Participants

Chelsey Pulcheon; IR; Lennox International Inc

Alok Maskara; CEO; Lennox International Inc

Michael Quenzer; EVP and CFO; Lennox International Inc

Ryan Merkel; Analyst; William Blair

Joe Ritche; Analyst; Goldman Sachs

Julian Mitchell; Analyst; Barclays

Noah Kaye; Analyst; Oppenheimer

Tommy Moll; Analyst; Stephens

Chris Snyder; Analyst; Morgan Stanley

Brett Linzey; Analyst; Mizuho

Joe O'Dea; Analyst; Wells Fargo

Presentation

Operator

Please stand by your program is about to begin. If you need assistance during your conference today, please press star zero.
Welcome to the Lennox fourth-quarter and full year 2024 earnings conference call. (Operator Instructions) As a reminder, this call is being recorded.
I would now like to turn the conference over to Chelsey Pulcheon from the Lennox Investor Relations team. Chelsea, please go ahead.

Chelsey Pulcheon

Thank you, Angela. And good morning, everyone. Thank you for joining us today as we share our 2024 fourth-quarter and full year results. Joining me 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 indicator of underlying business performance.
Please refer to our SEC filings available on our Investor Relations website for additional details, including a reconciliation of all GAAP to non-GAAP measures. The earnings release, today's presentation and the webcast archive link for today's call are available on our Investor Relations website at investor.lennox.com.
Now, please turn to slide 3 as I turn the call over to our CEO, Alok Maskara.

Alok Maskara

Thank you, Chelsey. Good morning, everyone.
I want to start by expressing my gratitude to our 40,000 employees, our 10,000 (inaudible) dealers and all of our customers for their loyalty and innovation that enabled us to deliver an exceptional, strong finish to 2024.
One of the highlights for 2024 is that for the first time, Lennox delivered over $5 billion in revenue and over $1 billion in adjusted segment profit. Another achievement in 2024, that both our segments delivered double-digit revenue growth. In addition to delivering record results, we also made thoughtful investments. Such as starting a new commercial factory to create growth capacity.
Let us turn to slide 3 for the fourth-quarter and full year 2024 overview.
Adjusted earnings per share was a record $5.60 for the quarter and $22.58 for the full year. Core revenue grew 22% in the quarter and 13% for the full year. Our adjusted segment margin expanded 250 basis points in Q4 and 150 basis points for the full year to 19.4%. The team also delivered a record $332 million in operating cash flow in the quarter and $946 million in the full year.
Michael will provide more details later in the presentation, but I want to highlight how proud we are of the work the team did this year to deliver significant year-over-year improvement in our cash conversion.
Now, please turn to slide 4 as I review some of the drivers of our 2024 success.
In 2024, we successfully completed the initial phase of our self-help transformation plan. The team's effort in '23, including pricing initiatives, portfolio simplification and strategic acquisitions, not only restore margins, but also established a strong foundation for an exceptional 2024.
Our strategic initiatives enabled us to successfully navigate the construction of a new commercial factory and overcome challenges associated with the refrigerant transition, showcasing our resilience and outstanding execution. In 2024, we continue making strategic investments while delivering impactful results, positioning us to continue our momentum into 2025 and beyond.
We successfully navigated the manufacturing transition from our [Fort A] refrigerant, effectively meeting customer needs as investments in sales and distribution channels, elevated the customer experience. Our ongoing focus on pricing excellence programs partially offset the investments for improving customer experience.
Our new commercial factory is now online and will be key to enhancing output and productivity. The area's integration remains ahead of schedule, exceeding the original value proposition. We maintained our strategic M&A pipeline and our disciplined M&A approach. The best deals for Lennox in 2024 with the deals that we decided not to pursue, thus regarding long-term shareholder value. Finally, by driving accountability to the Lennox unified management system, we ensure consistent performance.
Before I hand the call to Michael, I want to extend my heartfelt gratitude to Gary Bedard, President of our HCS segment since 2023, who has announced his decision to retire from Lenox. Gary's 26-year tenure at Lenox will leave a legacy that will continue to shape our future. We have initiated a search process to identify our next HCS precedent.
I'll now hand it over to Michael, who will walk you through how we successfully invested in the business while also delivering strong results.

