Welcome to the Lennox Third Quarter 2024 Earnings Conference. As a reminder, this call is being recorded. I would now like to turn the conference over to Chelsey Pulcheon from the Lennox Investor Relations team. Chelsey, please go ahead.

Thank you, Margo. Good morning, everyone. Thank you for joining us today as we share a remarkable 2024 third quarter 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 indicators 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 archived 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.

Thank you, Chelsey. Good morning, everyone. Lennox delivered another record quarter, highlighted by double-digit revenue growth, operating margin exceeding 20%, and strong free cash flow. We also made solid progress on multiple key initiatives as part of our ongoing transformation plan. I am grateful for our talented team and the growth mindset of our customers who enabled these exceptionally strong results. Let's turn to Slide 3 for the highlights of this quarter. Core revenue grew 15% and our adjusted segment margin expanded 90 basis points to a Q3 record of 20.2%, resulting in adjusted earnings per share increase of 24% to $6.68. We generated an impressive $452 million in operating cash flow this quarter, which is $139 million or approximately 44% increase over the same quarter last year. Our industry-leading ROIC also grew to 47%. Both our segments, HCS and BCS, achieved 15% revenue growth in the quarter and both continued to deliver strong segment profit. Investments in manufacturing capacity and front-end redesign has enabled us to gain share and meet customer demand for R-410A products. In addition, investments in digital processes and distribution technologies led to improved order fill rates within Home Comfort Solutions. The new commercial factory startup remains on track and the Building Climate Solutions segment successfully integrated the AES acquisition ahead of schedule. These results reflect the dedication of our 14,000 employees and the continued support of our dealers and customers. Therefore, I am confident in raising our 2024 EPS guidance range to $20.75 to $21. Now please turn to Slide 4 for more details on our CLO transition. As announced earlier this morning, John Torres, Lennox's Chief Legal Officer, has elected to retire. I want to take a moment to acknowledge John's outstanding 16 years of leadership and his lasting impact on Lennox. He led multiple acquisitions and divestitures to streamline our portfolio and ensure that we operate with the highest ethical standards by strengthening our ethics and compliance office. As a result of our thoughtful succession planning, we are excited for Monica Brown as she takes on the role of Chief Legal Officer effective January 1, 2025. Monica has been with Lennox for 12 years with a proven track record across our businesses and legal functions. Before joining Lennox, she spent nearly 13 years with a leading outside law firm. Looking ahead, Monica is well-positioned to continue John's legacy of success with a focus on advancing our digital capabilities and accelerating future growth. Now let me hand the call over to Michael to take us through the details of our Q3 financial performance.

