Conference Transcript - LII 2026-06-03

Ryan Merkel, Analyst — William Blair

All right, why don't we get started? Thanks for coming, everyone. This is the Lenox presentation. I'm Ryan Merkel. I cover building products at William Blair. Before we begin, I need to remind you that a complete list of disclosures and conflicts of interest is available on our website. With us today is Alok Mascara. He's the CEO of Lenox. Lenox manufactures and distributes residential and light commercial HVAC equipment. Products include air conditioners, furnaces, heat pumps, and controls. Linux has a long history of share gains and margin expansion driven by investments in products, distribution, and technology. I'm going to turn it over to Alok. He's going to do about five minutes or so, and then we're going to do a fireside chat format.

Alok Maskara, CEO

Great. Thanks, Ryan. Thank you for having us here. As Ryan said, I'm Alok Mashkara. I'm the CEO of Linux. I've been with Linux four years. I'm going to go through a few slides and then get into the fireside and Q&A mode. As a Linux public trade company, we made into S&P 500 a couple of years ago. A few things I'm going to highlight on our financials. First is our ROIC. At 36%, our ROIC is one of the highest in the industrial world and definitely highest in the HVAC industry. Shows you we are very good stewards of capital. 130-year history of the company. I'm only the CEO. So this is a company that's very well run over an extended period of time. On commercial side of the business, 38% of our revenue now come from BCS or commercial, and that is now paralleled and got better in profitability compared to our residential business. It's been a big turnaround story. The other thing I'm going to highlight on this page is 80% of our revenue comes from replacement, 20% comes from new construction, whether that's residential or commercial. What makes us different, although we are a smaller player in the residential industry, is, as Ryan said, we own 70% of our own distribution. So we are the largest manufacturing direct dealer base. So when we sell to a contractor under the Lenox brand, they will buy it from our 250 stores that are spread all over the U.S. and we would not go through a distributor. On the commercial side, we focus on light commercial, and we do everything. We install the equipment, we do preventive maintenance for the equipment, we recycle the equipment, and of course we manufacture and sell the equipment. So a complete full lifecycle solution for our commercial customers, which are typically large national accounts. The other thing that differentiates us is our digital data platforms. You know, because we have been organic growth, we have really good data lakes, we have really good data, and, for example, in our commercial and residential, over half of our business is done directly through our web platform. In residential, nearly half of all our orders come through Linux Pros, which is our own platform. We recently had Investor Day in March and we unveiled our 2026 to 2030 transformation plan after a very successful previous Investor Day where we met all the targets that we have laid out. I will highlight some of the four growth initiatives that are focused behind what we unveiled in Investor Day. The four things are heat pumps. We are undersizing heat pumps right now, and we want to grow more and have a very credible plan to go do that. Emergency replacement, which is a huge commercial growth initiative for us, is going to deliver a significant amount of revenue and margin expansion as we use our direct-to-contractor channel to win in that. Attachment rate, which is where we have done two recent acquisitions, one on service side and one on parts side. And finally, expanding our total addressable market, which we are doing through joint ventures, joint ventures such as Samsung joint venture and the Ariston joint venture, one in mini splits, one in water heaters. Along with that, we're expanding our margins through expanding our distribution profitability, because our distribution still is a break-even business at best, continue to win the pricing in mixed battle, and finally getting back to productivity after two to three years' distraction driven by regulatory changes and other factors. Net-net, we are confident that when we get to 2030, we will get to a revenue base between $6.5 to $7.5 billion organically, expand our margins, currently we are at 20.4% to 22% to 23%, and continue converting 90-plus percent of our income into cash, as we'll be through our recent investment cycles, which were around new factory distribution and into a new innovation center. So delighted to be here, remain confident in our future, and would be happy to flip it over to talk about how the five things that we always talk about, which is why we are confident in our future, is we will deliver growth acceleration, we'll continue expanding our resilient margins, we will continue to show execution consistency. We are known for this, we do it very well, while we invest in advanced technology. and everything we do is because of our talent and our culture. So this remains our framework that we will take forward for the next few years.

Ryan Merkel, Analyst — William Blair

Thank you. Great. Thanks for that, Alok. Why don't we start with a question on the macro? Can you talk about the HVAC demand backdrop and what are you hearing from contractors in the field?

Alok Maskara, CEO

You know, the contractors in the field, they lost confidence last year because of canister shortage, R54B, which is a new product, require some extra step they are back being confidence their confidence is back so i think that's the positive piece at the same time the consumer confidence is not back so if you think about where we are in the consumer confidence cycle that's not back so contractors are back in the field they are pitching replacement as they normally would have done and we feel like the de-stocking is now 100 behind us remember last year a lot of the impact we saw was due to de-stocking. So we feel good about getting into this year and maintain where we think we shake out this year would be not as good as what we had in 23-24, but not as bad as we back had in the worst year in the HVAC. Recent history was 25. So we look at we are going back towards normalization.

