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Date

Wednesday, January 28, 2026 at 9:30 a.m. ET

Call participants

  • Chief Executive Officer — Alok Maskara
  • Chief Financial Officer — Michael P. Quenzer
  • Vice President, Investor Relations — Chelsey Pulcheon

Takeaways

  • Revenue -- Fourth-quarter revenue declined 11%, attributed to weak residential and commercial end markets, deeper channel destocking, and reduced residential new construction.
  • Segment Margin -- Quarterly segment margin was 17.7%, impacted by volume declines and absorption headwinds.
  • Adjusted EPS -- Fourth-quarter adjusted earnings per share reached $4.45.
  • Operating Cash Flow -- Operating cash flow for the quarter was $406 million.
  • Annual Revenue -- Full-year revenue fell 3%, with the decline driven by destocking and softer end markets.
  • Record Segment Margin -- Full-year segment margin achieved a record 20.4%, including the effects of tariff and inflation pressures.
  • Adjusted Annual EPS -- Full-year adjusted earnings per share was $23.16, a 2% increase over the prior year.
  • Free Cash Flow -- Free cash flow for the year totaled $640 million, exceeding prior guidance of $550 million.
  • Inventory -- Inventory rose by $300 million over December 2024, including $200 million above seasonal norms to address anticipated second-quarter peak demand.
  • Share Repurchases and M&A -- $482 million was allocated to share repurchases, and $545 million to acquisitions and joint ventures in the year.
  • Capital Expenditures -- Capital expenditures for 2025 reached $120 million, with a $250 million target for 2026 to support innovation, digital technology, network upgrades, and R&D centers.
  • Accounting Change -- Adoption of FIFO accounting increased 2025 EPS by approximately $0.55, with quarterly and annual reconciliations provided in supporting materials.
  • 2026 Revenue Guidance -- Management projects total company revenue growth of 6%-7% in 2026.
  • 2026 EPS Guidance -- Adjusted EPS for 2026 is expected in the range of $23.5 to $25.
  • 2026 Free Cash Flow Guidance -- Anticipated free cash flow for 2026 is $750 million to $850 million, driven by inventory normalization and improved profitability.
  • Productivity Savings -- Management targets $75 million in productivity and cost actions related to materials, manufacturing, distribution, and SG&A in 2026.
  • BCS Segment Outlook -- The Building Climate Solutions segment is expected to achieve approximately 15% revenue growth in 2026, with high single-digit M&A contribution, mid-single digit volume gains, and low single-digit price/mix increases.
  • HCS Segment Outlook -- The Home Comfort Solutions segment is guided to roughly 2% growth, with mid-single-digit volume declines mitigated by price, mix, and M&A contributions.
  • Inflation Expectation -- Cost inflation for 2026 is forecasted at approximately 2.5%, reflecting tariffs and moderating price pressures.
  • Tax and Interest Guidance -- Management expects a tax rate of 20% and interest expense of $65 million for 2026, reflecting M&A and share repurchase financing needs.

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Risks

  • CEO Maskara said, "Revenue was down 11% in the quarter due to weak residential and commercial end markets," adding that channel destocking amplified the impact, and residential new construction was soft.
  • Light commercial HVAC industry declined for the seventeenth consecutive month by December 2025, which contributed to segment volume challenges.
  • CFO Quenzer stated, "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," indicating a weak first-half outlook.
  • Inventory remains temporarily elevated, with Quenzer quantifying "$200 million more inventory than seasonally," which creates additional absorption headwinds expected to impact the first quarter.

Summary

Lennox International (LII 0.55%) reported a challenging quarter and year with revenue and volume declines, but delivered record segment margins and increased annual adjusted EPS. Management transitioned to FIFO accounting, which favorably impacted EPS and streamlined reporting. Substantial capital deployment to acquisitions, share repurchases, and innovation initiatives shaped the year, while elevated inventory levels were cited as a short-term, managed headwind. Looking ahead, management forecasts a return to revenue growth of 6%-7%, supported by M&A gains, productivity initiatives, and the anticipated normalization of channel inventories. First-half 2026 is expected to remain pressured, especially in segments affected by destocking dynamics and soft macro factors, but a second-half recovery is embedded in the guidance.

  • CFO Quenzer stated, "we expect adjusted EPS of $23.5 to $25," clarifying expectations for profitability.
  • Management emphasized a fourth consecutive year of EBIT margin expansion, primarily in the Building Climate Solutions segment.
  • CEO Maskara highlighted that one-step channel destocking is "nearly complete," with two-step destocking anticipated to finish in the second quarter, framing recovery timing.
  • Capital deployment plans include $250 million in 2026 spending for innovation, technology, and training infrastructure.
  • Management attributed $75 million of planned productivity improvements to material, factory, distribution, SG&A, and tariff-related initiatives, targeting cost offsets against inflation.
  • CEO Maskara noted, "parts have been growing more than equipment and pretty much most of 2025," referencing a notable shift in end demand composition.
  • CFO Quenzer provided that "Interest expense is expected to be approximately $65 million" in the coming year, tied to acquisition and capital allocation strategies.
  • CEO Maskara described the portfolio shift enabled by recent acquisitions and partnerships as integral to broadening product offerings and expanding commercial capacity.
  • Management outlined a transition from stabilization to expansion in its self-help transformation plan, focusing on footprint growth, customer experience centers, and expanded product and testing capabilities in 2026.