Thank you, Alok. Good morning, everyone. Please turn to Slide 5. We are pleased to report our seventh consecutive quarter of double-digit year-over-year adjusted earnings per share growth. This quarter, we increased our adjusted segment margin by 90 basis points and achieved a remarkable 15% revenue growth, resulting in 24% adjusted EPS growth. Now I will share more details on our third quarter financial results. Core revenue was approximately $1.5 billion, up nearly $200 million from last year, attributed mostly to volume gains in both segments. Adjusted segment profit increased by $52 million or 21%, driven by $86 million in volume as well as price and mix benefits. This was partially offset by regulatory transition costs and expenses related to our new commercial factory ramp-up. Ongoing investments also impacted profits as we are committed to strategic initiatives in sales and distribution to support consistent profitable growth. The tax rate was 18.7% and diluted shares outstanding were $35.8 million compared to $35.7 million in the prior year quarter. Let's now turn to Slide 6 and review the third quarter financial performance of the Home Comfort Solutions segment. The Home Comfort Solutions segment had an exceptional quarter, delivering 15% revenue growth, 25% segment profit growth, and an impressive 170 basis point expansion in segment profit margin. Sales volumes increased by 11%, fueled by over 30% growth in our two-step distributor channel, primarily reflecting normal restocking after several quarters of industry-wide destocking. Our one-step contractor channel saw modest volume growth supported by R-410A availability compared to the broader market. Towards the end of the quarter, we saw early signs of R-410A-driven demand. Pricing execution has been a key focus for the HCS segment over the past year, driving 4% revenue growth in the quarter. Having successfully met our 2024 price improvement targets, we are now concentrating on pricing for the new R-454B products and these initiatives are progressing well. Finally, our quarterly profit was impacted by anticipated product cost challenges during our transition to our new R-454B products and for ongoing investments aimed at enhancing our distribution capabilities and improving the overall customer experience. Moving on to Slide 7. The Building Climate Solutions segment also delivered an impressive 15% revenue growth in the third quarter, 6% of which can be attributed to inorganic growth from our AES acquisition. We are very pleased with this acquisition, which was completed in the fourth quarter of last year. The integration was finished ahead of schedule and we have delivered better than expected AES profit margins, driven by additional synergies. From an organic growth perspective, sales volume was up 7% in the quarter but was constrained by manufacturing challenges and new factory ramp-up inefficiencies that limited production output. Segment profit increased by $9 million, though profit margin declined due to anticipated manufacturing ramp-up costs. Production startup at our new commercial factory in Saltillo, Mexico, remains on track. However, total manufacturing output for commercial HVAC continues to be below demand levels. For emergency replacement, we have started offering products in some pilot markets and early results are encouraging. Please turn to Slide 8, where I will review our cash flow performance and capital deployment strategies. Operating cash flow for the quarter totaled $452 million compared to $313 million in the same period last year. Capital expenditures were $40 million, representing $1 million increase year-over-year. Our cash flow performance has been solid this year, reflecting ongoing efforts to drive revenue growth, expand profit margins, and optimize working capital. Earlier this year, we implemented working capital initiatives with a focus on accounts payable, which has been a driver of the $183 million increase in year-to-date operating cash flow. In the coming years, we will unlock additional working capital by leveraging digital tools and efficient processes. Our return on invested capital, ROIC, stands at 47%, an industry-leading figure that remains resilient across business cycles due to high non-discretionary replacement demand. We continue to expand ROIC year-over-year, while also making capital investments that are poised to deliver substantial benefits in the coming years. Finally, we maintain a healthy balance sheet with net debt to adjusted EBITDA at 0.8 times, down from 1.8 times in the prior year. Our free cash flow deployment strategy remains focused on driving annual dividend growth and executing bolt-on acquisitions. We have reinitiated buybacks in the third quarter and we'll continue leveraging share repurchases to efficiently return excess cash to shareholders. If you will now turn to Slide 9, I will review our revised 2024 financial guidance. After the third quarter results and more visibility into the last quarter of the year, we have raised our full year revenue guidance. The table on the left summarizes our full year revenue growth factors. Total company core revenue is now projected to increase by approximately 10%. We now expect mid-single digit improvement in sales volumes, combined price and mix to be up low-single digits, and our AES acquisition to contribute low-single digit growth. As a result of our strong third quarter profit performance, we are raising our full year earnings per share guidance to $20.75 to $21 from the previously guided range of $19.50 to $20.25. We are also raising our free cash flow guidance to $575 million to $650 million. As you can see, most of our other guide points have not changed except for interest expense, which is now estimated to be approximately $45 million. Overall, year-to-date performance combined with increased clarity on industry demand has given us the confidence to significantly raise our earnings per share guidance. With that, please turn to Slide 10, and I'll turn it back over to Alok for an overview of the low GWP refrigerant transition.