Ryan Merkel, Analyst — William Blair

That's great. And a second question on price inflation. Just talk about what you're seeing on resi and commercial. And then there was a headline yesterday, Alok, with some changes on some tariffs. I don't know if you have any early thoughts on that. I think the recent tariff

Alok Maskara, CEO

changes on Section 232, that puts us back in a better competitive field. Folks who are manufacturing in Mexico, we were disadvantaged. Now, remember, we do manufacture a lot in U.S. as well. So we're not solely dependent on Mexico manufacturing. But that now puts us back in a better competitive position. So we welcome that news. That's good for us. Price seems to be sticking just fine. We haven't seen any changes in competitive behavior. It still remains a case where they have five manufacturers, five and a half manufacturers. There's 1,000 distributors and 10,000 contractors, and that industry dynamics continues to favor good pricing discipline going forward. MIX is mostly all R454B at this stage. The recent regulatory changes or announcements really doesn't impact that too, and we think that's going to continue going forward. so our stance on overall is slightly better after the news two days ago but it doesn't change our outlook it just gets us back into a better competitive playing field and then you mentioned

Ryan Merkel, Analyst — William Blair

the d stock is 100 behind you that was my next question but but maybe just talk about you know one step first two step you know where that change happened and then what does now that it's d the d stock is behind you what does that mean does that mean production can start increasing again

Alok Maskara, CEO

in the second half? Yeah, so the de-stocking both for us internally, externally in the one step, which is contractors who fill their bonds with products and distributors who fill their warehouses with product, we are back to more normal level. I think people had done that in 24, getting ready for the transition with R54B. Some people did that to beat the price increases, but that's now behind us. Hopefully we don't have to talk about it at all. Internally also, we are now at a better inventory position, which means starting Q3, what we sell versus what we make will be more in a balanced situation. In Q1 and Q2, we have absorption impact because we are manufacturing less than we manufactured last year as we work through inventory normalization. So starting second half will be in a better spot. And we have baked all this in our forecast. We publicly talked about the dollar impact of the under absorption, but it's just good to put that behind us. What we are now focused solely on is consumer confidence and helping our dealers, convincing that consumer to say, hey, a new replacement product gives you better warranty, better financing, better energy efficiency, better air quality. It's better for the environment. So let's work towards that sale.

Ryan Merkel, Analyst — William Blair

and then zeroing in on the residential market just talk about what the guidance assumes this year and you know what's important for investors to know about the residential market this year

Alok Maskara, CEO

sure what the guidance assumes is some of the known dynamics such as dealer confidence coming back is baked in some of the known dynamics around destalking getting over in q2 which at this stage it is over is baked in. We did not bake in any recovery in new home construction. We did not bake in any major change in consumer confidence. And that's a hard one, right? Nobody knows exactly where we are. We didn't bake in it getting worse. We didn't bake in it getting any better. We did bake in our share decline in new home construction. As you know, we walked away from lower margin accounts in new home construction. That's baked in on the residential side. So think of it is we didn't bake in any massive recovery into 2025. If that happens, that'll be a surprise and positive. At the same time, the unknown remains, little impact of weather and little unknown impact of consumer confidence. But at this stage where we are, we feel like we are very appropriately positioned to end the year on a good note. But June is the largest month for us in the year. So it's hard to sit here on the second or third day of June and proclaim anything

Ryan Merkel, Analyst — William Blair

different. And then I mentioned it, but you have a long history of share gains. What can you tell the room about what's different about Lenox and why you take market share? Sure. So I'll tell you

Alok Maskara, CEO

first, we'll acknowledge that our history of share gain continued until 2018 and so, and then a tornado hit our Marshalltown factory. Since then until 2023 or so, we actually lost share. So I think we should acknowledge the five-year period during which we lost share and did gain. Since then when we were back to the share gain mode, the way it works for us is our single largest differentiating factor is our contractor base who buys directly from us versus going through a distributor. That gives them significant advantage. One is that they can reach out to us directly for technical support. They can reach out to us directly for warranty. They like working directly with the manufacturer so we get the better training, better thing. When we were short on commercial products because of manufacturing difficulty, they sort of lost some ground and now they're getting back in with both residential and commercial product, especially focused on emergency replacement. Our products are really, really good. They are the quietest product. We delivers one of the best warranty support with 10-year warranty on elite products, and we really give them the good, better, best through Merit, Elite, and Signature Series products. In Signature Series, which is a premium product, they make more money than they make on any product in the HVAC industry. So end of the day, our contractors, which are the largest single source of the competitive differentiator, they are what causes Lenox to gain share. We are adding more contractors continuously and watching our churn rate and that we do through net promoter score, measuring our fill rate, and continuously having a sales team that goes on and adds more contractor. Now that our portfolio is full with commercial backend availability, with Samsung giving us the mini split to fight against leaders such as Mitsubishi and Ariston bringing the water heater, it's becoming easier for us to flip dealers into the linux family so everything that caused us to win in the past is back with a full portfolio so we remain very optimistic about the future yeah that's

