Lennox (LII) Q3 2026 Earnings Call Transcript

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DATE

Wednesday, Oct. 28, 2026

CALL PARTICIPANTS

• Investor Relations - Chelsey Pulcheon
• Chief Executive Officer - Alok Maskara
• Chief Financial Officer - Michael Quenzer

TAKEAWAYS

• Revenue -- $1.6 billion, up 10% driven by organic growth in Building Climate Solutions and contributions from completed acquisitions.
• Adjusted Diluted EPS -- $6.84, representing a 7% decline primarily due to lower price realization and higher inflationary costs.
• Total Segment Profit -- $323 million, a 2% decrease as profit gains from higher sales volumes were offset by a $45 million headwind from product cost inflation and tariffs.
• Building Climate Solutions Revenue -- $635 million, increasing 24% with 15% organic growth supported by business development and investments in factory capacity.
• Home Comfort Solutions Revenue -- $937 million, up 3% as a $39 million contribution from acquisitions offset a 1% decline in organic revenue.
• Home Comfort Solutions Segment Margin -- 18.7%, down 490 basis points reflecting targeted price adjustments to defend market share and $47 million in cost headwinds.
• Operating Cash Flow -- $395 million, rising $95 million from the previous year due to focused inventory reduction efforts.
• Free Cash Flow Conversion -- 108% on a trailing 12-month basis, indicating high efficiency in converting earnings to cash.
• Organic Inventory Units -- down more than 15% compared to the prior year, though acquisition activities added approximately $100 million in inventory value.
• Share Repurchases -- $151 million during the third quarter, totaling $302 million for the first nine months of the year.
• Full-Year Adjusted EPS Guidance -- $21.00 to $21.50, lowered from the previous range of $23.00 to $24.00 due to competitive pricing pressures and a higher expected tax rate.
• Full-Year Revenue Guidance -- approximately 6% growth, revised downward from 8% reflecting lower expectations for price and mix.
• Free Cash Flow Guidance -- $700 million to $750 million, reduced from the prior range of $750 million to $850 million.
• Building Climate Solutions Guidance -- approximately 23% revenue growth, an increase from the previous 20% target.
• Home Comfort Solutions Guidance -- approximately 4% revenue decline, compared to the prior expectation of 1% growth.
• Acquisition Accretion -- $20 million in operating profit during the quarter from recent completed acquisitions.
• Residential Sales Mix -- 1-step directed contractor sales declined 6% while 2-step organic sales increased 13% against a prior-year destocking comparison.
• Net Debt to Adjusted EBITDA -- approximately 1.4x, reflecting the $200 million acquisition of the Comfort-Aire and Century brands.
• Capital Expenditures -- approximately $225 million planned for the full year to support entry-tier product launches and innovation labs.
• Tax Rate Guidance -- 21%, up from the previous guidance of 20% for the full year.

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RISKS

• Maskara reported that the company faced low pricing realization, stating, "We just could not stick a midyear price increase," due to pricing fatigue in the market and a highly competitive environment.
• Quenzer noted that "tariffs and related inflation, net of cost productivity savings, drove $47 million in cost headwinds" within the Home Comfort Solutions segment.
• Maskara indicated that underlying residential demand remained constrained by homeowner affordability challenges, elevated mortgage rates, and broader consumer uncertainty.
• Management warned that inflationary pressures are expected to continue into 2027, particularly from tariff components and commodities, making the first half of the year more challenging.

SUMMARY

Lennox International Inc. (NYSE:LII) reported third-quarter revenue growth driven by strong performance in its commercial segments, though overall profitability was pressured by competitive dynamics in the residential market and rising tariff costs. Management reported that while volume trends are beginning to stabilize in Home Comfort Solutions, the decision to adopt dynamic pricing to defend market share resulted in lower price realization. The company stated it is launching a recovery plan focused on retooling its pricing approach, accelerating productivity across manufacturing and distribution, and refreshing its entry-tier product portfolio. For the 2027 outlook, management expect growth to be driven by internal initiatives and productivity rather than a significant recovery in market demand, which they anticipate will remain muted.