Thanks, Michael. All necessary preparations for design, engineering, and manufacturing of the low GWP products were completed earlier in the year, ensuring a successful launch in the third quarter. As part of this transition, we are also excited to introduce our new Lennox powered by Samsung Mini-Split and VRF heat pump systems. We have invested heavily in developing new low GWP products and minimizing disruptions during the transition. We anticipate continued manufacturing cost headwinds into the first quarter of next year as we continue to convert production lines in our factories. Our approach to reconfiguring our factories balances production flexibility with cost efficiency. In 2025, we expect a gradual shift in demand for the new low GWP refrigerant products. The first half of the year, specifically the first quarter, we'll see continued R-410A sales from manufacturers, distributors, and dealers as everyone depletes their regular and pre-bought R-410A inventory. We still estimate that for the full year, approximately 65% of the end-market demand will transition to low GWP product, which will favorably impact mix. Looking further ahead, we anticipate existing R-410A refrigerant will face price increases as supply tightens and demand moves towards low GWP products. This will increase cost pressure on repairs, leading to higher demand for system replacements. This transition also opens more service opportunities for dealers and contractors given additional safety features and components in the new R-454B products. We expect some of the low GWP price and mix benefits to extend into 2026 as the market fully transitions to the new low GWP product. With that, please turn to Slide 11 for our early thinking on the outlook for 2025. We are pleased with the resilience of the North America HVAC industry growth. We remain cautiously optimistic for 2025, given our sustained competitive momentum from our ongoing transformation journey. On the left-hand side of the slide, you will see several factors that will likely impact revenue growth in 2025. Mix benefits from the low GWP transition with 10% plus price increases will accelerate growth. Lennox has historically executed extremely well during these regulatory transitions, gaining share and confidence from our dealers and distributors. We plan to do the same thing next year. We anticipate higher manufacturing output from our commercial HVAC factories within our BCS segment. In conjunction with the investment we made in our sales team this year, we will be able to recapture some of the previously lost share in the emergency replacement market. Moreover, these improvements will instill greater confidence in our ability to serve national accounts with a full lifecycle value proposition. We are encouraged by the growth opportunities from partnering with Samsung for our ductless heat pump offering, strengthening brand recognition, and providing access to a broader customer base. Increased incentives for energy-efficient systems may lead to higher replacement demand as well as a higher tier mix. While we are generally optimistic about 2025 revenue growth, it is important to recognize our outlook can be impacted by several end-market factors. Uncertain consumer confidence continues to pose challenges alongside a trend towards more value-tiered products, which may negatively impact mix. Higher cost for the new products may also create complexities in the ongoing repair versus replace dynamics. From an industry perspective, we expect destocking in the first half of 2025 as distributors sell through R-410A pre-buys this year. Additionally, competitors may gain some share as they overcome their current availability challenges. On the right-hand side of the slide, we have highlighted key drivers for margin expansion. We anticipate margin improvements from the low GWP product mix with 30% incrementals, supported by our continued focus on price-cost discipline. We also foresee improvements in productivity from higher distribution fill rates as our focus on digital inventory planning and our investment in distribution technologies start to generate results. Greater factory efficiency will also contribute to our margin expansion, particularly in the second half of next year as we begin to lap the ramp-up costs associated with the new commercial factory and low GWP transition. However, these gains may be partially offset by several factors. Our investments in digital capabilities and distribution network improvements are essential for enhancing operational efficiency and improving customer experience. While these investments are crucial for long-term growth, they may create some near-term pressure on margins. Additionally, we anticipate inflationary pressures for both commodities and component cost. We also expect increases in healthcare and employee benefit costs. Ultimately, our focus in 2025 remains on superior execution to drive differentiated growth and expand margins. We will provide further financial guidance when we report our Q4 earnings early next year. Now please turn to Slide 12. As we wrap up today's call, I want to emphasize our confidence in driving sustainable growth guided by five key elements of our strategic transformation plan. Our first focus is on accelerating growth by adding new customers as well as capturing a greater share of wallet from existing customers. Second, we will expand our margins from price cost productivity and leveraging the strength of our direct-to-dealer network. Third, the Lennox unified management system remains key to our success, helping us streamline operations, share best practices, and execute our strategy. Next, our ongoing investments in digital and heat pump technology keep us at the forefront of innovation to deliver cutting-edge solutions for our customers. And finally, our strong culture rooted in core values and reinforced by our pay-for-performance model drives our success. Our differentiated strategy continues to create sustained competitive advantages and will enable us to achieve our long-term goals. I'm incredibly proud of what we have accomplished so far and I have no doubt that our best days are still ahead of us. Thank you. We will be happy to take your questions now. Margo, let's go to Q&A.

We'll take our first question from Tommy Moll from Stephens. Please go ahead.

Good morning, and thank you for taking my questions.

Good morning, Tommy.

Alok, I want to start on the A2L commentary that you've provided. I hear you talk about the 10% plus pricing tailwind versus the R-410A product, and then also about some early success with initiatives in recent weeks or months I guess. So if we pull all this together, am I correct in saying that, number one, the magnitude of the pricing mix tailwind is unchanged versus prior expectations? And then number two, that your conviction in successfully realizing that is higher now that you've introduced some product into the market, albeit at low volumes.

I would say both are true, Tommy. The third thing I would add is the competitive share gain that we get normally during any regulatory transition; the confidence in achieving that in this transition is also higher.

Thank you. Looking at the 2025 early thinking slide you provided, Alok, I wanted to unpack what you're referencing here in terms of the trend for the value tier and then the repair versus replace? What have you seen to date on those points? And then what do you want to make sure to communicate about how that might evolve into next year? Thank you.