Michael Quenzer

Thank you, Alok. Good morning, everyone.
Please turn to Slide 5.
We are pleased to report our eighth consecutive quarter of double-digit year-over-year adjusted earnings per share growth. This quarter, we increased our adjusted segment margin by 250 basis points and achieved an impressive 22% revenue growth resulted in 54% adjusted EPS growth.
Our success is driven by volume growth in both segments as we continue to effectively manage the transition to low GWP refrigerants. As expected, customers pre-purchased R-410A equipment, which is estimated to have positively impacted revenue by $125 million, an increased earnings per share by $1.
Now, let's proceed to slide 6 to review the fourth quarter financial performance of our Home Comfort Solutions segment.
So, Home Comfort Solutions segment had an exceptional quarter, delivering 25% revenue growth, 67% segment profit growth and an impressive 550 basis point expansion in segment profit margin. Sales volume increased by 21%, driven by over 50% growth in our two-step distributor channel, primarily reflecting the industry-wide R-410A equipment prebuy.
A one-step contractor channel also saw volume increased low-double digits. This was supported by better R-410A product availability compared to the broader markets as well as some prebuy. After adjusting for the prebuy, segment sales volume still grew by mid-single digits.
Pricing initiatives continue to progress well. Although the impact to the quarter was limited, we have implemented price increases on our new R-454B products, and these initiatives are progressing as expected.
Moving on to slide 7.
Building Climate Solutions segment delivered a very strong fourth quarter with revenue growing 17%. Of this growth, 3% was driven by inorganic contributions from our AES acquisition.
From an organic perspective, sales volume increased 14% during the quarter. This reflects early revenue benefits from our new Saltillo, Mexico manufacturing facility, as well as some R-410A equipment prebuy activity.
Segment profit increased by $8 million. However, profit margin declined due to $20 million in higher product costs related to new factory ramp-up activities and inefficiencies at our existing manufacturing facility. Production outlook continues to grow and is well positioned to support our 2025 emergency replacement growth initiatives.
Turning to slide 8.
Lennox delivered an impressive performance for 2024. We successfully navigated the low GWP referred to transition, achieving notable volume gains. Our disciplined pricing strategy drove consistent quarterly price yield, contributing to margin expansion of 150 basis points.
While our strategic investments for future growth tempered this margin improvement, these investments are expected to deliver significant benefits in the coming years, including sustained revenue growth and further margin expansion.
Turning to slide 9, let's review our cash flow to capital deployment.
While revenue and earnings growth were impressive, our cash flow performance stood out even more. As highlighted in the Q3 earnings call, enhanced working capital efficiency has been a key focus. We've made significant progress, particularly in accounts payable initiatives, resulting in a free cash flow conversion rate of 97%. This strong cash flow conversion comes despite the capital expenditures exceeded depreciation by approximately $65 million.
Capital expenditure investments in high ROI projects remain a core component of our cash deployment strategy. Over the past two years, capital expenditures have consistently outpaced depreciation. This trend is expected to continue in 2025 with estimated capital expenditures of $150 million.
We maintain a robust balance sheet with net debt to adjusted EBITDA at 0.6 times, down from 1.3 times in the prior year quarter. Our free cash flow deployment strategy continues to prioritize inorganic growth opportunities that deliver ROIC, exceeding [whack] within three years of acquisition. Additionally, we will continue leveraging share repurchases to efficiently return excess cash to shareholders.
If you'll now turn to slide 10, I will review our 2025 full year guidance.
Anticipating another year of profitable growth, let's begin with the table on the left, which summarizes our full year revenue growth drivers.
Total Company core revenue is projected to increase by approximately 2%. However, the 2024 prebuy will result in year-over-year revenue headwinds in both both Q1 and Q4. We also expect a low-single digit increase in sales volumes driven by growth in our BCS segment.
Additionally, mixed growth from the introduction of the new low GWP products will contribute an estimated 4% to revenue growth. The phase-out of legacy 410A new products is expected to conclude by the second quarter.
Turning to the right side of the slide, we've outlined key cost assumptions for 2025.
Inflation is anticipated increased costs by approximately 3%. At the same time, we plan to make strategic investments in areas such as information, system advancements, distribution growth initiatives and projects designed to improve customer service. Investments will also include enhanced sales and marketing efforts with total investments estimated at approximately $25 million for the year. In terms of cost productivity, we expect to generate savings of $50 million at the ramp-up cost of our new BCS factories inside, the material cost efficiencies are realized.
In summary, even with the headwinds from the 2024 prebuy, we anticipate revenue and profit growth with profit margins relatively flat. We expect adjusted earnings per share to fall within the range of $22 to $23.50. And free cash flow is projected to fall within the range of $650 million to $800 million.
With that, please turn to slide 11. I'll turn it back over to Alok for an overview of our 2025 priorities.

Alok Maskara

Thanks, Michael.
Let us revisit our self-help transformation plan, which has been a cornerstone of our success since 2022. We transitioned from the recovery and invest phase to the growth acceleration phase at the end of 2024. As we move through 2025 and into '26, we will maintain our disciplined approach to investing in the business while prioritizing growth.
This year will lay the groundwork for the next phase of expansion, supported by the momentum from share gains and new product introductions. Investments in digital customer experience are making it easier for customers to engage with us, strengthening loyalty and satisfaction across all touch points. Our expanded heat pump offering, supported by the Samsung JV, not only broaden our product portfolio, but also position us to capitalize on growing demand for energy-efficient solutions.
Additionally, our focus on improving our attachment rate for parts and accessories ensures that we provide a more comprehensive customer experience while driving incremental growth. An additional growth driver is up commercial emergency replacement program, enabling us to better serve a significant segment of the market that we have been unable to fully supply in recent years.
Second, we are committed to resilient profit margins. Benefits expected from the low GWP product transition, increased productivity from BCS volume improvements and material cost reductions strengthen our ability to deliver consistent and reliable financial performance.
Lastly, we will continue to utilize our Lennox unified management system to deliver superior execution with clear priorities. Defined M&A strategies, our robust distribution network and ongoing investment in customer satisfaction underscored our commitment to operational excellence.
As we look ahead, the investments made over the past two years set the foundation for growth in 2025 with a strong trajectory into 2026 and beyond as we move towards the expansion phase. With our collective commitment and strategic focus, I am confident that we are not merely executing a ban. We are creating a path for ongoing success.
We remain confident in our long-term vision and given progress so far, we believe we will be within the 2026 revenue target range of $5.4 billion to $6 billion and at the high end of our ROA target range of 19% to 21%.
The prebuy dynamics in 2024 will create impact into 2025, which is expected to normalize by the end of this year. Hence, we anticipate a stronger 2026 has a strategic investment fence continue to drive momentum.
Now, let us turn to slide 12.
Let me wrap up by summarizing the five reasons that make Lennox an attractive opportunity for all our stakeholders.
First, we are 100% focused on North America growth end markets of HV, ACR and accelerating growth through share gains. Second, we are expanding our resilient profit margins through pricing, productivity and mix optimization. Third, we deliver superior execution through the Lennox unified management system. Fourth, we are in advanced technology industry leader with high efficiency products and services, supported by a digital customer ecosystem. Fifth, we win because our exceptional talent and culture is defined by our core values and guiding behaviors. Our pay-for-performance philosophy ensures that our internal goals are closely aligned with those of our shareholders.
As I look forward, I remain confident that our best days are ahead. Thank you.
We will be happy to answer your questions now. Angela, let's go to Q&A.