• Management is preparing a comprehensive launch of a new entry-tier product portfolio in the first quarter of 2027 to address consumer affordability and overseas competition.
• CEO Maskara stated, "We have launched a recovery plan focused on regaining share and restoring margins," which involves rightsizing the residential business and expanding distribution efficiencies.
• The company is investing in an innovation lab for data center cooling, using two-phase cooling technology that Maskara noted is approximately 18 months away from current state technology.
• Management indicated that the Building Climate Solutions segment is winning more emergency replacement business through improved quoting speed and product availability.
• The recent acquisition of the Comfort-Aire and Century brands is providing strategic insights into the entry-tier market and strengthening relationships with overseas suppliers.
• The company plans to implement an annual price increase in early 2027 to offset inflation and tariff impacts that could not be fully captured during the current year.

INDUSTRY GLOSSARY

• 1-step sales: Direct sales from the manufacturer to the HVAC contractor.
• 2-step sales: Sales from the manufacturer to an independent distributor who then sells to the contractor.
• A2M conversion: The transition to new refrigerant standards as part of environmental regulatory updates.
• BCS: Building Climate Solutions, the segment focusing on commercial HVAC and refrigeration.
• HCS: Home Comfort Solutions, the segment focusing on residential HVAC.
• RNC: Residential New Construction market.
• Section 32 derivative tariffs: Specific trade duties mentioned by management that impacted product costs by up to 25% on certain categories.
• Side discharge: A configuration of HVAC unit where the fan blows air out the side rather than the top, often used in space-constrained installations.
• Unitary: Standardized, factory-assembled HVAC systems often used in residential or light commercial buildings.

Full Conference Call Transcript

Operator: Welcome to the Lennox 2026 Third Quarter Earnings Call. All lines are in a listen-only mode and there will be a question and answer session at the end of the presentation. You may enter the queue to ask a question by pressing *1 on your phone. To exit the queue, press *2. As a reminder, this call is being recorded. I will now turn the call over to Chelsey Pulcheon, from Lennox Investor Relations. Chelsey, please go ahead.

Chelsey Pulcheon: Thank you, Chloe. Good morning, everyone, and thank you for joining us as we share our 2026 third quarter results. Joining me today is CEO, Alok Maskara; and CFO, Michael Quenzer. Each will share their prepared remarks before we move to the Q&A session. Turning to slide 2, a reminder that during today's call, we will be making certain forward looking statements which are subject to numerous risks and uncertainties as outlined on this page. We may also refer to certain non-GAAP financials that management considers relevant indicators of underlying business performance. Please refer to our SEC filings available on our Investor Relations website for additional detail. Including a reconciliation of GAAP to non-GAAP measures.

The earnings release, today's presentation and the webcast archive link for today's call are available on our Investor Relations website at investor.lennix.com. Now please turn to Slide 3 as I turn the call over to our CEO, Alok Maskara.

Alok Maskara: Thank you, Chelsey. Good morning, everyone. Thank you for joining us today. Let me start with our third quarter results on slide 3. Third quarter revenue grew 10.2% to $1.6 billion while total segment profit declined approximately 2% to $323 million Adjusted earnings per share declined 7% to $6.84. Double digit revenue growth was driven by continued outperformance in Building Climate Solutions, contributions from acquisition, and improving residential sales volumes. Profitability however, fell short of our expectations. In response to the competitive environment, we adopted a more dynamic pricing approach. To defend and stabilize our residential market share position.

We are encouraged by the early results from these actions but the trade off was lower price realization at a time when tariff and inflationary pressures continue to increase. Within Home Comfort Solutions, organic sales improved meaningfully from the second quarter and our share position began to stabilize. At the same time, underlying demand remains constrained by homeowner affordability, elevated mortgage rates, and broader consumer uncertainty. Building climate solutions delivered another quarter of double digit growth with revenue up 24%. Margins remained healthy although higher tariff and inflationary cost were not fully offset by pricing during the quarter. Given our third quarter performance, and expectations for the remainder of the year, we are reducing our full year earnings outlook.

Our focus now is not only delivering a strong finish to 2026, but also on retooling the business to target consistent growth and revenue, profit, and EPS in 2027. Now please turn to slide 4. We have launched a recovery plan focused on regaining share and restoring margins. While the near term environment has changed, we remain confident in our long term strategy. Our recovery plan is centered on 4 actions and we are moving with urgency on each of them. First, pricing. We are rewiring our pricing approach to be more dynamic in current competitive conditions. This means being more responsive and targeted by region and customer segment.