Yes, what we have seen so far is not a meaningful shift between repair and replace, but we continue to be cautious about it, especially given that the price of new equipment will rise. So we continue to monitor that and that's why I want to call it out. On the value tier shift, as we went from roughly 13 SEER to 14 SEER and as we look at the overall state of the economy, we have seen a shift towards more people buying the minimum SEER. It used to be about 60% to 65% of the industry, so now it might be 65% to 70% of the industry. So that's what we are calling out in the value tier. No surprises, no changes from any of our previous conversations, just wanted to lay out the positives and the potential watch-outs for 2025, but really no change in Q3 that we are calling out.

Noted. Thank you, Alok. I'll turn it back.

Thanks, Tommy.

Thank you. We'll next go to Ryan Merkel with William Blair. Please go ahead.

Hi, everyone. Thanks for taking the question. My first one is just on the 65% next year that will be A2L. Can you just talk about some of the assumptions you're making there? And then would you say the risk is to the upside there or to the downside? I know that is kind of a hard question, but.

It is a hard question, but Ryan, we are here to answer your hard questions. Listen, I think the risk right now is fairly balanced around the number 65%. If you remember earlier in the year, we were talking about 50% to 65%, but right now we feel more confident around the 65% number. I think if it's a little lower, it could be because there is more pre-buy in 410A, which we will see in Q4. And if it's higher, it will be because a lot of the competitors are already out of 410A inventory. So as we're selling 410A, it could be used this quarter versus being left over for next year. So those are kind of the two dynamics on the 410A that we are selling today: does that end up becoming pre-buy, or is it just because competitors are short on that product. So those will be the pluses and minuses on that, Ryan.

Got it. Okay. And then just on the pre-buy, clearly that helped the quarter. As we think about the first half of '25, can you quantify the magnitude just so we can set our models correctly?

Sure. So on the pre-buy, I'm not sure how much it helped Q3. If you think about Q3, what helped us was three different factors. First of all, the end of destocking and beginning of restocking — that was probably the largest contributor. As you saw, our two-step business was up around 30%, so I think that's the biggest factor for what helped in Q3. Second, I would call out is just share gains. We've been gaining share because of better execution and there was some impact of competitors running out of inventory. So I think share gains were the second factor. Third, which may have happened a little bit towards the tail end of the quarter, is pre-buy. But remember, most of our business goes to dealers and unless they go start buying in bulk, they're not going to be able to do a lot of pre-buy, and distributor inventory levels are still pretty close to normal. So I just want to emphasize the point on the pre-buy and how we expect it to play out. What we would expect is in Q1 next year, there will be some depletion or destocking of pre-buy, maybe some carryover in Q2, but that gives us confidence in the 65% number, saying majority of the sales next year will be R-454B.

Got it. Thanks.

Thank you. And we'll next go to Joe O'Dea with Wells Fargo. Go ahead.

Hi, good morning. Thanks for taking my question. I wanted to start on the market share comments that you've made. I mean, I think that going back to 2018 time period in tornado and a period of time of maybe two or three years of some share headwinds, it seems like over the past couple of years, those have reversed and you've been on a share gain trajectory. But can you just level set in terms of through these periods of time, how much you may have given up, how much you've recaptured net-net, where do you stand today, and how you're thinking about those share gain opportunities moving forward?

Sure. I'll start by reaffirming what you said: yes, we have reversed those share losses and we are back on a positive trajectory. Because we do both one-step and two-step, share is a little difficult as we look at AHRI or any of those data. But today, where we stand because of all the moving pieces, we are confident that we have gained share and we continue to gain share. What we have to do next year is make sure that we can retain most of the captured share, because as competitors have inventory, which many of them don't right now on 410A product, then there would be a lot of our effort going towards making sure our share gains are more permanent. On the commercial side, where also the share gain comment comes up, we have not been able to recover the share so far. That’s part of our plan for 2025 on getting share back in the emergency replacement market, because we are still constrained by manufacturing capacity, not demand in that segment. So I want to separate the share comments into commercial and residential.

Got it. And then, just wanted to circle back on the R-454B pricing commentary and you've noted that the initiatives are progressing well, any color that you can provide on what that means in terms of or with respect to the 10% plus price? And I think there is still debate out there on how to think about that price and list versus realized, so any clarification there when you talk about 10% price and if that's a realized number?