Industry glossary

  • FIFO (First-In, First-Out) Accounting: Inventory valuation method in which the earliest acquired goods are considered sold first, impacting earnings and inventory carrying value, and aligning more closely with the physical flow of goods in the HVAC sector.
  • One-step / Two-step channel: HVAC distribution frameworks; one-step refers to direct dealer distribution, while two-step involves intermediaries such as wholesalers prior to reaching dealers or contractors.
  • HCS (Home Comfort Solutions): Lennox business segment focused on residential heating and cooling products and systems.
  • BCS (Building Climate Solutions): Lennox business segment serving the commercial heating and cooling market with equipment and services.
  • R-454B / R-410A: Types of refrigerants; R-454B is a lower global warming potential alternative to legacy R-410A, with regulatory transitions impacting HVAC product demand and mix.

Full Conference Call Transcript

Chelsey Pulcheon: 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 two, a reminder that during today's call, we will be making certain forward-looking statements which are subject to numerous risks and uncertainties as outlined on this page. We may also refer to certain non-GAAP financial measures that management considers an 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.

Please note that the results being presented today reflect the FIFO accounting adopted by the company as of Q4 2025. The rationale and the financial impact of this change are summarized on slides 15 through 18 in the appendix. The earnings release, today's presentation, and the webcast archive link for today's call are available on our Investor Relations website at lennox.com. Now please turn to slide three as I turn the call over to our CEO, Alok Maskara.

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, software 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 company 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 three for an overview of our fourth quarter and full-year financials. Revenue was down 11% in the quarter due to weak residential and commercial end markets. The impact was further amplified by deeper channel destocking and soft residential new construction activity. Our segment margin was 17.7% in the quarter, driven by volume declines and expected absorption headwinds. Operating cash flow was $406 million. Adjusted earnings per share for the quarter was $4.45. Full-year revenue was down 3%, driven by volume headwinds from destocking and softer end markets.

However, the team still delivered a record 20.4% segment margin despite tariff impact and other inflationary pressures. Operating cash flow was $758 million, down from last year due to temporarily inflated inventory levels. Overall, 2025 was a complex and challenging year, and I'm proud of the team 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 four 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 with low dealer and consumer confidence and the lack of housing recovery. On the commercial side, we fully ramped our emergency replacement growth initiative in several metro regions while the light commercial HVAC industry declined for the seventeenth consecutive month by December 2025. 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 the second quarter of this year. In addition, unique challenges from 2025, such as the 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 five 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. Since 2022, we have deployed an incremental $300 million to broaden our capability, streamline our operation, and strengthen our competitive position. These investments are now embedded in how we run the business and are reflected in our financial statement.

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 team clearer priorities and strengthens the connection between how we engage with customers and how we generate profitable 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' code, 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 enhanced this with new IT systems for warehouse and transport management that reinforce network productivity and efficiency. On the manufacturing side, we doubled the square footage dedicated to our commercial operation, 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.

In 2026, we will add new customer training and engagement centers and build our digital tech stack to enhance customer experience. We will also invest in automation across our existing labs, build new test chambers to in-source certification, and expand our engineering capability through new R&D centers. We anticipate these investments will carry attractive returns, expedite innovation, and improve customer support. In summary, Lennox is positioned to respond with agility as demand recovers while continuing to accelerate growth and improve margins well into the future. With that, I will turn it over to Michael to review our 2025 financial results and 2026 guidance.

Michael P. Quenzer: Thank you, Alok. Good morning, everyone. Please turn to slide six. As Chelsea mentioned, we updated our 2024 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, adoption of FIFO increased our 2024 full-year EPS by approximately 12¢ and raised EPS for 2025 by approximately $0.55. The 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 direct detail held in layers. Second, it aligns cost increases more closely with the timing of price realization.

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 EBIT declines to 16% despite a 23.3% decrease in revenue. Please turn to slide seven. In all, we noted that May report worse than anticipated. Organic volume was down 40% by continued destocking into the channels. Using warranty registration, we built in all test television. In the one channel, all destocking in the two channel is expected to continue in Q2.

Can utilization in May, which helps manage all incremental costs, were $20 headwind through one discipline actions resulting in a $19 million SG&A reduction partially offset the higher product costs. Please turn to slide eight 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 loaded organic volume declines to mid-single digits.

Like HCS, product cost headwinds reflected absorption and pressure and the timing of inflation expense recognition underfoot. With that, let's move to slide nine 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, 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. 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 seasonally, which will remain slightly elevated in the first quarter but is aligned to meet second-quarter peak demand. This inventory management strategy will create some additional absorption headwinds in the first quarter 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 a healthy leverage profile. 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 seven 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 one point of growth from initiatives across parts and accessories, commercial emergency replacement, as well as Samsung ductless inducted heat pump products. 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 in joint ventures.

At the segment level, 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. On costs, inflation is expected to be up approximately 2.5% reflecting tariff carryovers and moderating price cost pressure. 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 M&A activity and share repurchases. We expect the tax rate of roughly 20%. Based on these assumptions, we expect adjusted EPS of $23.5 to $25. Free cash flow is expected to be between $750 million and $850 million driven by inventory normalization and higher profitability. Overall, we are cautiously optimistic for 2026 as we expect to return to revenue growth and build on our momentum to deliver our fourth consecutive year of EBIT margin expansion.

With that, please turn to slide 12, and I'll hand it back to Alok.