Particularly where a competitive price cap affects our ability to win or retain business. The objective is to defend our existing position and recapture share where we have lost it while remaining disciplined about the economics of our business. Second, productivity. We are rightsizing the residential business for current market conditions, and accelerating productivity across manufacturing, distribution, and SG&A. With the A2M conversion behind us, we are able to dedicate more resources to productivity which is expected to play a larger role in restoring margins. Third, portfolio. Affordability has become increasingly important for homeowners and entry tier products have gained more relevance in the market. We are refreshing our entry tier portfolio with new products, including additional site discharge offerings.

More accessible price points will also strengthen our product portfolio for new construction. We are pleased with the heat controller acquisition and early performance is in line with our expectations. Strategically, it has provided new insights and capabilities in the entry tier market and broaden the portfolio available to us. We see additional opportunities across parts and accessories to broaden how we serve our contractors and distributors. Finally, promoters. As evidenced in our Net Promoter Score insights, we have a strong base of promoters across our traditional residential and commercial contractors as well as our commercial national account.

Within residential national accounts, particularly private equity backed contractor groups and residential new construction, we see an opportunity to deepen relationships and create more promoters. To capture that opportunity, we are updating our value proposition and expanding our capabilities to better meet the evolving needs of these customers. We also continue to strengthen the relationships that have made us successful across our traditional contractors and commercial national accounts. These are actions within our control and execution is already underway. The near term objective is to stabilize share, and improve profitability. Over time, a stronger portfolio a more advantageous cost structure, and deeper customer relationships, position us to return to consistent growth and margin performance.

With that, I will turn it over to Michael to walk through the third quarter financial results in more detail.

Michael Quenzer: Thank you, Alok. Good morning, everyone. Please turn to Slide 5. Third quarter revenue increased 10% driven by continued volume growth in commercial equipment and services, along with contributions from M&A. Recent acquisitions are performing well, delivering approximately $20 million of operating profit accretion in the quarter. That growth helped offset higher tariffs and other costs. However, competitive pressures, limited price realization, and total segment profit declined 2%. Our immediate priority is turning revenue growth into improved profitability. Alongside the product and pricing actions Alok outlined, we are accelerating cost productivity across manufacturing, distribution, SG&A including restructuring where appropriate. Restructuring actions are already underway with the associated charges included in GAAP net income and excluded from adjusted results.

Against that backdrop, let's take a closer look at our segment results starting with home comfort solutions on slide 6. Home Comfort Solutions revenue increased 3% in the third quarter organic revenue down 1% compared to the 9% decline in Q2. Directed contractor sales declined 6% improving from a 12% decline in Q2 while 2 step organic sales increased 13% benefiting from last year's industry destocking comparison. Sales trends are improving, though we are not yet seeing a broad recovery in underlying demand. Acquisitions contributed $39 million in revenue, and $6 million in segment profit, performing in line with expectations.

Despite improving sales trends, organic segment profit declined $46 million Favorable mix and price provided $13 million of benefit However, tariffs and related inflation, net of cost productivity savings, drove $47 million in cost headwinds. We expected the price increase we introduced in late Q2 to cover more of the cost headwinds. But homeowner affordability pressures softer demand, increased competition limited realization. With current competitive conditions, we are placing greater emphasis on cost productivity across manufacturing, distribution and SG&A to support margins in the near term and position us for stronger margin expansion as volumes recover. Let's turn to slide 7 and review Building Climate Solutions. Building Climate Solutions revenue increased 24% in the third quarter. Including 15% organic growth.

Acquisitions contributed 9% to revenue growth and approximately $13 million in segment profit. Our investments in factories and sales coverage are improving quoting speed and product availability. Helping us win more emergency replacement business. We also continue to grow with national accounts through our full life cycle equipment and service offerings with new heat pump product offerings, further expanding our opportunities. Together, these capabilities position us for continued growth in both channels over the next several years. Higher sales volumes drove organic segment profit growth but margins declined as pricing did not fully offset higher tariffs and inflation. Price increases take longer to implement under large national account contracts, while competitive pressures limited realization with local contractors.

We are focused on narrowing the price cost gap through additional productivity, while we expect continued volume growth will provide further margin leverage. Let's now turn to slide 8 to review cash flow and capital deployment. We generated $395 million of operating cash flow in the third quarter, up $95 million from last year. With trailing 12 months free cash flow conversion reaching 108%. We continued to reduce inventory with organic inventory units down more than 15% from last year, Inventory dollars were slightly higher as acquisitions added approximately $100 million of inventory and inflation further increased inventory costs.