I think as we finish Q4, when we have greater clarity on market movements and acceptance, we can talk about that in early Q1. Right now, the 10% is what we are looking to gain out of price. But realize, it will apply to only the 65% of sales that are R-454B, and we will also be raising price on R-410A next year. So the 10% has to be taken in conjunction with R-410A pricing today. There are a lot of moving pieces and we can provide greater clarity later. But overall, what we are seeing in the marketplace is that the higher-cost products we're introducing, R-454B, are being supported by competitive moves on 10% plus price increases into 2025.

Got it. Thank you.

Thank you. And next we're going to go to Jeff Hammond with KeyBanc. Please go ahead.

Hi, good morning, guys.

Hi, Jeff.

I appreciate all the color on the '25 moving pieces. If we look at the market today, what do you think residential and commercial unit growth will look like as you move into 2025? I know there are a number of moving pieces and some noise from the pre-buy, but what's the underlying unit demand in each business?

If you think about residential, and we talked about this earlier in the year that we expected for a dealer the volume to be flat-to-down, then halfway through the year, we upgraded to flat, and now we're going to say flat to maybe slightly up is where we are on the residential side. And I'm talking about installed units, away from stocking and destocking. Think of flat as conservative, flat to slightly up as a bit more optimistic. It's hard to give a firm number with the different moving pieces.

I think what we need to do is see this Q4 pre-buy play out and see how that impacts the end-market demand as well as share gain initiatives. Normally, we've executed better than others during this transition. So those are two unknowns that we need to see how they play out over the next quarter.

For non-residential, flat to slightly up would be a good way to look at end-market demand. On commercial, since we remain supply-constrained, we follow industry figures where the market has been growing slightly. It's still not fully recovered from the COVID decline; our commercial markets are typically retail single-story buildings. From that perspective, we do see the market continuing to grow low-single digits at the end-market. On residential, I'm more optimistic about lower interest rates and better market performance going into next year.

Okay. And then just in commercial, maybe let us — remind us your mix in education and there has been a lot of funding around K through 12 and I know that's been a hot market. If you're seeing any signs that as that sunsets that market might see a move back.

We have not seen any signs of that market slowing down. Our exposure in education is probably less than some competitors, given historically we have been focused on retail, but we look at that as a good growth opportunity. Currently, we don't see any of that slowing down as schools are issuing bonds and these are necessary maintenance projects; many units remain past their useful life.

Okay. Thanks so much.

Thank you. Next we'll go to Jeff Sprague with Vertical Research. Please go ahead.

Hi, thanks, and good morning, everyone. Hi, Alok, I just want to come back to kind of the share gain dynamics and we got to hop over and see what else Watsco is saying this morning, but you're kind of putting the share gain largely being a function of some competitors running out of 410A, where they sound like maybe there is actually some bigger problem with somebody. I'm not expecting you to kind of name names, but are you actually seeing somebody also struggle with the transition or is there some other kind of systematic problem in the channel other than just kind of running out of 410A?

Obviously, we don't know what's happening inside the hood with any of those competitors. What we know is our availability right now on 410A products is better than many of the other players and that's giving us an advantage. We also know that investments we made last year in improving our sales team, being a better distributor, making sure we have higher fill rates, and ensuring a decentralized model focused on our typical dealer are paying off as well. So I want to break out the share gains into two parts: one is consistent with our execution, and second, a current advantage because of competition stumbles. It's part of the transition. We made a bet that throughout this year, 410A demand would be higher and the shift to R-454B would happen next year. I believe some competitors may have made a different bet and they may have run out of products.

And then thinking about the after effects of whatever pre-buy we have into next year, the 35% of the market that's not R-454B almost by definition has to be sitting in distribution by the end of the year if manufacturers are running low now. So that feels like a potentially bigger air pocket early in the year than maybe people think. Can you comment on how you see the state of distribution at the end of the year and how this kind of give back on the pre-buy might play out?

Yes. We'll get greater clarity next year because Q4 is still just starting and we have to work through it. Our 35% estimate is based on the fact that manufacturers will also have some 410A inventory that we will be selling. So as we look at our own distribution and other manufacturers', there will likely be 410A inventory at the end of the year. So it's not just inventory at distributors, it's inventory at manufacturers and distributors. Q1 is where we will see the most impact. I think the effect starts waning in Q2 and that's why the 65:35 split. I wish there was exact science behind this, but it's an educated guess. We will be wrong; we just don't know yet whether it's upside or downside.

Understood. Thanks for the color. I appreciate it. Thanks, guys.

Thank you. Next we're going to go to Stephen Volkmann with Jefferies. Please go ahead.