Question and Answer Session

Operator

(Operator Instructions)
Ryan Merkel, William Blair.

Ryan Merkel

Hey, thanks. Good morning and congrats on another nice quarter.
I wanted to start with the prebuy. It most likely will have a bigger and maybe you're expecting, just comment on what your thoughts on why that was? And then what does it mean from 1Q, I think, has barely half.

Alok Maskara

Hey, Ryan. Good morning.
I don't think I heard the second part of the question properly, but the first part on the prebuy of this, we are calling out $125 million in prebuy. As you can imagine, it's the estimate we don't have 100% visibility into the number. And we know there was some cloudiness because we had temporary share gains that happened in Q4 at some of our competition does what out of products. So, it's a little higher than we expected. But I would say it's within the range of expectations are.

Michael Quenzer

And then, Ryan, that second part of your question at the impact to Q1. Yeah, really the $125 million the pull forward into Q4 from Q1 so we'll see a headwind there. And also, you'll see that in Q4 in 2025 is the year-over-year comps won't have that as well.

Ryan Merkel

Got it. Okay. So, $125 million revenue hit 1Q sort of [the map]. (multiple speakers) Okay.
And the second question is that a flat volume outlook for their HCS segment? I mean, I think it makes sense to be conservative, but talk about the assumptions behind that.

Alok Maskara

So I mean, there's a lot of uncertainty in the market, right? I mean, you saw existing home sales are at a fairly low level of interest rates, market rates, they continue to be high. So, we're going to based on what we saw in 2024. We continue to monitor of flattish industrial volume. It maybe a little conservative, but given the uncertainty in the market, just seem like that's the right assumption to make at this point.

Ryan Merkel

Yeah, that's fair. Okay. Thank you.

Alok Maskara

Thanks, Ryan.

Operator

Joe Ritche, Goldman Sachs.

Joe Ritche

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

Michael Quenzer

Hey, Joe. I think there's an opportunity potentially Alok has mentioned there on the volume. If interest rates go down, maybe the HCS volume could give us a little bit more (inaudible) who would come through a 30% incrementals.
But if you look at the overall guide, it does imply overall margins are approximately flat at 19.4%. The inflation assumption of 3% might come in a little less, but I think right now feels prudent to keep inflation up there. And obviously, we as a group are trying to drive as much productivity as possible. So, from a cost productivity perspective, we're going to focus to drive a little bit higher if we can as well.

Alok Maskara

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

Joe Ritche

Okay. That's helpful.
And then as I kind of think through just the 1Q number, I think in answering Ryan's questions for the right way to think about things sequentially in HCS, yes, you've got call it $125 million that goes away 4Q to 1Q. And there's typically like, I don't know, mid-single digit sequential step down. And so it is the -- you're still assuming an organic growth in HCS in the first quarter, am I thinking about it correctly?

Alok Maskara

Well, first of all, the Q1 as an estimate, maybe only in January. Some of it could extend to Q2 depending on how dealers convert, They could now already selling the 454B cookware. And it may just drawing that, you know, a lot in the science somewhere.
But on the sequential question, maybe Michael can give you some --

Michael Quenzer

Yes, I think that's generally close, but not all $125 million was in the HCS segments. I think it was in the BCS segment, but I think it looks at it right. We did have a little bit of our 410A inventory going into the quarter. Some of this might kind of move into Q2, but predominantly will be in Q1.

Joe Ritche

Okay, great. Very helpful. Thanks, guys.

Operator

Julian Mitchell, Barclays.

Julian Mitchell

Hi, good morning.
Maybe I just wanted to switch and talk for a second to the BCS segment and sort of the guidance there. I mean, I think people have been concerned about the revenue outlook there because you don't have a AI exposure or what have you in BCS. And there's some question marks around the (inaudible) funding unwinding into 2026.
So, maybe just help us understand what you're seeing in the BCS segment top line-wise across different verticals, mid-single digit, underlying volume growth assumption clearly speaks to, I think, at a much healthier market in what a lot of investors have been thinking.

Alok Maskara

So I would say from our perspective, the markets that we saw remain healthy. And at least this week on Monday, the Chinese have told us that it's good not to have data center exposure in those docks. So I think from that perspective, we are not terribly concerned to exposure, there was low or splash there to start with.
If I look at our exposure, it remains in places such as retail, foodservice, warehouses, big box, DIY-type stores. And we see the replacement volume, which is primary our sales actually picking up now since we have made the conversion to 40 or 54. And some of these companies have been waiting to go to the new refrigerant before they put more sales.
Second thing underlying our confidence is that the, clearly, we have a new factory. We were primarily supply-constrained, not demand-constrained, and that was still the case case in Q4. So, we do expect us to get more fair share of the market, including emergency replacement that we talked about.
In terms of your funding for the schools, beyond what I've heard that concern just pay for the IRA would receive most of the programs continue to move forward and some schools are issuing bonds and other things. I mean, let's keep in mind this is a nondiscretionary spend in the air conditioning breaks, you can run the schools. So from a nature of the replacement program and the nondiscretionary nature that we look at, we don't see that as much impact. And that gives us sufficient confidence on our guide.