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 '24, the team focused on stabilization and consistent execution. During that period, we reinforced pricing discipline, restored commercial margin, 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 Ariston joint ventures, along with Durodyne and Subco acquisition, broadened our product offering 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. 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 heavy 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 March 4, where we will also provide deeper visibility into our strategic growth initiatives. Now let's turn to slide 13 for why I believe Lennox remains the industry leader. Lennox remains a highly attractive long-term investment. Our market benefits from strong replacement fundamentals, and we operate the direct-to-dealer model that differentiates our customer experience. Our margin profile is resilient, driven by disciplined pricing, operational excellence, and a portfolio aligned to the evolving needs of contractors and consumers.

These trends are reinforced by a high-performing culture centered on advanced technology and execution, which positions us well as we embark on the next phase of our strategy. I'm confident in our strategic direction and remain committed to delivering sustained value for our customers, employees, and shareholders. I believe that we are building meaningful momentum and that our best days are still ahead. We will be happy to answer your questions now. Thank you. Madison? Let's go to Q&A.

Operator: Thank you. If you'd like to ask a question, please press *1 on your telephone keypad. Our first question comes from Ryan Merkel with William Blair. Please go ahead. Your line is now open.

Ryan Merkel: Everyone, thanks for the questions. I wanted to start with HCS revenue in the fourth quarter. Down 21% was a little worse than I was thinking, and clearly, it was hard to call. So two questions. First, how did HCS trend through the quarter? My feeling is November and December were maybe a little worse than October. And then secondly, where was the surprise? Was it more the one-step or the two-step?

Alok Maskara: Ryan. Great to speak with you. Thanks for your question. Yes. November and December were worse than where October was trending, so I think that's a fair assumption. I think the surprise for us was more on the residential new construction side, which I think performed worse than we expected. But I think the one-step channel and two-step channel behaved similarly, both undergoing destocking. So while the two-step impact was more, that was expected. But I think they both went through destocking in Q4. That was more than we expected.

Ryan Merkel: Got it. Okay. That's helpful. And then slide four is really helpful. Thanks for that. A few tailwinds in 2026. But Alok, can you square those tailwinds with the guide for HCS, you know, up to because it implies volumes are down maybe 3% plus don't know if there's M&A in there. But just square that up for us, how you're thinking about that.

Michael P. Quenzer: Sure. I'll take that. So, yeah, within the HCS guide, we have about a mid-single-digit decline in volume for the full year. Down more in the first half as we're gonna see continued destocking into the first quarter specifically on the two-step channel, a little bit on the one-step. But we get into late Q2 into Q3 into Q4, that's when we start to see growth that will kind of normalize us and be a positive inflection in the second half of the year by year. But the first quarter, we'll try it down on the full year.

Ryan Merkel: Got it. Alright. Thank you. Pass it on.

Operator: Thank you. We'll move on to Amit Mehrotra with UBS. Please go ahead. Your line is now open.

Amit Mehrotra: Thanks. Good morning, everybody. Hope you're all well. I wanted to ask about inventory levels and obviously, they're up a lot year over year in dollar terms. And trying to understand when you expect those to normalize and maybe you can talk about it from the perspective of both one-step and two-step.

Michael P. Quenzer: Yeah. And I mentioned that in the script that we have about $200 million more than seasonally normal at this point. We have another $100 million in there for just investments to get better experience with our customers. Within that $200 million, you'll see some continue 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 summer season in the second quarter. And right now, those inventory levels in December approximately align with what we'll need in summer season. A little bit of work to do in the first quarter of the ramp factories down to get some absorption.

But overall, we think 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. We found that this is the best approach to mitigate some of these destocking industry issues that we're fighting through.

Alok Maskara: And, Amit, if I could just add to this. First of all, welcome to the Lennox coverage universe. Great to have you on the call. Amit, your question was answered by Michael on our inventory levels. On the channel perspective, Michael also mentioned, we think one-step is completing the destocking and largely done in Q1. And two-step destocking will be done by Q2. That kind of inventory outside our four walls.

Amit Mehrotra: Yeah. Makes sense. Thank you. And then just a follow-up. I know price mix has guided up to mid-single digits this year. Be curious if you just give a little bit of a sense of how much of that is kind of the carryover effect and how much of that is prospective increases. Obviously, you make regular price increases this year. Just trying to understand the bifurcation between those two. Would be helpful. Thank you.

Michael P. Quenzer: Yeah. A little bit of a carryover in the first half. So, on the mix benefit of point-ish. Maybe close to two points in the first half of the carryover mix, then the rest is new price initiatives that we're gonna start to launch into this quarter and into Q2.

Amit Mehrotra: Thank you very much.

Operator: Thank you. We'll now move on to Joe Ritchie with Goldman Sachs. Please go ahead. Your line is open.

Joe Ritchie: Hey, guys. Good morning. Can we just maybe just talk a little bit about seasonality and cadence of EPS and how to think about the first quarter just given all of the moving parts? Just any guidance that you can give us around 1Q would be helpful.

Alok Maskara: Sure. You know, obviously, it's been quite cold recently, Joe. So that may impact a few things. But in general, remember on the HCS side, we're gonna be facing pretty tough comps. There was a lot of stocking up going on as some of the 454 items had just been launched, but people are still buying 410A. On the BCS side, we had a tough quarter with our own production move and some of the key account challenges. But net-net, we would expect Q1 to be down. We would expect the first half to be down and the second half to be up overall. But, yeah, we don't expect a great first quarter right now.

Joe Ritchie: Okay. That's helpful. Thank you, Alok. And then just going back to your assumptions for Resi volume this year. I think you said that you had it down mid-single digits for the full year, down more in the first half. I guess as you're kind of thinking through, like, the swing factors as you progress through the year, like, maybe just talk through some of your key assumptions on the mid-single-digit number as you progress through '26?

