restored commercial margins, and built the organizational and operational foundation for sustainable growth. In 2025, our priority shifted to diversifying the portfolio and strengthening our market position. The Samsung and Ariston joint ventures, along with Duro Dyne and Supco acquisition, broadened our product offerings and will increase our share of wallet. The new commercial manufacturing capacity improved product availability, especially for the emergency replacement market. By addressing constraints at our existing Stuttgart factory, we also created an opportunity to grow our commercial national account business. Beginning in 2026, we will move into the expansion phase of our self-help transformation plan.

Thanks, Michael. I want to highlight the progress we have made on our self-help transformation plan, which is now entering its final phase. From 2022 through 2024, the team focused on stabilization and consistent execution. During that period, we reinforced pricing discipline, restored commercial margins, and built the organizational and operational foundation for sustainable growth. In 2025, our priority shifted to diversifying the portfolio and strengthening our market position. The Samsung and Ariston joint ventures, along with Duro Dyne and Supco acquisition, broadened our product offerings and will increase our share of wallet. The new commercial manufacturing capacity improved product availability, especially for the emergency replacement market. By addressing constraints at our existing Stuttgart factory, we also created an opportunity to grow our commercial national account business. Beginning in 2026, we will move into the expansion phase of our self-help transformation plan.

Alok Maskara: This stage focuses on scaling our footprint, broadening our product portfolio, and extending our reach across residential and commercial end markets. It includes adding training centers, customer experience centers, and new distribution capabilities. From an innovation perspective, we will invest in testing and certification labs, digital and AI solutions, and a healthy pipeline of new products. We remain on track to deliver on our most recent long-term commitments, and we will share updated long-term targets at the 2026 Lennox Investor Day on 4 March 2026, where we will also provide deeper visibility into our strategic growth initiatives. Now, let's turn to slide 13 for why I believe Lennox outperforms the industry. Lennox remains a highly attractive long-term investment. Our markets benefit from strong replacement fundamentals, and we operate with a direct-to-dealer model that differentiates our customer experience.

This stage focuses on scaling our footprint, broadening our product portfolio, and extending our reach across residential and commercial end markets. It includes adding training centers, customer experience centers, and new distribution capabilities. From an innovation perspective, we will invest in testing and certification labs, digital and AI solutions, and a healthy pipeline of new products. We remain on track to deliver on our most recent long-term commitments, and we will share updated long-term targets at the 2026 Lennox Investor Day on 4 March 2026, where we will also provide deeper visibility into our strategic growth initiatives. Now, let's turn to slide 13 for why I believe Lennox outperforms the industry. Lennox remains a highly attractive long-term investment. Our markets benefit from strong replacement fundamentals, and we operate with a direct-to-dealer model that differentiates our customer experience.

Yeah, and I mentioned that in the script. Yeah, we have about 200 million more than seasonally normal. At this point, we have another 100 million in there for just Investments to, to get better experience with our with our customers. Within that 200 million. You'll see some continued to go down a little bit in the first quarter, but we also need to make sure that we have the right level as we hit the hit the summer season and the second quarter. And right now, those inventory levels in December approximately aligned with what we'll need in the in the summer season. So a little bit of work to do in the first quarter of the ram factor is down to get some absorption. But overall we think we're going to be in a really good spot in the second quarter without having to do a ton of disruption on our Factory by ramping it down significantly and then ramping it back up. Um, we found that this is the best approach to mitigate some of these dto industry issues that we're fighting through and I'm with you. If I could just ask

Alok Maskara: Sure. I mean, I think obviously, like, you know, we got more than 11 months still to go, but from where we are, you know, we're going to be closely watching consumer confidence, which like you know remains uncertain. Interest rates and housing, both existing home sales and new home sales, is something we'll be closely watching. We'd obviously be closely watching our dealer confidence as well, which was shaken last year by the transition and the lack of canister shortage, which I think is improving. So like I outlined on page 4, those are the key things we'll be watching for. You know, from our perspective, Q4 and Q3 were significantly impacted by destocking, and we remain fairly confident that that's going to be behind us in the second half. So that's probably shaping our overall view.

Alok Maskara: Sure. I mean, first of all, we look at that dynamic more as deferred replacement, because anything that you repair will come back for replacement, typically in 12 to 24 months. So I think that's the way we look at it. When we speak to our contractors, we find that the dealer confidence on the new product, the dealer confidence on upselling to a replacement, the dealer confidence because of canister shortage, was a large part of the impact. Clearly, there's consumer sentiment there as well. Now, the fact that the dealer sentiment has turned to more positive going into the year makes us a little bit more favorably inclined towards that trend this year. But so far, like, you know, what we have assumed is it's not going to get any worse. We haven't assumed that it's going to get better either.