Julian Mitchell

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

Michael Quenzer

Yes, Joel.
And I think I would bucket that a little different, maybe look more at the first half just because of the dynamic of things going to shift in Q1 to Q2 is the selling out of the Fortinet. So from a revenue perspective, we think kind of the first half will be about 45% of the year, second have been 55%. This is a little bit different than the normal kind of 50-50. Second half of the year, you'll really start to see the mix benefit of the 454B products coming up, as well as some more of the gains from the new commercial factor in the second half.

Julian Mitchell

That's great. Thank you.

Alok Maskara

Thanks, Julian.

Operator

Noah Kaye, Oppenheimer.

Noah Kaye

Thanks very much.
Sort of a location where we've had a couple of years now of regulatory transitions for the company has executed well on and and really claim the opportunity around pricing and share gains. You mentioned in some of the factors that went into the thinking include potential tariffs and labor and other considerations have brought about by the administration's page.
So, how do you think about your opportunities related to that. For example, if we do have a comparison, USMCA partners and others, perhaps that could be a pricing opportunity for perhaps with your investments, there are some share gain opportunities there. The central question is how are you thinking about contingency planning and responding to any potential changes?

Alok Maskara

Sure. Noah, that's a great question.
And things remain very dynamic, as you know. But if we take each of these, if tariffs come into more in China and less than Mexico, Canada, we would be net beneficiary as we have done a really good job of reducing our supply chain reliance on China. And the fact that we did the Samsung JV also means that things are (inaudible) are now coming from Korea, not from China. So I think that, in hindsight, not just dependent on the Samsung's better-quality product, but awarding many tariffs from China would be a big win for us
So if tariff is coming in from Mexico, 40% of the industry capacity is in Mexico, roughly, which means we'll all have to work through offsetting with productivity, seeing the impact of any Peso devaluation, but then offset with price. So, we look at that price going to be incremental to what we are positioned here. But clearly, there will be a delay in timing, given I'm not sure how much time and we would have to react to any status and tariffs announcement.
On the labor piece of this and this will be no impact to our factories and some of the fleet. We had a different type of employer versus people who might be doing construction on HVC installed in the field. I think what does that happen with that is since replacements require less scale and less label versus massive repair, I think the repair versus replacement trend would probably continue shifting more towards replacement as the units are harder to repair that requires much more skilled labor and not more labor versus the higher ticket item to just to test full replacement.
But from our contingency planning, and obviously being close to our customers, close to our dealers, making sure that we can address any of those concerns. And also continue to monitor tariffs and work on supply chain redundancies because we are now have a much heavier dual source focus than we had two years ago, giving us flexibility and supply chain movements.
Finally, the last thing on the consumer side, which is probably going to have the biggest impact. We just need to watch consumer confidence, interest rates, mortgage rates and help our dealers offset any weaknesses that come in either through financing programs, either through they are really more education to the consumer and keep working with new homebuilders and others which are more guaranteed volume for us.
So, I hope that answered your question as how it was a little winded.

Noah Kaye

No, it was comprehensive and I realized that in some respects, it was a multi-part question. So out of respect the colleagues, I'll pull back myself offline and follow up then. So, thank you very much.

Alok Maskara

Thanks, Noah.

Operator

Tommy Moll, Stephens.

Tommy Moll

Good morning, and thank you for taking my question.
I want to start on the topic of your 454B pricing. Are we still thinking 10 or maybe 10 plus percent? There's at least one OEM in the market that's less disciplined than that.
And if we just look at the mix guide for Home Comfort anyway, in the mid-growth range, maybe you could bridge from whatever the for 454 contribution as to how you get that up mid-single?

Michael Quenzer

Sure, Tommy. Yes, I'll give you some more clarity on that.
Our plan is still a 10% price increase on average on the 454B product and that equates to about 70% of revenue in the HCS segment. And as we've been talking about, we're going to continue to sell through some 410A equipment in the first half of this year. So, it will take a little bit of time due to bleed into the 454B products. And we think about 65% of the full year will be sales of that 454B products. So kind of do all that math, it dilutes down to that mid-single digit mix benefit for Home Comfort Solutions.

Alok Maskara

And on the competitive question, Tommy, I mean, we have heard that too, but I also think people are talking about 2024 pricing because some of the OEMs release for 454 in 2024 and we believe 2025 percent pricing. So, we are optimistic that as we take this forward, all the OEMs will be adjusting price in 2025. That typically happens in the first quarter, anyway.

Tommy Moll

Thank you, both.
And as a follow-up, I wanted to unpack the home volume outlook a bit. So where you talked about the prebuy, the mid-single digit headwind and then the separate volume callout you have there is flat. I just want to make sure I'm interpreting this correctly. For the volumes that you would report in your financial, you didn't have those two together should be a mid-single headwind. Maybe you could just clarify how we should think about that.

Michael Quenzer

That's exactly right. That's exactly how to look at it.

Tommy Moll

And then if we take that mid-singles headwind for the segment level, can you give us any sense of the sell end versus the sell through assumptions you're making there?

Michael Quenzer

I think you can see in the results from the fourth quarter. We were more impacted in that channel for the sell in the two-step channel, but we did see a little bit of a prebuy on the sell through as well.

Tommy Moll

Okay. Thank you. I'll turn it back.

Operator

Chris Snyder with Morgan Stanley.