Alok Maskara: Sure. I mean, I think obviously, like, you know, we got more than eleven months still to go. But from where we are, we're gonna be closely watching consumer confidence, which, like, you know, remains uncertain. Interest rates and housing, both existing home sales and new home sales, something we'll be closely watching. 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 they can only outline on page four. 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's going to be behind us in the second half. So that's probably shaping our overall view. On the largest factor on 2025 performance was destocking. And the fact that it's gonna be behind us, that's gonna help us get to a better number this year.

Michael P. Quenzer: And, Joe, I'll just add to that. I mean, we'll watch the seasonal demand. I mean, if it turns into a hot summer early and there's a lot of, you know, replenishment of inventory that happens, that could happen very quickly. And we're in a really good position for that. So I think that's one thing we'll start to watch the season play out as we get into March and April as well.

Joe Ritchie: Okay. Thank you, guys.

Operator: Thank you. We'll now move on to Tommy Moll with Stephens. Your line is now open.

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

Alok Maskara: Good morning, Tommy.

Tommy Moll: Alok, on pricing last quarter, this is specifically to Resi, if I recall correctly. Last quarter, there was conversation about maybe a mid-single lift increase in your deal, something in the low single digits range. Is that still a reasonable bogey to use for this year?

Alok Maskara: Yeah. I think for a new pricing, that's still a reasonable bogey. And then Michael mentioned there's a carryover effect. Right? So it can be too precise, I mean, I look at our mid-single digit as a combination of new pricing, which we have announced already across the entire business portfolio. And then carry over. Remember last year, we talked about the mix was gonna be roughly forty percent 410A, sixty percent 454B. So that forty percent 410A is gone, and it's all gonna be 454B. Think the price mix lift from last year used to be overall number of mid-single digits that we have put in our guide.

Tommy Moll: Great. Thank you. And then, Alok, on Resi here for volumes, and even more specific on the one-step, it sounds like destocking is nearly entirely in the rearview mirror here. So in the Outlook you've provided for resi volumes, would one-step be implied up for the full year, or are you still assuming even without destocking headwinds that there may be some additional headwinds. Thank you.

Alok Maskara: I would say, listen, I mean, 70% of our business is one-step. So I think the way we would look at it, one-step is gonna be flattish to maybe slightly up. Two-step's gonna be down. I think that's as much precision as we have in our forecast at this stage. But, yeah, one-step will do better than two-step, especially given that two-step would be going through destocking or to the second quarter. Now at the same time, if something changes, and Michael said, we're landing an early start and a hard start to summer. Then, you know, two-step might come back and start holding more normal level inventory. But the current assumption is exactly what you said.

Tommy Moll: Okay. Alright. Great. Thank you. I appreciate the insight, and I'll turn it back.

Alok Maskara: Thank you.

Operator: We'll now move on to Jeff Hammond with KeyBanc Capital Markets. Your line is now open.

Jeffrey Hammond: Hey, good morning. Can you hear me?

Alok Maskara: Yeah. Yeah. Maybe just starting with BCS. The 15% growth, if you could unpack similarly like you did for the res business, price volumes, M&A in there. And then just maybe I think you were saying that you know, you thought that would maybe start to turn and, you know, what you're seeing just real-time on the commercial unitary business?

Michael P. Quenzer: I'll give some guide points within that. So we expect within the 15 high single-digit growth from the acquisition, most of that M&A kind of leans toward that segment with the DuraDyne business. From a volume perspective, we expect up mid-single digits with recovering end markets share gains, then price mix combined are gonna be kind of more in the low single digits on that side of the business.

Alok Maskara: Yeah. And I think from what we are seeing in the market is, it's gone through seventeen straight months of decline per the HRI data by December. So, I think just comps get better, and we are seeing good uptake in quotations and good uptake in the backlog as well. So while it's not boom years, I think it's gonna become less of a bearish as we go into 2026.

Jeffrey Hammond: Okay. And then just on the repair-replace dynamic, how are you building that into your path? As you talk to more of your contractors? You know, the view that the consumer's tight and this persists, or it was mostly a, you know, a tan or issue and, you know, it kinda goes away.

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 twelve to twenty-four months. So I think that's the way we would 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 a little bit more favorably inclined to what that trend this year.

But so far, like, you know, what we have assumed is it's not gonna get any worse. We haven't assumed that's gonna get better either. We think it'll remain at the 2025 level. Which, you know, had heightened repair versus previous replaced.

Jeffrey Hammond: Okay. Appreciate the color.

Operator: Thank you. We'll now move on to Noah Kaye with Oppenheimer. Your line is now open.

Noah Kaye: Good morning, and thanks for taking the questions. I think, Michael, you mentioned a couple of times the absorption factor for 1Q. Can you expand on that? And would that lead decrement on volumes in 1Q to be kind of worse than the typical 30-ish percent decline?

Michael P. Quenzer: I think we have some cost actions that we're trying to mitigate within that you saw. We did some really good cost and A cost productivity in the fourth quarter. Some of that's going to repeat into the first quarter. A lot of material cost reduction programs are on tariff mitigation and other things are going to soften it. But Q1 is kind of a light quarter from a volume perspective. So if you think about 10 to 15 million of absorption that can have a pretty big impact within the decremental. But we think as you get through Q1, that absorption goes away and we get back into cost productivity across factory material and our distribution network.