Ryan Merkel, Analyst — William Blair

great to hear uh shifting to commercial talk about the outlook for commercial uh this year and why is

Alok Maskara, CEO

commercial going to outgrow residential this year i think commercial after 14 straight months of decline as an industry grew for the past two years. So while residential isn't a spot where commercial was last year, we were wondering when the industry is going to turn. We know now it's turning. A few reasons for the turn, right? With current electricity pricing and the new equipment, which actually brings energy efficiency and changes the payback period, key accounts are finally getting to a stage where we talked about deferred demand or average age of rooftops on a big DIY store. They are finally coming through and the industry is turning and these products do bring the payback period down to three years versus four years historically. So that's been very positive for us. Second thing on commercial for us specifically is we are gaining share And that's because of our availability. We have deployed inventory all over US. We have now convinced our contractors that they can trust us to get them the product delivery that we could not for the past many years. Both our factories are running very well. And our new commercial heat pump products are getting very good reviews from large national accounts and helping us to flip some of the losses that we have back from 2018 to 2023. three. Our full life cycle value proposition with the AES acquisition, where we can go to a large account and say, we'll do the whole thing. We will recycle your units, which is a big deal to them. We will give you a preventive maintenance contract through our own employees, not an outsource. We will install them for you. And we will give you energy saving overall in the bracket. That's working very well for us. That's resonating with our key account. So you're bullish on the industry. After 14, 15 months of decline, we are bullish on our prospect. And I think the whole picture together is working very well for us. I think residential will be in a similar shape next year. I know this year is still going to be, you know, we're already in June. And the weather, the consumer confidence, all of that is still TBD. So we could be in 26, but I feel confident by 27, and we've been in a similar situation in residential as well.

Ryan Merkel, Analyst — William Blair

And commercial had really strong results in the first quarter.

Alok Maskara, CEO

Q1 was the first time where commercial made more money than residential. I actually tell him it's because residential made less than they should have. I think commercial made the right amount. Resi just made less. So that's the way we want to change it.

Ryan Merkel, Analyst — William Blair

And sticking with commercial, just explain for the group, because there might be some new people here. You kind of have almost three businesses within that. So talk about the go-to-market there.

Alok Maskara, CEO

So in commercial, we have three businesses. One is a standard rooftop equipment business. That's where we compete heavily with other light commercial players, such as Train, Aon, Carrier, Goodman. Second business for us is a service business, often not well-known, where we have about 800 Lenox trucks with Lenox employees that go around doing preventive maintenance. That's a growth business that's growing consistently. We are adding more branches and more technicians, and we train our own technicians through a Build-A-Technician program that's unique to the industry. Our third business is a refrigeration business where we are the market leaders in refrigeration when it comes to cold storage, refrigeration when it comes to supermarkets, refrigeration when it comes into any 7-Elevens or gas stations that have a walk-in beer freezer, so think of any of those things, that's where our technology is very, very well known. That applies in fast food as well. We make the core cooling element for refrigeration in that. It's known as heat craft. Together, that business is a very attractive portfolio. What we don't have in that business is heavy commercial. That's where a lot of the questions come in from, but that's the one we don't have. Otherwise, you're very pleased with our commercial portfolio. And then switching gears

Ryan Merkel, Analyst — William Blair

here. You've been at Linux now since 2022. Talk about when you joined, what were your top priorities, and then update us on your progress. Sure. You know, I was thinking about this. My