Chris Snyder

Thank you. Appreciate the question.
You guys talked to $125 million prebuy in Q4, but if I kind of look at it in here about a 2% headwind on a regular five billion-plus revenue base, does that imply that there's maybe like a similar amount of prebuy in the Q3 numbers as well or am I missing something in that math?

Alok Maskara

Yes, Chris, that is a great question.
So, what happens is if I take that one $125 million first, we will get the destocking impact of that. And let's say that in the Q1, Q2 and then the Q4 timeframe to Q4 2025, we will fix difficult comps so that kind of impact you twice, right? So from that our perspective, that's why the number seems twice.

Michael Quenzer

And then in Q1 2026, you'll get that benefit back, right. So one of the destocking at the comp impact, right.

Chris Snyder

Okay. Thank you. I really appreciate that.
So, I guess the assumption is that there wasn't a material prebuy impact in Q3.And then maybe just following up on that, I know it's kind of hard to imagine to triangulate and pinpoint what the prebuy is, I'll just be interested in how you guys went about doing it. This is obviously a lot of focus on that as of '25. Thank you.

Alok Maskara

But first of all, thank you for acknowledging and we had met that. It is not easy, not at it precisely accurate, right. We think we are directionally correct, not precisely accurate on 125. So, but we just wanted to give a clean number.
We did not incorporate any prebuys. We did have last call on 410A, so that may have forced some distributors in order to hold a prebuy. We remain fairly neutral. And no, we did not switch all our lines over to 454B as some of our competitors did. And we only did that at the tail end of the year and we delayed that as much as possible.
I believe that lead to better availability for Lennox products in the marketplace when it comes to 410A product. And that gave us share gain in addition to the prebuy impact that we are talking about.
Our goal is, of course, keep as much of that share gain as we can. But realistically speaking, we have baked in that we are unlikely to keep all the share gain that we had had. And that's one reason we have been more muted in the volume outlook for 2025.

Chris Snyder

Thank you. I appreciate that.

Operator

Brett Linzey, Mizuho.

Brett Linzey

Hey, good morning, everyone.
First question is on the new commercial Mexico facility. So, you're moving from the piloting to the production instead of a time line. Are you able to quantify what you're embedding in 2025 in terms of the volume contribution and better throughput there?

Michael Quenzer

Yes. If you look at the volume, (inaudible) were up about mid-single digits. There's a few points in there for share gain, which would be predominantly related to the new factory supply improvement.

Brett Linzey

Okay. Got it. I imagine that's a little more back-end loaded or should we think about that as progressing evenly through the year?

Michael Quenzer

Little more back-end loaded? I mean, the season for emergency replacement is predominantly Q2 to Q3. So, starting more than late Q2 into Q3 is when you'll start to ramp up.

Brett Linzey

And then just a follow-up on the inefficiencies in the existing facility. Maybe just a finer point there was that was that Arkansas late in the year? And then any update on the status of those improvements into January?

Alok Maskara

I think the existing facility inefficiencies were related to the startup as we got a lot of components from Stuttgart during ramp-up to send to Mexico into trial runs and otherwise. But yes, that was late in the year and it wasn't the higher end of what we were expecting so those inefficiencies, which, obviously, we will capture back in 2025 as we have to the ramp-up phase. But yes, it was Stuttgart and the ramp-up vision to Saltillo, but Stuttgart was a bigger impact.
The factory in Stuttgart is doing much better. And frankly, having the new factory in Saltillo means we are going to reduce the number of SKUs we manufacture in Stuttgart. Some of the emergency replacement skews move over to sort of Saltillo so we are more optimistic on recovering.
But as you know, that's been a difficult factory for many years. So fingers crossed, we are optimistic for this year.

Brett Linzey

I appreciate the insight.

Operator

Joe O'Dea, Wells Fargo.

Joe O'Dea

Hi, good morning.
I think, Michael, you touched on maybe the inflation has a bit of conservatism in there, but can you unpack that a little bit? And that's 3% inflation, presumably costs across all costs? And so you're talking sort of labor materials, freight, all in bundled. And anything in particular where you're seeing more of sort of inflationary headwinds coming through?

Michael Quenzer

Yes. It's on average on all of our costs, we have about $4 billion of costs. We're seeing higher inflation at (inaudible), around healthcare and some of the wages. They're more than the three a little bit lower on the commodity side. But in general, kind of blends, the three. I think we'll continue to watch it. Like I said, it could be some conservativism, but inflation definitely continued to exist in the especially on some of the SG&A side.

Alok Maskara

And keep in mind that some of the tariff uncertainty impact that as well. Tariffs and things like steel, then we clearly want to acknowledge that and be prepared for that.

Joe O'Dea

Right. But I guess so the idea is that that price in the revenue bridge of up one in compares to inflation of three. So you're not going out to the market and saying we got, you know, we have a right to get more because the costs were getting burden.

Michael Quenzer

Correct. And then we have some of that through the mix as well that we're getting a little bit better incrementals to cover for some of that. But we're also looking to drive more productivity as well.

Alok Maskara

Keep in mind the 454B, we could afford and mix and price. You put that in mix. So, you got to pick up a lot of (inaudible) covering inflation.