Thank you very much. Actually, I'm just going to build right off of that. Alok, wouldn't you rather be wrong by having more R-410A, so that you are price competitive further into 2025?

For the whole industry, which we care about deeply as well, I would hope that everybody runs out of 410A by the end of the year, so we get better mix and the transition is more seamless for our dealers. For a dealer dealing with two different product lines and training crews, it's difficult. So we want to support our dealers and I hope the entire industry runs out, which is quite likely given that some competitors are already running out of 410A. From our perspective, we would like our manufacturing transition to be clean and for us to move to R-454B. At the same time, we don't want to be price-disadvantaged in the first quarter when others may have 410A. That's a daily balance we have to manage.

Okay. And maybe just switching to commercial, any words of wisdom as we think about how the new facility ramps up through 2025 and we try to model when the startup costs kind of go away?

Yes, the startup costs will go away by mid-next year; a large part will abate in Q1. From a timeline perspective, we are on track. The startup inefficiency is maybe a shade higher than we thought originally, because we are putting extra focus on quality and sometimes paying more for freight to move products back-and-forth. We want to make sure it's high quality and we take care of customers through the transition. Think of another three quarters of ramp-up associated with inefficiencies fading away in Q1 and into mid-year.

A lot of these costs we're experiencing right now are temporary. We're launching a factory. In the second half of next year, when that factory is fully operational, these temporary transition costs should abate.

Great. And then just finally on that, you mentioned earlier that demand is outstripping supply on commercial; when this thing is up mid-year to normal run-rates, is that then in better balance?

We know we'll be in better balance. We may still be below total potential capacity because we're only getting initial capacity in Saltillo up and running, and if demand continues to outstrip supply, we will add more capacity in stages. The factory is large enough for us to double current capacity, but we are doing it incrementally. Yes, we'll be better able to serve our customers; currently customer satisfaction is low because we can't meet demand.

Helpful. Thank you, guys. Good luck.

Thank you. Next we're going to go to Joe Ritchie with Goldman Sachs. Please go ahead.

Thanks. Good morning, guys. So, Alok, to square those comments on your own inventory levels exiting the year, is the way we should think about it that you expect to carry inventory levels of 410A products to at least meet demand for the first quarter and that's really the balance you're trying to get right?

Approximately. We are also a distributor and about 70% of our sales act like a distributor sale. If we turn inventory about five times a year, we'll have 410A inventory from phase-in, phase-out that we will sell in Q1. Some of it is practical constraints of transition, and other is that we want to remain competitive. While it's not a goal to carry excess, I think that's largely how it will play out because we will continue manufacturing until we can fully transition.

Okay, fair enough. And then just on pricing for 410A, given that the products will be discontinued going into next year, does that change the pricing dynamics you're able to put through in the early part of next year as you typically put your annual price increases through? How should we think about 410A pricing for the portion of the year that it holds into early 2025?

First, we want to be fair to customers. From a demand and supply perspective, if 410A is short in supply, which we are experiencing, then we fully expect to capture incremental pricing in 2025 on any 410A product sold. When we do annual price increases, cost pressures are rising, so yes, we fully expect 410A sold in 2025 to be at higher prices than 410A sold in 2024.

Okay, great to hear. Thank you.

Thank you. Next we'll go to Julian Mitchell with Barclays. Please go ahead.

Thanks very much. Alok, maybe first off, there are some interesting bits and pieces on the margins on Slide 11; trying to wrap it together. I think your operating margin this year is guided up about a point for the year as a whole, so sort of 25%-ish incremental margin. When we look at the bits and pieces on Slide 11, is the main takeaway that it's a similar incremental next year or is there something I'm missing on some of the moving parts?

Overall, we expect our margins to expand next year, predominantly led by the mix benefits we'll see. Offsetting some of that will be investments we are making. We expect at least a 30% incremental on the mix and then additional volume tailwinds from share. So think of 25% to 30% incremental as a sound range, but we need to go through all the details still.

Remember our long-term margin targets; we are still working toward them and want to keep making progress over the next year to year and a half. I don't want to give an exact number now because Q4 still has to play out, but we do expect margin expansion next year for sure.

That's helpful. Thank you. And then just my follow-up on the pre-buy. It sounds like if we're trying to quantify it, we should not be too concerned for a couple of reasons about the extent of the destock. One is that if I look at your residential volume guide for this year, it's gone up about three points versus July, but a lot of that is share gain. So you've got maybe a point effect from pre-buy this year. And also Q1 is typically a very small seasonal quarter for you, particularly for cooling product. So maybe clarify if I'm misunderstanding anything?