Net debt to adjusted EBITDA increased to approximately 1.4x reflecting in part the $200 million acquisition of the Comfort-Aire and Century brands completed in Q3. We also repurchased approximately $151 million of shares during the quarter. Looking ahead, our capital deployment will place greater emphasis on opportunistic share repurchases when our shares trade below our assessment of intrinsic value while maintaining a disciplined net debt to adjusted EBITDA ratio. We continue to expect approximately $225 million capital expenditures this year, to support our entry tier product launch in early 27. New contractor training facilities, innovation labs for data center cooling applications, and AI tools to drive growth and productivity.

With that, let's turn to slide 9 and discuss our updated financial guidance. As Alok outlined, we are updating our full year adjusted EPS guidance range to $21 to $21.50. Lower price realization and expected tax rate of 21% compared with 20% in our prior guidance are the primary drivers of the reduction. Sales trends are improving in HCS, and growth remains strong in BTS. However, competitive conditions have limited our ability to realize the pricing we expected to offset higher tariffs and inflation. Our updated outlook assumes these pressures continue through the remainder of the year.

We now expect revenue growth of approximately 6% compared with 8% previously, This primarily reflects a lower contribution from price and mix which we now expect to deliver low single digit growth. Compared with mid single digit growth in our prior guidance. Our overall volume outlook is also modestly lower although we continue to expect a low single digit decline. Stronger BCS volumes partially offset lower volume expectations in HCS. At the segment level, we now expect BCS revenue growth of approximately 23%. Up from 20% while HCS revenue is expected to decline approximately 4% compared with our prior expectation for 1% growth.

Consistent with the lower net income outlook, our reduced flat free cash flow guidance to $700 million to $750 million from $750 million to $850 million We remain focused on reducing inventory and sustaining our progress in cash conversion. Looking ahead, improved residential sales trends and continued growth supported by our commercial investments provide opportunities to build momentum. Entry level product introductions and cost productivity actions also provide opportunities to improve profitability but relying solely on an end market recovery. With that, I will turn the call back to Alok.

Alok Maskara: Thanks, Michael. Before we close, I wanna share some early perspective on our 2027 outlook. Please note that we are not providing 2027 guidance today. But we will discuss several assumptions that are shaping our planning. Starting with price and cost, we expect inflationary pressures to continue particularly from tariff components, and commodities. As we reset the business, the first half of 27 will be more challenging as we work through year over year tariff headwinds. Our pricing approach will be responsive to competitive conditions while productivity will play an increasingly important role in balancing the price cost gap. Successful execution of our recovery plan is expected to drive sales EBIT and EPS growth in 2027.

With momentum building as the year progresses. Importantly, our plan does not depend on a significant market recovery. We are planning around muted industry volumes with resilient replacement demand and continued softness in new construction. Instead, our growth opportunities are largely driven by within our control. In HCS, that means recapturing share, expanding our entry tier offering, and growing penetration of parts water heater, and ductless. In BCS, it means continuing the momentum with national accounts, emergency replacement, and services. The third tier and the 1 most likely within our control is productivity. We have meaningful opportunities for material cost reductions, manufacturing productivity, and further efficiencies across distribution and logistics. Improved volumes, should also provide factory absorption benefits.

We will provide our detailed 2027 guidance with our fourth quarter results. With the actions underway I intended to reset the stage for continuous growth and productivity for 2027 and beyond. Let me close on slide 11. While we are clearly not satisfied with our profitability this quarter, the short term challenges we are addressing do not change the long term value proposition of Lennox. We operate in attractive markets with significant replacement demand. We have strong brands, differentiated technology, and a direct to dealer model that creates close relationship with our customers. Over the last several years, we have also expanded the business through investments in capacity, innovation, acquisitions, and joint ventures thus creating additional avenues for growth.

The near term priority is translating those trends into better financial performance. That means restoring share in residential, and improving profitability by closing the gap between price and inflation. While maintaining the momentum we have built in our commercial businesses. We are proud of our talented team and winning culture. And grateful for the loyalty of our customers. Our long term strategy remains intact and we are confident in Lennox's ability to deliver sustainable value, strong margins, and high cash conversion. I truly believe that our best days are still ahead. Thank you. Michael and I are happy to take our quest. Your questions now. Chloe, let's go to Q&A.

Operator: Certainly. We will take our first question from Jeffrey Hammond with KeyBanc Capital Markets. Your line is open.