Joe O'Dea

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

Alok Maskara

I think the mid to late Q2, when we get a good sense because we also have some of the OEMs have not announced a 2025 pricing.
So that's when we'll get a good sense of it.
But so far, the early signs are positive.
I mean, there's no reason for us to be concerned about it.
The reason the impact is what we called our business, 70% of 70% of that 10%.
And that's why you kind of see the numbers what they are between progressively as we go towards the second half, we have a greater portion of that getting captured.
They cannot right now.
There's no reason to be or are we concerned with that number?
Got it.
Thank you.
We'll go next to Jeff Hammond with KeyBanc.
Please go ahead.
Hey, good morning, everyone.
I guess just a just a few cleanup.
So just on the Mexican production, you said industry capacity 40%.
Can you just level set us on what your mix is?
And if there's any particular OEMs or we have particularly lower mix versus the industry?
Yes.
I mean, I guess we have just looked at all the different OEMs and looked at other reports and come with that number.
So I wouldn't say it's precisely accurate.
Staff is directionally correct for our perspective.
We make the low and mid-end products are in there.
And we have been previously talked about the debt tariffs.
We believe about $1 billion of our 20% of our output would be impacted through that since we make our premium products in U.S. And we also have three residential factories commercially.
So far, all our production was in U.S. and none in Mexico.
So we're just starting on that the other, but we do know many of our competitors often sometime in the same geographic area within Mexico, the manufacturing to Mexico has now.
So we think the 40% number, it's about, right, obviously more skewed towards residential versus commercial.
So your you'd say today, you're probably below that industry average slightly below, but it depends on which OEM, right?
For some OEMs, we are significantly below with some OEMs.
We actually a little bit higher.
So it just goes OEM by OEM.
Jeff.
Okay, great.
And then just on this distribution margin focus, can you just level set us on kind of progress over the past year?
What are the some of the big opportunities this year?
And do you think you'll start to to move those margins up?
Or is that a longer longer timeframe?
It is over a long time frame, but some of the results that you see today are based on that initiative as well.
If you think of Etsy, as we did have a record ROS and you've followed us for a long period of time, and that is consistent with getting more distributor margins, realized lot of the incentive changes that we made and the reorganization that we did happen at the end of Q2 in 2024.
I think some of those results are just coming through, but that's a long journey that we've talked about.
Manufacturers.
Both distributor margin is higher than our 2026 targets.
So I think that continues beyond 2026, but progress so far, the confidence to say that we would be on the high end of our previously targets for 2026.
And what your parts and accessories mix today and what do you think in total minus?
Okay.
Hasn't changed much over the past year and we remain at about 20 ish percent parts and accessories.
I'm confident mine documents twice that much, but we've been talking about that for many years.
And I think it's finally time to show some results for the next few months and years.
Entitlement remains high and our current volume remains low.
Great.
Thanks, Luke.
We'll go next to Nicole DeBlase with Deutsche Bank.
Please go ahead.
Yes, thanks.
Good morning, guys.
Finally, nickel, a lot of a lot of ground has been covered here.
But I guess maybe just some cleanups for me.
And how are you guys thinking about within HCS for 2025?
New construction is about 20% of that segment.
We think it's going to be kind of flattish.
But the big driver there is going to be if interest rates continue to go down.
If it goes down, we think that there's pent-up demand in that space for new home construction that that could happen.
But it's obviously labor challenges as well on that side of the year, the industry to making sure that can keep up with with the demand.
So it's mostly interest rate driven, but kind of flattish within the guide.
Okay.
Okay.
Got it.
Understood.
And then just thinking through kind of the margin dynamics by segment, I know you guys don't give official margin guidance by segment, but it's directionally right way to think about it.
Maybe HDS. could be a bit more challenged year on year, given some of the pre-buy in 2024 and then PCS should be up.
And I guess, you know, is there it's fair to assume that PCS sees more margin expansion in the second half, some of the new plant ramp-up costs roll-off?
Thank you.
That's correct.
Overall, margin guides about flat up in BCS down in ACS.
A larger portion of the 50 million of productivity will be BCS, which is a big driver of that margin expansion that will kind of happened throughout the year with volume gains.
Share gains will mostly be kind of the second half for BTSs.
That factory ramps up.
Thanks, Michael.
I'll pass it on.
We'll go next to Deane Dray with RBC Capital Markets.
Please go ahead.
Thank you.
Good morning, everyone.
For R&D.
I'll echo some of the previous comments.
You provided some really good calibration on what you think the pre-buy was for you guys and a lot.
Could you expand a bit?
You referenced some of your competitors who had stock-outs because they switched over earlier.
How much of a surprise was that how tax, Nicole, where you and and how you position in the fourth quarter?
And could you give us a sense of the individual months played out?
Was it a big like windfall in December or was it level loaded?
Yes.
First of all, we were not surprised that a competitor or had a misstep almost always happens in any of these regulatory transition.
But yes, we were surprised as to which compensate that had Administaff.
I mean, we would have expected somebody else to have events from that perspective.
There was a bit of a surprise how it impacted us was like we were fully loaded and we had really high fill rates throughout, so we were able to capture additional share.
Now the challenge is to take that share and make it more of a permanent share.
And we know that's going to be a challenge.
And we bake that in Q4, it was fairly even across all three months.
And part of it was driven by just beginning to anything we could manufacture we were selling.
So it was more constrained by manufacturing capacity and where we had different inventory station in our supply chain.
Some of the 10 per share gain did start in Q3.
Certainly, I think from the share again that happened and we remain very optimistic that we'll convert part of that to more permanent share gain.