But little headwind as we get the inventory to the right spot for Q2.

Noah Kaye: Okay. That's helpful. And then I believe I heard you say the CapEx number will be $250 million for the year.

Michael P. Quenzer: Correct. Yes. It's normally about $150 million of just normal recurring CapEx, and then we have a 150 million of strategic innovations that we're doing and a good proven track record of ROIs and organic investments. I think we have a good pipeline of these projects that have really strong ROIs for the next several years and gonna keep investing in them and spot the customer experience. And that's where we're focused on both digital and, at our physical, distribution network.

Noah Kaye: Yeah. I think the second part of the question was just to ask whether we should view those, you know, growth organic investments in CapEx as something more permanent? Or should we think about kind of reversion more towards the typical maintenance CapEx range?

Alok Maskara: No. I would not think of those permanent. I think our maintenance slash regular CapEx remains in the $125 million range. 25 to $150. You know, three years earlier, we had called out Saltillo estimate, and we had said if any other big investments, we'll call it out. So now we're just calling out that we're gonna be spending like, your additional $100 million or so. And those are really good projects. Many of these projects are deferred because all our engineering and other resources were tied with each web. So but, no, I would say after that, we go back to our usual maintenance type CapEx.

Noah Kaye: Very helpful. Thank you.

Operator: Thank you. We'll now move on to Chris Schneider with Morgan Stanley. Your line is now open.

Chris Snyder: Thank you. I wanted to follow-up on company inventory and the associated absorption headwinds that come from that. It seemed to me that inventory was kind of flattish quarter on quarter in Q4 when normally it would step down, maybe to like the mid-single-digit level. So I guess, you know, has there not been any destocking yet? And maybe that's the first part of the question. And the second part is, you know, why did the absorption headwinds end after Q1? It seems like this $200 million excess inventory will be sold into peak summer demand.

But I would think that means underproduction up in those summer months, and I would expect that I would have thought that the absorption headwind, you know, comes through on a lag as it flows off the balance sheet into the P&L.

Michael P. Quenzer: Thank you.

Alok Maskara: Sure. Because the So that's why the inventory didn't go down meaningfully. It didn't go down slightly. On the inventory piece, yes, we did ramp down production. But as you saw, our sales came in much lower than expected in Q4. So now we have to ramp like, you know, even more in which we did towards the end of the quarter. The second question on absorption, Q1 will have the largest impact because this is the time you start ramping up for selling product into Q2. So now the manufacturing for sales into Q2, plan that happening in Q1. Just given the lead time from when the product is manufactured to when it's sold. Hence, we called it up.

Will be some impact of absorption in Q2, but most of it will be in Q1.

Chris Snyder: Thank you. I appreciate that. And then maybe just following up on the cost inflation. The 2.5%, came in below what I was expecting just kind of based on some of the tariff wrap and then the metal inflation and other cost inflation we're seeing in the market. So can you maybe just kind of help us unpack that number? How much is tariff wrap? How much is new cost inflation? And I think it seems like there's maybe some offsets there in mitigation that's perhaps keeping that number a little bit lower we would have thought. Thank you.

Michael P. Quenzer: Yeah. That's a correct interpretation of the guide. So right now, what we apply is the two and a half percent to our total cost. Would be manufacturing cost, distribution cost, and SG&A cost. Not all are going up the same. We are seeing a little bit more inflation on the commodity side, but we also have a hedging program that delays some of that cost increase. And we've significantly moved away from copper and have more of an aluminum product. So that's softening at least from the metals perspective why it's not as heavy within the guide. Tariffs, there will be kind of some wraparound impact of tariffs. It's about $125 million full year 2025.

We'll have a little bit of carryover in the first half of that. Assuming the tariff structure stays the same, which is what we've built within the guide. But overall, we assume that inflation, and then we're gonna drive productivity and investment actions against that inflation number.

Alok Maskara: If I could just add to that, we have significant cost reduction that went in fact in 2025. We have a thousand fewer employees than we had before we went into the cost reduction spree. And we are not gonna bring all of that cost back. Some of the benefit that you see is from our perspective, the productivity aspect of it both on materials, manufacturing, and SG&A is something that we have baked in going forward.

Chris Snyder: Thank you. I really appreciate all that color.

Operator: Thank you. We'll now move on to Julian Mitchell with Barclays. Please go ahead.

Julian Mitchell: Hi. Good morning. Maybe just wanted to start with overall operating margins. I don't think that's been fleshed out too much yet, but just wondered, is it fair to say the full-year guide is embedding operating margins down slightly maybe year on year. And then you've got between the segments anything you'd flesh out, perhaps BCS up for the year, and anything you could help us around kind of first half versus second half year on year on the margin front, please?

Michael P. Quenzer: Yes. So overall, the guide implies EBIT ROS expansion of about 20 basis points. I mentioned that in the 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 as end markets there are down. So that the volume leverage in BCS, you'll start to really see that within their margin expansion. Within the seasonality, we'll talk a little bit about that. But when you look at 2025, the seasonality first half to second half from a revenue perspective was about fifty-fifty.

As we think about next year or 2026, it'll be, you know, three or four points less than 50% in the first half. Three or 4% higher in the second half. Normal incrementals on the volume that we talked about at 35% of the decremental and incremental plus the cost inflation and productivity initiatives. So overall, a little bit more headwind in the first half. But the margin expansion will definitely start to show in the second half.