Alok Maskara, CEO

first conference when I joined as a CEO was this conference. So thank you, Ryan. And we're sitting here and we said, our first priority is 100 million extra EBIT from the commercial business. So we're glad to report that we are way beyond that. We delivered actually two to three times that much and extra EBIT by turning around the commercial business because we were just not focused, right? So second we talked about, which you made good progress, is our distribution business was not taken as a business. It was taken as we are manufacturing company and just have distribution attached to it. We have made significant investment in turning around the distribution, and we still have a lot of room to go. The results are not there yet. So in commercial, we worked on it. The results are here. And a lot more growth is yet to come because the factory just started production last year. On residential, on the distribution, we have made changes. We have got the digital infrastructure. We are going to hub and spoke system that went live this year in February, still being rolled out across US. A lot of results from that are yet to come. And it's hard to work through that when you're down market. People are so focused on the down market you miss the benefit of some of the upswing on the residential side third priority for us that time we talked about was just succession planning and talent and that's been working very well again we have changed quite a few things in our culture to make it a lot more focused on customer experience customer experience not as a manufacturer but customer experience as a distributor because the reason distributors exist is they do a better job running hot shot trucks, better job getting the product data, better job making 99% availability, which manufacturers don't do. So that's the third aspect is still work in progress. At that point, we were filling at about 75, 78%. Today, we are filling at 90, 91%. We need to fill at 98%. Don't get me wrong. So we still have a long journey to go. But we are working through all of that. So we feel like the strategy has been working. I'll tell you the thing that's not working for us, A, is the residential market, and B, the amount of time it took us to retool our distribution network. I think that was

Ryan Merkel, Analyst — William Blair

slower than I thought it would be. And then you mentioned the investor day. You know, for me, the heat pumps, the water heaters, the ductless were some of the big, you know, new things you

Alok Maskara, CEO

were talking about. Just expand on that a little bit. Sure. I think we historically grew up as a furnace company. The riveted furnaces in Marshalltown, Iowa is our history. I would say we were in denial about the heat pump trend, right? We didn't invest in the heat pump trend. We did not get focused on market share in Florida. When we divested the European business, we said, hey, if we could just all travel to Florida and gain share in Florida, we would do better than having these businesses in Europe. Heat pumps are a critical portion, and now we have embraced it fully. We have completed a full portfolio. So our portfolio in heat pump was not complete. We didn't have good mini splits. We got that through Samsung. But more importantly, we didn't have the full range of different SEER rating. We didn't qualify for rebates in Massachusetts with our heat pumps. We did not have indoor units that fit in Florida. Now we have the full portfolio of heat pumps. That, I don't think we internally appreciate it, and externally folks still don't appreciate, that we could not install a heat pump in a cabinet in Florida because it's typically in a closet in a condo. We just didn't have the product. That product range is going to pay for us significantly over the next multiple years in share gain. And our heat pumps today get only 15% to 18% of our sales. That should be twice as much. And that's going to contribute a lot towards our growth going forward. All the investments are now made, and the results are yet to come, including on the Samsung side.

Ryan Merkel, Analyst — William Blair

And you mentioned the culture and more focus on customer service, and that came up with the Investor Day as well. So maybe just a couple more examples of what you're doing there and what some of the feedback and data that you've had back on that has been.

Alok Maskara, CEO

Yeah, I think that is some part of it being a legacy, really good company with very loyal dealer base. We just got complacent. So we first had to accept that we got complacent and then talk about a set of metrics. So we start with what's called a customer charter. Every business has a charter. A lot of the metrics are internal only, but we publish those metrics externally. So if you go to a Lenox dealer conference, we show them, here's the commitment that we are making to you. We want to return all warranty claims within X days. We want to pick up the phone within 30 seconds. We want to acknowledge any defects immediately. We want to make sure our fulfillment rate is at 95% for A items, 90% for B items. We are going to commit to you that we are going to have a salesperson visit you once a week. I'm going down the list, but that charter we publish, and then we measure internally and publish that externally. And that's not necessary and required. And then we use Net Promoter Score, in addition to all of that, to measure progress. Each business unit leader sits and discusses their Net Promoter Score with me personally every month. We look at fill rate every week on each of those things. Things that a good distributor would do, a good manufacturer does not because manufacturing, we're still measuring PPM and on-time delivery, but that doesn't matter as a distributor. What matters to distributors is what a contractor fails. So that's a cultural shift. We have had to change quite a bit for that. We had to put in like advanced shipping notification software. We had to change our warehouse management system. We are changing all our telephony system. We had to change our POS system in our 250 stores. We are changing how we organize our store for parts. There's probably a much, much bigger change than you can imagine. Every business had to get a new customer service leader who really gets measured on how fast you pick up the phone. I mean, those kind of things, if you walk into, which I think some of your team did, into our residential building, there's a three big screen that shows you live metrics of are we picking the phone on time or not in green and red. So every employee walking through can see. Oh, we're not meeting our metrics. We are red right now. That's a big cultural change that's going on. And I think the results are yet to come on that. I'm super excited about the direction we are going, but it required a lot of changes and still a lot more to come.