But tactically, our response was, you know, we we were very selective M&A to make sure that customers that we took on where customers would stay with us for more permanent and were not buying from us during the stock out.
So I think we are able to gain some new customers and convert some liability from getting existing customers as well.
Yes.
Let's be clear.
That's a high-quality problem to have to talk about temporary market share and windfall from a pre-buy, a tough comp.
So that's I appreciate all the calibration.
And then the second question, I luckily expand on your comment where you said some of your best deals in 2010 for those that you did not do.
Was it just a question of price, but I have a hunch there's probably a there was a data center opportunity that you passed on.
But any kind of color there would be helpful.
Sure.
Yes.
There were data center opportunity that we passed on.
There was international expansion opportunities that were passed on.
There was some domestic consolidation opportunities that we passed on as well in all came down to a very disciplined framework, mini hubs, having a conservative CFO, to give Michael some credit for this, right.
I mean, we have ROIC target.
We are kind of and I don't wear rose-colored glasses to look at the industry.
And we feel that often we can get more share with better execution was going and buying share through M&A.
So I think we were kind of proud of those costs.
I was hoping somebody would catch on to my comment we had started fund would that come in when we were writing the script.
All right.
Good collaborative, much down a lot.
Thank you.
We'll go next to Nigel Coe with Wolfe Research.
Please go ahead.
Thanks.
Good morning, everyone.
Alex, maybe can you maybe just dig into the BCFs volume guidance for the year up and mid-single-digits anyway to quantify how much is baked into the SO2 ramp-up?
And I'm thinking is it industry flattish and that's mid-single-digits is all share gain.
Any anything that would be helpful.
Yes.
We think there's a little bit of market growth and their remember, we have three businesses, a service business, refrigeration.
In an age perspective, it's a little bit of market growth, but about one new points of that would be a share gain specifically around emergency replacement.
Okay.
That's helpful.
And then just back to 14 A., if you want to sort of put your industry it had on, but if you have to have a given the excess image excess Fortuna units shipped in 20 painful, would that be 1 million of Yahoo?
In a way to size that.
And then just thinking about your inventory levels in 4Q, obviously a little bit high Cuba, Q2, I don't know, $25 million perhaps higher than I would expected.
Is that a good way to think about the forthcoming inventory held at year end?
So first of all, on the previous one and a lot of industry report, and I will admit I'm no industry expert, but I think the units are estimated ranges from low end of 300, high end of 600.
So it's in that number, not EUR1 million.
So I think it's how comfortable in that talking about.
That's the range, and we think it's within that range.
And nobody has more insight to be more precise within that what our own internal inventory, I mean, it was the case of two things, right?
I mean, commercial, we are building up a bit of inventory to get into emergency replacement unit inventory position in the local market.
So we are building inventory for commercial, and we'll probably see that trend continue in Q1 because Q2 is upbeat season, but that's probably driving diabetes tend to your model there.
Okay.
That's helpful.
Thanks.
Okay.
We'll go next to Damian Karas with UBS.
Please go ahead.
Hey, good morning, everyone.
Mining.
Wanted to ask you about the free cash flow.
Guidance of cash obviously came in a good bit better than you had expected in 2024.
But the guidance for this year, the range is pretty wide.
So could you just maybe spell out the moving pieces there?
Yes.
I think if you look at it from a conversion perspective, the midpoint of our free cash flow guide to the midpoint of our net income guidance of up to 85% conversion.
So a little below the than compared to the 90% conversion that we've traditionally targeted, mostly because of us having to reinvest in inventory both and VCS nature.
Yes, as we deploy, we had some of that as well as the capital expenditures continue to be a little bit higher than depreciation.
But we think when we get back into 2026 and beyond, we're going to be well into the 90%.
Again, it's better for them on receivables and accounts payable initiatives that are related.
Got it.
That's helpful.
And then a lot to talk a little bit before about potential policy implications from tariffs and integration policy.
Just curious how you're thinking about the pause on IRA funding.
Is that something that you now give you some some cause for concern at all?
Just thinking about your 2026 targets and beyond and what that might mean for our heat pump penetration, where I know you guys are very confident that you'll be gaining some share in the market.
Yes.
I mean, I think the good news with the IRS pauses that was not making a huge difference in our volumes in 24 or 23.
We are also waiting for that to come through the states and come back to at the back part of it has already been right.
So the energy efficiency rebates on tax that has not changed.
So no, I think IT has no, whether it was paused or going on did not have a material impact for us in 24 and not going to have a material impact in 25 new benefits paused.
So it's a bit of a no news for us.
Okay, great.
Thanks a lot.
Thanks.
We'll go next to Steve Tusa with JPMorgan.
Please go ahead.
Hey, good morning.
I see.
So I just wanted to kind of clarify a couple of things.
And so are you guys still saying that there was no pre-buy in 3Q?
You're saying that most like the vast vast majority came in 4Q?
Yes.
Yes, that's true, Steve.
But also with the caveat that Q three, we did see some share gains, which we were calling the temporary share gain when some of the OEMs were not to make it not able to fulfill the demand for the ride.
The wave.
All of you might expect was in Q4?
And then on that share gain, do you think the share gain in 4Q is kind of like commensurate with that rate that you booked in the 3Q?
Or was there any difference?
Because I obviously I don't think those guys kind of change that maybe data center strategy a little bit, but I do think like commensurate split between the share in 3Q.
oh, no.
I hear you, I think Q4 was less.
They did improve their position and then the large, the for 54 b. and they were aggressive in the marketplace.
With that.
I think from that perspective, I think share gain was more of a Q3 story.
It obviously bled into Q4, but towards the tail end of Q4, I think it was almost all pre-buy.
Right.
So what happened was you guys they didn't really have a competitive product.
You guys shipped a lot of the the the 14 a gain some share.