Thank you. Um, I wanted to, uh, follow up on company. Inventory and the associated absorption headwinds, that come from that. Um, you know, it seems to me that that inventory was kind of flattish quarter on quarter into Q4 when normally it would step down. Um, maybe to like the mid single digit level. So I guess, you know, has there not been any docking yet? Um, and maybe that's the first part of the question. And then the second part is, you know, um, why does the absorption headwinds end after q1? It seems like this 200 million excess, inventory will be sold into Peak summer, demand. Um, but I would think that that means under production up in those summer months and I would expect that, I would have thought that the absorption headwind, you know, comes through on a

Yeah, that's a correct interpretation of the guide. So right now, what we apply is the 2 and a half percent to our total cost so it would be manufacturing cost, distribution costs and sgna costs, not all are going up the same. We are seeing a little bit more inflation on the commodity side, but we also have hedging programs that delay. Some of that cost increase. And we've significantly moved away from copper and move have more of an aluminum product. Um, so that's softening at least from the metals perspective of why, it's not as as heavy within the guy, uh, tariffs tariffs. There will be a kind of some wraparound impact of terrorists. There's about 125 million dollars, full year 2025. We'll have a little bit of carryover in the, in the first half of that. Assuming the terror structure stays the same, which is what we built within the guide. But, um, overall, we assume that inflation and then, we're going to drive productivity and investment actions against that, that inflation number.

Yeah, so overall, the guy implies ebit, Ross expansion of about 20 basis, want to mention that in our script, we're looking at the fourth consecutive year in a row of margin expansion within BCS. It's going to be up more within HCS, it's going to be flat to slightly down, um, as and Mark, there are down. Um, so that the volume leverage within BCS, you'll start to really see that um, within their margin expansion. Uh, within the seasonality, it'll talk a little bit about that. But when you look at 2025 the seasonality first, half the second half from a revenue perspective was about 50/50 as we think about next year or 2026, it'll be, you know, 3 or 4 Points less than 50% in the first half 3 or 4% higher in the second half. Um, normal incremental is on the, the volume that we talked about a 35% on the decimal in incremental plus the cost inflation in and um the productivity initiative. So overall a little bit more headwind in the first half but the, the margin expansion will definitely start to show in the second half.

Alok Maskara: ... Yeah, Julian, we get in trouble every time we try and predict the number of units in the market, and I know you guys have pretty sophisticated models, just like we do. I think from our perspective, the assumption has been that the sell-in number was heavily impacted by destocking, and the end of destocking would lead to automatic improvements. Our assumption is that the repair versus replace activity is stabilized going forward. So we're not expecting it to turn back, but we are expecting it to stabilize, at least going forward. So net-net, I mean, on a sell-in basis, you will see higher numbers than where we ended the year, as you said, 73, 74. And on a sell-out basis, I mean, those numbers are really not that reliable, so we focus less on that.

Alok Maskara: .Yeah, Julian, we get in trouble every time we try and predict the number of units in the market, and I know you guys have pretty sophisticated models, just like we do. I think from our perspective, the assumption has been that the sell-in number was heavily impacted by destocking, and the end of destocking would lead to automatic improvements. Our assumption is that the repair versus replace activity is stabilized going forward. So we're not expecting it to turn back, but we are expecting it to stabilize, at least going forward. So net-net, I mean, on a sell-in basis, you will see higher numbers than where we ended the year, as you said, 73, 74. And on a sell-out basis, I mean, those numbers are really not that reliable, so we focus less on that.

Joe O'Day: Makes sense. Thank you. And then, can you just talk about, like, what you're doing with your dealers to help kind of position them for, you know, posturing toward more selling of replace over repair? You know, understanding that the last year and kind of the introduction of a new refrigerant had its challenges, along with canisters. But just, you know, entry-level economics and what the message is, as well as any color on, you know, what, what is an entry-level cost today versus what it was five years ago? Because I think that's something that, you know, seems like face value. It's a, there's a little bit of shock value with it, but how the economics are, are compelling on sort of the replace versus repair side and, and what you are messaging or helping on the marketing side with dealers.

Joseph O'Dea: Makes sense. Thank you. And then, can you just talk about, like, what you're doing with your dealers to help kind of position them for, you know, posturing toward more selling of replace over repair? You know, understanding that the last year and kind of the introduction of a new refrigerant had its challenges, along with canisters. But just, you know, entry-level economics and what the message is, as well as any color on, you know, what, what is an entry-level cost today versus what it was five years ago? Because I think that's something that, you know, seems like face value. It's a, there's a little bit of shock value with it, but how the economics are, are compelling on sort of the replace versus repair side and, and what you are messaging or helping on the marketing side with dealers.