Julian Mitchell: That's helpful. Thank you. And just wondered kind of any perspectives on the market in HCS. You know, maybe last year, the market was I don't know, seven three seven four million units, and the sellout just under 8,000,000. Just wondered your thoughts around how we're thinking about those very big moving parts for '26. And what degree of repair normalization you're expecting this year in the industry?

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 ocean has been that the sell-in number was heavily impacted by destocking. And the at the end of destocking, lead to automatic improvements. Our assumption is that the repair versus replace activity is stabilized going forward. 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.

Seven three, seven four, and on a sellout basis, I mean, those numbers are really not that reliable, so we focus less on that. What we have seen in our own one-step channel is that the confidence of the dealer has come back and people are now looking at 2026 as a fresh start with R-454B. That's probably the best news out there, Julian. Given all the other potential headwinds, consumer confidence and numbers that don't seem to be improving. Including yesterday's number where consumer confidence was very, very low.

Julian Mitchell: That's great. Thank you.

Operator: Thank you. We'll now move on to Jeff Sprague with Vertical Research. Your line is now open.

Jeffrey Sprague: Hey, thank you. Good morning, everyone. Hey, look, maybe just coming back to the a piece of that last point. Just on repair versus replace, stabilizing, that is sort of a thesis at this point, or do you think there's actual evidence of that? And I guess, maybe a lie to that point is within the mix any evidence that people are trying to mix lower? Obviously, you got the mix carryover on the refrigerant coming through and I guess it's getting harder to mix lower as all the SEER levels have continued to move up.

But, you know, is there any evidence of just consumer distress on, you know, what kind of units they're buying and whether it's a replacement or a repair.

Alok Maskara: Yeah. So the first one, it's supported by our own research and data now. We don't have like, your data on all the dealers, but we do serve quite a few of the dealers that have a direct conversation with them. Is it statistically relevant? I mean, that goes down to a geeky road that I won't go to, but I'd say it's more than just a hypothesis. It's definitely something that we have printed out on it stabilizing. On the second part of mix, I mean, remember 70% of the sales are now to the lowest SEER at minimum SEER has gone up. Are they trade downs that are happening? Yes. Are they gonna be meaningful impact to us?

Unlikely given that 70% of it's already the minimum SEER numbers. Now it comes down to single stage, variable speed, and some of those things that we are continuously looking to refine and put forward. You will see overall that, you know, from our perspective, mix will improve because 454B were versus 410A. That's a carryover effect. Coming forward.

Michael P. Quenzer: Jeff, I'll just add on the repair side. We expect the input cost there to be up significantly more than systems starting this year and into the next few years. There are 410A gas and going to be up. The cost of the technician complexity is going to be continue to go up. So we expect that equation within the repair, brakes, replace to lean more toward a system replaced over the next year to two as well.

Jeffrey Sprague: Yeah. No. Understood. And then maybe just on capital deployment. Obviously, you've become a bit more active on the M&A side here. Is there an active pipeline? Should we anticipate more in 2026? What are your thoughts there?

Alok Maskara: Yeah. You know, we maintain a pipeline. Like, we obviously have to digest what we bought and make sure the integration goes well. But if you're bolt-on acquisition, ask for a consistent strategy. Remains a focus. I would say over the next couple of years, you should expect more. Can be definite about anything in this year? But, you know, the style of what we bought is something we like. You know, something we would look at similar size, maybe slightly smaller acquisitions in the pipeline. And I know our focus will remain on things that we can ensure two plus two is gonna be greater than four.

So, like, I think that we can apply our stores network, things that they can apply our national account team. And that's where we're very happy with the Durodyne and Subco acquisition. Because it's a net add to us and a significant room for improvement on the margin side as well.

Jeffrey Sprague: Mhmm. Okay. Great. Thanks. I'll leave it there.

Operator: We'll now move on to Nicole DeBlase with Deutsche Bank. Your line is now open.

Nicole DeBlase: Yeah. Thanks. Good morning, guys.

Alok Maskara: Hi, Nicole.

Nicole DeBlase: Just to circle back on the question about quarterly cadence, I think Michael, you answered that with respect to revenue. When we think about that one half to two half split, is that kind of reflected in EPS as well? Or is it maybe a bit more pronounced because of the under absorption in the first quarter?

Michael P. Quenzer: Definitely into the first quarter, you'll start to see that, but there's also gonna be some more cost productivity as we get into the second quarter to mitigate some of that resource. So first quarter is gonna be tougher, but from a revenue perspective, that's the main thing that drives the margins at 35% decrementals then offset with some productivity and or absorption. That's the main driver of our

Nicole DeBlase: Okay. Okay. Understood. And then just coming back on price as well, when you guys kind of look out over the competitive landscape, we've heard some noise around maybe some price competitiveness particularly in the new construction channel recently. I guess, what are you guys seeing out there in the market? And do you think that your competitors are kind of aiming for a similar level of price increase for 2026 as you are? Thank you.

Alok Maskara: Yeah. Based on everything we have seen so far, yes, we see our competitors aiming at similar price increases. So not surprised. Yeah. We have seen some of the low-end RNC business get more competitive, and we talked about that earlier. You know, we have chosen some of those not to go down that path. And instead focus on our core dealer network and get the right kind of customer experience there. But nothing is surprising nor is it any major deviation from the past. If I believe on one salesperson in one small territory, they will tell me that they're facing significant price competition. That's probably true for all our competitive scenario.

But if you look at broad-based across US full basis, industry remains very disciplined. Industry remains very focused. And we compete on technology. We compete on availability and service. And that's how we compete.