You're not misunderstanding. Our industry is often over-analyzed. Companies that execute well will do better. Seventy percent of our sales are somewhat immune to pre-buy discussions and that's as planned. The other 30% — we believe the majority of the effect right now is restocking, not heavy pre-buy. Q4 will tell us more; if Q4 is very heavy and driven by pre-buy, answers could change and we'll address that in Q1. So far, we assume there will be some pre-buy but not a heavy amount that materially impacts us this year.

Great. Thank you.

Thank you. Next we're going to go to Noah Kaye with Oppenheimer. Please go ahead.

Thanks for taking the questions. Really great quarter for cash generation. As we look towards '25 and lapping some of the investments you've made on the CapEx side, and in the past you talked about getting back to near 100% free cash flow conversion, how do we think about share repurchases picking up for 2025? You've been less active in the past couple of years but historically were active on repurchases.

I'll start by saying our CFO is really helping drive free cash. He is bringing a new level of discipline and focus on working capital management. I'll hand it over to Michael to answer in detail.

One of the initiatives I started is aligning the organization on working capital management to get closer to 100% free cash conversion. We're focused on that over the next couple of years. We are generating a lot of cash, and our deployment strategy remains consistent: we will increase our dividend annually, consider bolt-on acquisitions with the right returns, and use share repurchases as a tool to efficiently deploy capital if acquisitions are not pursued. We restarted buybacks this quarter and will continue to use repurchases as appropriate.

Okay. And can you talk a little bit about the acquisition pipeline and what your needs may be at this moment?

We are looking at bolt-on technologies, primarily in the commercial space to enhance product offering, distribution opportunities to provide a fuller assortment through our residential distribution network, and technologies to make products smarter — thermostats and controls. They must have the right fit and price, and deliver appropriate returns.

I'll add that we're trying to be more of a distributor versus just a manufacturer. There is an opportunity for products our dealers or key accounts buy that we don't sell today. Appropriate products and technologies brought into our network would be value enhancing. We're disciplined in capital allocation and will balance these opportunities carefully. It starts with strong cash flow, which Michael and the team are delivering.

Great. I'll have some follow-ups offline. Thanks very much.

Thank you. Next we're going to go to Deane Dray with RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone.

Good morning, Deane.

I saw that the plan to build share in emergency replacement is highlighted on the outlook for '25, you've talked about this before. Can you just share some color on what it means to refocus on that business? My understanding is you will need to boost inventory in the field because you need 24-hour turnaround and the customers have to know this and it's either you're ready for that order or you miss it entirely. So what kind of working capital burden increase are you looking at to fill emergency replacement, and can you size that? Thanks.

Deane, that's a very good question. Returning to emergency replacement requires effort. It starts with more manufacturing capacity, ensuring appropriate inventory within 24 hours and sometimes same-day in urban markets, and having the right people in the field to win back contractors. Most of the working capital impact will be in 2025. We'll be happy to revisit sizing, but it won't be extremely material because today we have excess working capital from raw product inventory as we start and transition factories. We will redeploy a lot of working capital from raw materials into finished goods closer to the customer. It's a heavy move operationally, but financially a lot of it comes from redeployment of existing inventory as part of startup.

That's really helpful. Thanks. And then second question for Michael. On ROIC, Lennox is so far ahead of anyone else in industrials. As you make CapEx and investment decisions, are you looking at ROIC impact? Do you hesitate on investments because they might pressure ROIC? Is ROIC more of an outcome or a target in how you think about it?

Our industry-leading ROIC is driven by disciplined investments and limited inorganic acquisitions historically. When we look at acquisitions like AES, they were good ROICs — above 20% but below our 47%. We'll continue to look at bolt-on acquisitions above our cost of capital. For CapEx, we maintain discipline and look for projects with healthy ROIC above our cost of capital. We don't target a specific ROIC every quarter, but we aim to stay strong and ensure projects deliver appropriate returns.

That's really helpful. Thank you.

Thank you. Next we're going to go to Brett Linzey with Mizuho. Please go ahead.

Good morning. Congrats on the quarter. I wanted to come back to the early thinking on 2025 and the 30% incremental comment on low GWP: is that a volume incremental comment, and then price mix should drop through at something above that similar to this year? I'm hoping you could parse those pieces out.