Makes sense. Thank you. And then, um, can you just talk about like, what you're doing, uh, with your dealers, uh, to help kind of position them for, you know, posturing toward more selling of replace over repair? You know, understanding that, you know, last year and kind of the introduction of a new refrigerant had its challenges along with, uh, canisters. Um, but just, you know, entry level economics and what the message is, um, as well as any color on what what is an entry-level cost today versus what it was 5 years ago? Because I think that's something that, you know, seems like face value. It's say, uh, there's a little bit of shock value with it, but how the economics are, are compelling on sort of the replace versus repair side and and what your messaging or helping on the, um, marketing side with dealers,

Alok Maskara: Sure. I'll start by saying our contractors and dealers are naturally inclined to focus on replacement versus repair because, A, it's a higher margin to them, and B, they are of the clear understanding that repairing is just deferring replacement, and they try and communicate that to their own consumers and make sure that they make the smart choices. Remember, repairs are hard to finance and replacements. We help them with financing, we help our dealers with training, we help them with the sales collateral and material, and run appropriate promotions with them, especially when it comes to financing and rebates to incentivize replacement versus repair. We clearly didn't do a lot of that last year, given the transition, and I think we are back to that mode now that the dealers have good confidence on it.

Makes sense. Thank you. And then, um, can you just talk about like, what you're doing, uh, with your dealers, uh, to help kind of position them for, you know, posturing toward more selling of replace over repair? You know, understanding that, you know, last year and kind of the introduction of a new refrigerant had its challenges along with, uh, canisters. Um, but just, you know, entry-level economics and what the message is. Um, as well as any color on, you know what, what is an entry-level cost today versus what it was 5 years ago because I think that's something that, you know, seems like face value. It's say, uh, there's a little bit of shock value with it, but how the economics are, are compelling on sort of the replace versus repair side and and what your messaging or helping on the, um, marketing side with dealers,

Alok Maskara: On your price perspective, you know, compared to sort of pre-COVID level up to now, the price from manufacturer to the contractor or the channel has definitely gone up, but the price from the channel to the consumer has gone up even more. Some of it reflects the higher labor costs as the skilled labor shortage persists and grows across US. Some of it also reflects the fact that consumers were not getting as many quotes, and we see now consumers are getting many more quotes, and that's coming more back to normal. So I see any price pressure is gonna play out more between the consumer and the channel versus the channel and the manufacturer. And then finally, as we look at this going forward, what I started by saying holds true is any repair is simply deferred replacement.

On your price perspective, you know, compared to sort of pre-COVID level up to now, the price from manufacturer to the contractor or the channel has definitely gone up, but the price from the channel to the consumer has gone up even more. Some of it reflects the higher labor costs as the skilled labor shortage persists and grows across US. Some of it also reflects the fact that consumers were not getting as many quotes, and we see now consumers are getting many more quotes, and that's coming more back to normal. So I see any price pressure is gonna play out more between the consumer and the channel versus the channel and the manufacturer. And then finally, as we look at this going forward, what I started by saying holds true is any repair is simply deferred replacement.

Michael Quenzer: Right. Yeah. So we start with basically a cost inflation of 2.5%, and then from there, we drive productivity against it. So we have $75 million of productivity against that overall inflation. It's really across several things. It's within the factory. We're gonna finally start to leverage a lot of the productivity within the BCS factory that's gonna be fully up and running in the-- throughout the year. We're gonna see distribution investments we've made on the efficiencies on our network. You saw in Q4, we recognized a lot of SG&A cost actions. Alok talked about the headcount reductions. That'll carry out into 2026, as well as technology and AI investments around systems that will help drive some of that cost productivity. And then finally, it's about tariffs.

Right. Yeah. So we start with basically a constipation of 2 and a half percent. And then from there we, um, Drive activity against it. So we have 75 million of productivity against that overall inflation. It's really across several things. It's within the factory. We're going to finally start to leverage a lot of the the productivity within the BCS Factory, that's going to be fully up and running in the in the throughout the year. We're going to see, distribution Investments we've made on the efficiencies on our Network. You saw on the fourth quarter, we recognized a lot of sgna cost actions. The low talks about the headcount reductions that will carry out into um into 2026 as well as technology and AI Investments around um, systems that will help Drive some of that cost for everybody. And then finally, it's it's about tariffs

Right. Yeah, so we start with basically in constipation of 2 and a half percent. And then from there we, um, Drive productivity against it. So we have 75 million of productivity against that overall inflation. It's really across several things. It's within the factory. We're going to finally start to leverage a lot of the the productivity within the BCS Factory, that's going to be fully up and running in the in the throughout the year. We're going to see distribution Investments we've made on the efficiencies on our Network. You saw on the fourth quarter, we recognized a lot of sgna cost actions. The low talks about the headcount reductions that will carry out into um into 2026 as well as technology and AI Investments around it um, systems that will help your

In the quarter, despite carrying more say that the whole thing was designed as telling Michael good morning. I hope being notices this. Okay, well, I noticed and um, just the idea you carried more inventory. So so that would have worked against you. But looks like you, you really came through on the receivable side. Just were there any 1 timers in there. Did you pull any uh, those receivables forward? Just give some color. There would be helpful because it was a really standout quarter in free cash flow. I, I would give Michael full credit for it. I think he's done a really good job centralizing. Our AP teams, consolidating, accounting moving things to shared services and driving some really good processes especially around collection and time being. So, you know, a lot of process improvements and you would see there's a good trend of us managing AP AR

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Q4 2025 Lennox International Inc Earnings Call

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Q4 2025 Lennox International Inc Earnings Call

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