Nicole DeBlase: Thanks a lot. I'll pass it on.

Operator: Thank you. We'll now move next to Joe O'Dea with Wells Fargo. Your line is now open.

Joseph John O'Dea: Hi. Good morning. Can you elaborate a little bit on the price mix trends in HCS over the past few quarters? I think we saw that step down a small amount from Q2 to Q3. Q4 was a few 100 bps below the Q2 level. On similar comps. And so just in terms of what you're seeing on the price side or the mix side that's been contributing to that.

Michael P. Quenzer: Yes, Joe. It did step down a little bit in the fourth quarter third quarter. It's mostly related to just the bigger decline in condenser sales where we saw the bigger mix lift up. So we had a bigger proportion of furnace and parts and accessories and things that didn't have that same big mix lift up in the fourth quarter, the same proportion as the third quarter. That's the main driver. Besides that, mix continues to stick within each product channel.

Joseph John O'Dea: Makes sense. Thank you. And then, 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 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 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 compelling on sort of the replace versus repair side and what your messaging helping on the marketing side with dealers.

Alok Maskara: Sure. I'll start by saying 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. 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, help them with the sales collateral and material and run appropriate promotions with them, when it comes to financing and rebate. To incentivize replacement versus repair.

We clearly didn't do a lot of that last year given the transition, I think they're all back to that mode now. That the dealers have good confidence on it. On your price perspective, you know, compared to sort of pre-COVID level up to now, the price from manufacture to the contractor or the channel has definitely gone up. But the price on the channel to the consumer has gone up even more. Some of it reflects the higher and grows across US? labor cost as the skilled labor shortage persists. Some of it also reflects the fact that consumers were not getting as many cores. And we see now consumers are getting many more cores.

And that's coming more back to normal. So I see any price pressure is gonna play out 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 was true is any repair is simply deferred replacement. So a lot of things that were patched up and then repaired last year may come back again for replacement this year. If not definitely next year. So we feel very good about the long-term trend despite some short-term disconnect that we all saw last year.

Michael P. Quenzer: Joe, I'll just add to that. We expect, or if you believe, that electricity costs are going to continue to increase. There's a potential monthly savings in utility bills that homeowners can get with the new system. The minimum system efficiency has increased significantly over the next last few years, and there's a lot of cost savings that a homeowner can get the new system out as well.

Joseph John O'Dea: Helpful details. Thank you.

Operator: Thank you. We'll now move on to Steve Tusa with JPMorgan. Your line is now open.

Stephen Tusa: Hey, guys. Good morning. Thanks for all the details as usual.

Alok Maskara: Morning, Steve.

Stephen Tusa: Just on these other items from slide 10 from the last quarter where you had growth in the value tier? I know Jeff touched on the repair versus replace, but the rationalization of low margin RNC accounts. Any change in those? I don't see them on the head tailwinds, you know, headwinds slide. Any change in those dynamics?

Alok Maskara: Back in Q4 already. No. No change in those dynamics. And we talked about the RNC. So I think that continues. So move towards trade down, we touched on the Q&A. But, no, nothing changed. What we highlighted on slide four this time, was our comparison to what we think things are gonna improve or be different in 2026. Those two factors remain the same, Steve.

Stephen Tusa: Okay. And then just lastly on this accounting change. How would that have kind of impacted the shape of the year? And I guess you guys hedge as well on copper, maybe a little more aluminum. Like, what kind of would we what would we have seen in maybe when does that, you know, kind of recouple to, you know, wherever these commodities are moving?

Michael P. Quenzer: You mean the 2026 year or a 2025 year?

Stephen Tusa: Yeah. '26. I mean, you gave us the differences in '25. So just did how would the shape of '26 say? I mean, it all normalizes in the end. Right? But, like, would the shape of '26 maybe been a bit different?

Michael P. Quenzer: Yeah. I think it leans to that absorption comment and making first quarter where some of that's gonna come into the '26. You're gonna see some variations the fourth quarter of 2026 go to 2027. Just that's the natural timing of FIFO versus LIFO. But net kind of neutral impact for the change FIFO to LIFO in 2026.

Stephen Tusa: Okay. Great. Thanks a lot.

Operator: Thank you. We'll now move on to Brett Linzey with Mizuho. Your line is now open.

Brett Logan Linzey: Hey. Good morning all. Just wanted to follow-up on the repair-replace one more time here. Did you actually see positive parts growth in the fourth quarter? And then are there any regional or efficiency level observations where the trade down might be more pronounced?

Alok Maskara: The answer to the second question is no. We don't see any specific regional differences. That could, like, you know, drive repair versus replace or trade downs. On the first part, yeah, I mean, parts have been growing more than equipment and pretty much most of 2025. Now you see that in the HRI data. We also see it in our own data. So, yeah, I mean, we do have actual data to support the fact that parts grow more. And we heard that from other conference calls and our distributors as well.

Brett Logan Linzey: Got it. And then just a follow-up on NSI in the part strategy. Maybe an update on how NSI is now tracking organically and pulled in the And then as you continue to build out that parts pull-through strategy, do you better throughput, how do we think about incrementals in the context of better branch flow and volumes going forward?

Alok Maskara: Sure. So, yeah, I think, and as acquisition overall we remain very pleased with it. We only have sort of like, two months of data from last year. But I think the sales performance is as we expected. It is just like other parts businesses. Growing. I mean, they obviously have some destocking impact too. Going forward, I think this year is obviously gonna be focused on integration, and we have expenses and all that associated with that. And Michael referred to that as part of some of our ERP conversion cost in there. But we would expect both through on an SI to be at or better than our overall margin levels. Going forward.