What we're expecting is price-cost drop-through. Mix will come through with pricing; the drop-through on mix will be at least 30% to maintain gross margins and reflect additional product costs and investments. Our volume incrementals are also similar to 30%. So expect both mix and volume to drop through at roughly 30% incrementals next year.

Got it. And then thinking about new versus replacement in residential, obviously new housing has been a drag; how much was that down so far this year? With a better housing environment, should you pick up some share in new housing next year or grow in line with the market?

We are starting to see green shoots in new housing — either bouncing along the bottom or coming off the trough. Our share position in new housing remains strong. On replacement, if interest rates decline and consumer confidence improves, replacement demand should increase. On the value tier, our comment is driven by SEER changes, pricing levels, and higher interest rates. We'll analyze these dynamics further and provide more firm guidance in 2025.

Thanks. Appreciate the insight.

Thank you. Next we're going to go to Steve Tusa with JPMorgan. Please go ahead.

Hi, good morning.

Good morning, Steve.

What do you think is driving distributors to stock up in the last couple of months of the summer when demand is effectively flat-to-up a little and you have this transition coming? What's the driver?

It depends on which type of distributors. We haven't seen our distributors stocking up beyond normal levels. We're seeing distributors return to normal inventory levels after destocking. In Q4, they might do some 410A pre-buy to get price advantage versus R-454B, but we have not seen a big push to stock up from the distributors we work with.

On top of comps, Q3 last year that channel was down about 20% due to destocking, so favorable comps as they restock this year.

Got it. And then when it comes to the pricing for next year, you're saying 10% plus on the products that are R-454B, with 65% penetration, so that gets you into mid-single-digit plus range for price capture for the year; is that the right math?

Yes. We'll provide greater clarity in 2025, but that's roughly the right math for now.

And the stick rate in regulatory transitions is normally high due to cost investments, so that also supports capture of incremental pricing.

Got it. And then lastly, do you expect industry volumes next year to be down, given pre-buy, consumer uncertainty, and the other factors?

I would say industry installed volumes are likely flat to slightly up next year, driven by unit age and repair-versus-replace dynamics, but it's hard to predict precisely.

One more question: the share gains this year from competitors being out of the market, why are those sustainable? Are they structural or temporary?

Whenever somebody stumbles, some of that becomes permanent, as we experienced after the tornado. Some dealers switch back, some don't. Our goal is to make the share gains as permanent as possible; that comes down to execution.

Got it. Okay. Thanks a lot.

Thank you. Next we'll go to Nigel Coe with Wolfe Research. Please go ahead.

Thanks. Good morning. We covered a lot of ground — what is the feedback from your end customers, the contractors and dealers, on A2L? Have they come to terms with the technology and training requirements? Do they want A2L or do they want to take as much 410A as they can? If you're going to increase prices effective 2025, is there an incentive for them to stock up in 4Q versus 1Q?

Talking to contractors, there are diverse views. In general, most contractors prefer to continue doing what they are doing, but they also realize they must move to R-454B. High-end contractors want to move sooner because they sell higher-tier products; others at the bottom end will try to keep 410A as long as they can. Acceptance has been good: many have completed training and understand installation. There's a risk some will stock up on 410A at the end of the quarter — many dealers have garages and barns — that's a risk we manage every year.

Just thinking about repair versus replace, if we're in an R-454B world but many systems are R-410A, why wouldn't there be more component repairs like compressor replacements to avoid full system replacement given the price increases? How do you see that dynamic?

It comes down to unit age. If a unit is five years old and a compressor fails, a dealer will likely replace the compressor. If it's 12 to 15 years old with multiple issues, they'll likely replace the whole system. In 12- to 15-year-old units, as R-410A prices spike, that becomes an additional factor pushing replacement. Based on the R22 to 410A transition, early years didn't change repair-versus-replace, but later years did move more toward replacement. I expect similar: limited impact in 2025, with more effect in subsequent years.

Great. Last quick one: have you sized the dollar TAM for emergency replacement in commercial, and what share do you think you could get?

We haven't publicly sized that yet, but we know what we used to have and the industry mix. Industry is more weighted to emergency replacement than we are. Industry is roughly 60:40 between emergency replacement and key accounts; we are more like 90:10 in key accounts. So there's a significant opportunity for us to grow emergency replacement. We may come back next year with some sizing on that.

Great. Thanks.

Thank you for joining us today. Since there are no further questions, this will conclude Lennox's 2024 third quarter conference call. You may disconnect your lines at this time.