Ryan Merkel, Analyst — William Blair

Yeah, that's great. I want to ask about the convergence of air and water and just talk about what that means for you. And I know some regulations out in 29 are important to that.

Alok Maskara, CEO

So I think the way we look at it is from a contractor perspective backwards. So we start with a contractor. I said earlier, they are our largest asset, not on a balance sheet. 50% of them sell water heaters today. 10 years ago, 5% of them sold water heaters. So we just have to acknowledge that, right? So if you do the survey every three years, you can see the trend, and we do. By the way, we survey them every year. This is a longer survey that we've done. 50% of them sell water heaters, And the reason they do that is multiple. One is in spring and fall, they're looking to fill their portfolio. Second, as many of them have become more professional, either through private equity and other ownership, they're trying to be home services focused versus just HVAC focused. Third is it helps them from recurring revenue perspective. It's much easier for them to sell a service contract that includes a water heater maintenance versus just changing the filter. So I'm going to tune your furnace. I'm going to also take a look at water heater, flush them if it's needed, pull that all together. Finally, on the technology side, as water heaters become more heat pump water heaters, the traditional plumber is punching out. They don't want to program. They don't know how to program this heat pump. They don't understand the installation difficulty. They are used to cutting pipes and resoldering pipes. They don't get this whole new system that's been put in with a massive control. That's where the HVAC folks are stepping in. They already have a plumber on staff. They already have an electrician staff. They've been installing heat pump for a decade now. So they have this thing going on. So that all coming together is why we strongly believe that air heating and water heating is converging and converging rapidly. In 2029, when the new regulation goes into effect, where every water heater above 35 gallon must have a heat pump, that's going to be a step change in that. In future, when you go to a zero GWP, so natural refrigerant, you're going to have one condenser outside your home. That's going to feed both your water heater and your air cooling system. Now, we're not there yet. In Europe, we are getting there faster. But in the U.S., we are going to get there as well. So if anybody doesn't believe the air-water convergence, that's ultimate test. You see that in our lab. If you walk AHRI show, every European player has that in their booth because it happened in Europe, and it's going to happen in the U.S. in just a matter of time. So we believe in that. Our restaurant partnership is a great way to play into that. And our water heater launch has gone better than our expectation.

Ryan Merkel, Analyst — William Blair

We just have two minutes left, and this last question, Alok, is just for a bit of fun. So if we're sitting here a year from now and the stock price has worked, it's much higher than it is now, what are the one or two things that the market is currently underestimating about your business?

Alok Maskara, CEO

You know, this is where when you are in a downturn, everybody thinks that downturn is going to last forever. So I think first thing they're underestimating is overestimating how long will this downturn last. Resi HVAC industry has never had more than a six-quarter decline. And we are approaching six quarter. This will be the fifth quarter. It'll be a six-quarter decline. So I think that'll be the one. Second thing is, I think, we underestimate our commercial business. If you think about, and I was kidding with one of the analysts, I'm like, you know, what have most people got wrong about Lenox over the past multiple years? Because our stock has, when it joined, was $200. It sucks when it went down from $690 to $500, so I hate it. But it's up substantially, and the biggest thing we missed is the commercial piece. We get the Resi moniker attached to our stock, but commercial is a really good portion of our business, a big strength. So those are two will be resi recovery and the commercial strength that we have today.

Ryan Merkel, Analyst — William Blair

And then maybe I'll just finish with data centers. A small percent of the portfolio today, but at the Investor Day, you mentioned some opportunities. What are those opportunities?

Alok Maskara, CEO

Listen, first of all, we don't play in hypes. So we're not going to get in the data center hype. The way we look at it is the data center cooling technology is going to continue evolving. The current cooling technology is mostly based on chillers that we don't make. So we're not playing, we're sitting out of that, right? That's mostly air. The next generation is liquid. So we start getting some opportunities when it goes to liquid cooling because that's now based on compressors versus edge chillers, right? The third generation technology is most likely going to be a refrigerant direct on two-phase flow, which everybody's talking about. Or it could be immersion. I don't think it's immersion, but that's up to time to talk. Once it gets to the refrigerant direct two-phase technology, we have a credible opportunity to play in there. Our refrigerant business is a market leader in that space. We are putting in significant amount of investment to be ready for that, to be able to show in our customers and start testing and creating digital twins and having dialogue with multiple people on that, right? So that comes down to, A, us being right about the technology evolution because technology is shifting very fast, and B, being ready for the transition when that happens. but today we don't have a product all right we're out of time thanks everyone

Ryan Merkel, Analyst — William Blair

thanks a lot that was great appreciate it