And by 2027, I think you'll definitely be on the better side compared to our usual incremental.

Michael P. Quenzer: And I'll just add to that. Yeah. We're really excited about the platform that brings. It brings culture and experience around partnerships that we didn't have. We had about $500 million of legacy and accessories within our existing business. And joining that with that existing parts and accessory business is going to help us really get that attachment rate into the 2025% of our sales currently. It's only about 15% in the HCS segment. So really excited about the opportunities that we have around that acquisition, helping our existing parts and accessories business as well.

Brett Logan Linzey: Appreciate the details.

Operator: Thank you. We'll now move on to Nigel Coe with Wolfe Research. Your line is now open.

Nigel Coe: Thanks, guys. Good morning. We cut a lot of ground, but I did want to go back to the two-step versus one-step for both the quarter and FY 2026. Obviously, we've got the HRI data through to November. Looks like 4Q was trending down I don't know, 40%, 45%. Is that what you saw in your two-step, which would imply one-step down with 20 to about percent in units. Then in '26, Alok, you mentioned one-step up low singles. Just wanna make sure you're inferring that two steps down probably mid-high single digits.

Alok Maskara: Yeah. So I think let me start with the Q4 number. Right? I mean, obviously, December data is still to come. But, yeah, we saw similar behavior. On the two-step, and that gives you the right calculation to interpret what happened on the one-step. For us in Q4. And I'll let Michael answer the right question.

Michael P. Quenzer: For look talking to the full-year revenues. If you break the volume down, volume down mid-single digits, slightly less down and indirect. That business will come back a little stronger. And then on the direct, we've got a little bit of headwind in there from RNC as well just being weaker on that side of the channel.

Nigel Coe: Okay. But you still think you'll grow low singles with the RNC headwind. Is that fair? Or

Michael P. Quenzer: Correct.

Nigel Coe: Yep.

Michael P. Quenzer: Okay. Once you take an And then just Once you take an So that's with mix and price.

Nigel Coe: Okay. Got it. Okay. And understood. And then just a quick one on the $75 million of productivity. In '26. That's a big swing in the bridge. I think you've got some compensation benefits in '25. I'm assuming would impact that number as well. So just unpack the $75 million in a bit more detail. And maybe just if you could just clarify my I think this is Michael. Material productivity is in the 2.5% inflation number. And so that this $75 million would not include that.

Michael P. Quenzer: Right. Yeah. So we start with basically cost inflation of two and a half percent, and then from there, we draw 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 gonna finally start to leverage a lot of the within the VCS factory that's gonna be fully up and running throughout the year. We're gonna see distribution investments we've made on the efficiencies on our network. You saw in the fourth quarter, we recognized a lot of SG&A cost actions, the low talk 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. We've seen a lot of tariff costs within 2025 and we know path to mitigate some of that. But the new cost pool that we can drive productivity against. But we feel real focused on that productivity number and hope to exceed it.

Nigel Coe: Great. Okay. Thank you.

Operator: And we will move to our last question from Deane Dray with RBC Capital Markets. Your line is now open.

Deane Michael Dray: Morning, Dean. Hey. Just a couple of quick ones for Michael. It looks like you all did a really good job at containing your decrementals. Quarter, you know, that benchmark to try to keep it in a down market to know, a decremental 25% looks really well done. I just was curious. Are you managing to that number or is this more of an outcome? Because it looks like you took out a lot of SG&A at the right time to hit that decremental. But just love to hear kind of behind the scenes how you're managing that.

Michael P. Quenzer: Yeah. Definitely. We manage two main things within that. First, it's the price-cost equation to make sure we're positive on that. So that helps in the decremental. And two, as we saw end markets deteriorate in 2025, both BCS and ACS took some cost actions and you to see those in there to help mitigate the decrementals that we know temporary. And we believe that we've restructured the organization in a way that the volumes come back into Q2, that we'll be able to drive strong incrementals at the 35% with the cost structure in place now.

Alok Maskara: Yeah, and I think Dean, we have every year strategic planning process and during that we have ABC cost items that we would pull if markets go down. Last year was a year we had to pull all ABC and maybe some BB items as well. Given how steep the volume decline was. So it's not that we're managing to a number. We just have a strategy and a set of processes that we leverage to make sure that costs flow in line with our growth or revenue.

Deane Michael Dray: That's really good to hear. And just a quick one on free cash flow, which was a real strong point in the quarter despite carrying incremental you would say that, Dean. The whole thing was the design of telling my this morning. I hope Dean notices this.

Alok Maskara: Okay. Well, I noticed. And just the idea, you carried more inventory. So that would've worked against you. But looks like you really came through on the receivable side. Just were there any one-timers in there? Did you pull any, those receivables forward? Just, you know, some color there would be helpful because it was a really standout quarter in free cash flow.

Michael P. Quenzer: I would give Michael full credit for it. I think he's done a really good job centralizing our APAR teams consolidating accounting, moving things to shared services, and driving some really good processes, especially around collection and timely. So there's a lot of process improvement. And you would see there's a good trend of us managing APAR. More disciplined fashion than we have done in the past. So I wouldn't say there's any one time there.

Deane Michael Dray: Good to hear. Thank you.

Operator: Thank you. Thank you for joining us today. Since there are no further questions, this concludes Lennox's 2025 fourth quarter conference call. You may disconnect your lines at this time.