And then when they came with their for 54 b., those share gains, you know, Bob EBIT, that kind of got right, slowed down a bit.
That's fair.
Yes.
Okay.
And then on the inflation numbers, that the 3%, what is the hard number?
Like what's the base on that?
Is that like total cost just sales minus profit or COGS or what the actual run rate like the actual number on that?
The absolute number that total cost sales months off about $4 billion of costs.
Yes.
Okay.
That's a that's super helpful.
And then sorry, one more just on Mexico.
What is the what it is a plan for you guys?
What will I will it be mostly price increases are can you shift some back here if if they do go through with some of these things, which I'm not sure that they will, but if they do will be mostly price increases?
Or can you shift some stuff back to the US?
So in the short term, besides any impact from peso devaluation and productivity, it would be mostly pricing on a lot of effort as a long-term then.
Yes, we'll start looking at Lincoln Re, looking at getting more in Marshalltown more in Orange Book.
I guess some of these factories used to make this product, but to ramp that back up to take us some time.
Got it.
Okay.
Thanks a lot.
Appreciate all the color.
We'll go next to Jeff Sprague with Vertical Research.
Please go ahead.
Thanks.
Morning.
Just one more on inventory, if I could.
I just had a little bit, but actually your inventories relative to sales, right, where a lot lower than the normal here in the fourth quarter?
Right.
So obviously, you're blowing out for today, but I think about what you said about kind of comes from commercial inventory build and the fact that inventories look a bit low relative to sales in Q4 doesn't really jump out to me that you have a lot of for 10 a lift in house to be pushing out into the channel and the first half for first quarter.
Maybe can you just sort of triangulate me on that and a little bit more color on the position and maybe a second part of that to Michael.
Sorry, just you did give us kind of the 45 55 revenues split, but I guess my question about inventory is going to, you know, you had over absorption in Q4, obviously under-absorption likely in Q one.
Maybe just a little more color on how to think about the margin trajectory would be helpful.
Sir, you had I think it's a good point on the inventory more we're seen as we did have some 14 availability at the end of the year, but a lot of that was pre-bought into Q4.
So what kind of sell that through kind of early into Q1?
It'll kind of start to mitigate and be gone fully gone by the second quarter.
But I think that's really the depletion of that inventory you're going to start to see going into the first quarter.
And then on the absorption side, you're right, we will start to ramp up the new for 54 B product in the first half of the year, and that should give us access to more some more tailwinds in ACS.
On the ECS side, though, we're going to have unfavorable comparisons in the first half as we continue to launch that new factory second half of the year, you get a lot better productivity from that absorption, RBC US.
Great.
Thanks.
I'll leave it there.
Yes.
Thank you for joining us today.
Since there are no further questions, this will conclude let access 2020 for Q4 and full year conference call.
You may disconnect your lines at this time.
No, no Boom Boom Boom from.
No, no.
So on.
No, no, no, no.
No, no, no, um, no, no manner.
And in.
Yes.
I mean, no, yes, no, yes.
Yes.
Okay.
No.
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Yes, yes.
Thank you.
Yes, yes, yes.
Welcome to the Lennox Fourth Quarter and Full Year 2024 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.
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I would now like to turn the conference over to Chelsea portion from the one X Investor Relations team.
Chelsea.
Please go ahead.
Thank you, Angela, and good morning, everyone.
Thank you for joining us today as we share our 2020 for fourth-quarter and full-year results.
Joining me ICEO. allotments, Gara and CFO, Michael, when they're each, we'll share that our prepared remarks.
Before we move to the Q&A session.
Turning to slide tail, 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 indicator 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, the earnings release, today's presentation and the webcast archive link for today's call are available on our Investor Relations website at investor dot landec.com.
Now please turn to Slide 3.
As I turn the call over to our CEO., Alok Misra you, Chelsea.
Good morning, everyone.
I wanted to start by expressing my gratitude to our 14,000 employees, our 10,000 plus dealers and all of our customers for their loyalty and innovation that enabled us to deliver an exceptionally strong finish to 2020.
For one of the highlights for 2024 is that for the first time ever Nanox delivered over 5 billion in revenue and over $1 billion in adjusted segment profit.
Another achievement in 2024 is that both our segments delivered double digit revenue growth.
In addition to delivering record results, we also make thoughtful investments such as starting a new commercial factory to create growth capacity.
Let us turn to the 2024 overview.
Adjusted earnings per share was a record five, 60 and 50 and funded 250 basis points in Q4 and 150 basis points for the full year to 19.4%.
The team also delivered a record 332 million in operating cash flow in the quarter and $946 million in the full year.
Michael will provide more details later in the presentation, but I want to highlight how proud we are of the work.
The team did this year to deliver significant year-over-year improvement in our cash conversion.
Now please turn to Slide 4.
As I review some of the drivers of our 2020 for success in 2024, we successfully completed the initial phase of our self help transformation plan.
The team's effort in 23, including pricing initiatives, portfolio simplification and strategic acquisitions, not only restore margins, but also established a strong foundation for an exceptional 2024.
Our strategic initiatives enabled us to successfully navigate the construction of a new commercial factory and overcome challenges associated with the refrigerant transition, showcasing our resilience and outstanding execution in 2024.
We continue making strategic investments while delivering impactful results, positioning us to continue our momentum into 2025 and beyond.
We successfully navigated the manufacturing transition from our forte and a refrigerant effectively meeting customer needs and investments in sales and distribution channels, elevated customer experience.
Our ongoing focus on pricing excellence programs partially offset the investments for improving customer experience.
Our new commercial factory is now online and will be key to enhancing output and productivity.
The Alias integration remains ahead of schedule, exceeding the original value proposition.