Jeffrey Hammond: Hey, good morning, guys. I am really just trying to unpack the level of margin degradation in HCS. I mean, I understand kind of the more competitive dynamic, and kind of the res new construction walk away, but just help me a little bit better understand what else is going on to drive the kind of margin degradation.

Alok Maskara: Sure. Jeffrey, I think it is pretty simple. We were expecting to go out with a price increase that with a higher realization. And as you know, we talked about doing that towards the tail end of Q2. At the same time, we faced tariffs and other inflation and most of the tariffs impact started coming through with the 32 derivative tariffs in Q3. I just believe there is a short term mismatch between our pricing realization which was very low, and inflation and tariff that came through. that is kind of the 1 and only change since we talked last. On why the margins in HCS were lower.

Jeffrey Hammond: And the price realization being low, is it a function of the competitive dynamic?

Alok Maskara: It is a function of company dynamics. it is also from pricing fatigue. I mean, we had done so many price increases. With the ever changing tariff environment. I mean, at this stage, we are planning to go out with a price increase for 2027 which I think works better for our national accounts, better for our contractors. And we expect that to offset inflation as we work through the year. We just could not stick a midyear price increase.

Jeffrey Hammond: Okay. that is helpful. And then it looks like your inventories are still kind of stubbornly high. Just wondering where you think you are at in the destock? Do you need to destock more?

Alok Maskara: Yeah. Actually, our inventory progress we are making is really good progress. The units are down 15%. Some of it is up because of acquisitions. We will continue to see some decline go into the fourth quarter, seasonally But most of the absorption headwind we have seen is already behind us. As we look into next year, we have some additional productivity initiatives around reducing inventory around raw materials, some of our source products, but those will not impact our absorption. So I think the inventory will continue to go down, support our free cash flow guidance, and in a good spot. on that. Okay, thanks. Thanks, Jeffrey.

Operator: We will move next to Ryan Merkel with William Blair. Your line is open.

Ryan Merkel: Hey, everyone. Thanks for the questions. I wanted to start with the actions to regain share. Can you just talk about where the share loss occurred? And if the price adjustments you have made, has that helped you regain share? Or is there a lot more to go?

Alok Maskara: I think that is a good clarification. I mean, we have talked in the past about our share loss in RNC. And we are now at a stage where within the next quarter or so, like, you know, that will be lapping itself and we get back to more of a normalized year over year comparison. In addition, when we talk about share, we talk about share loss as much as we talked about defending our share. And we had to essentially go to a much lower price realization in Q3 as we look to defend our share in the remaining portion of the business. So there is no incremental share loss beyond what we talked about.

But just to defend our share and not lose any more share, we had to go to the dynamic pricing approach which meant we could cover the steep tariff impact and inflation in Q3. But just want to clarify, there is no additional share loss that you are talking about We are clearly gaining share in VCS, gaining share in commercial. And the only share loss that is noticeable and evident is the ones we have talked about in the past.

Ryan Merkel: Got it. Okay. Thanks for clarifying that. And then on the HCS revenue guide for 2026, it is gonna be down 4 now. Can you give some color on 1 step versus 2 step there? And then is the biggest factor for the negative revision just the increased competitive dynamics, or is it equally residential new construction is a little bit worse?

Michael Quenzer: Noah. Overall, what we expect is in the 1 step to be down in the full year low double digits 2 step, we expect to be up kind of low single digits. This is total organic sales, and, it is it is pretty much in line with our previous guidance with the expectation that maybe a little bit softer on the 1 step as we enter the fourth quarter. Most of the revenue decline though in the guide was related to second half pricing actions. Okay.

Ryan Merkel: That makes sense. Alright. Guys. Pass it on.

Operator: We will take our next question from Noah Kaye with Oppenheimer. Your line is open.

Noah Kaye: Thanks for taking the questions. Maybe good morning. Maybe talk a little bit about the competitive pressure you are seeing. How much of this is coming from the incumbents versus you know, kind of smaller entrants, non-U.S.-based players And then, Alok, what do you think you need to do to the cost structure at this point to kind of put the operating costs on a more equal footing given those competitive pressures?

Alok Maskara: Sure. So, yeah, let me first answer the competitive question. You know, the competitive pressure is just in the industry in general. I mean, you know, we are a competitive industry. We have had some new entrants. I think the lower tier products typically come from more of those new entrants. And then the competitive pressure for the rest of portfolio is typically from incumbents. But those lines are blending. You know, as we look at lots of people partnering with 1 another But net, it remains competitive. The lower tier offering is definitely in response to like, you know, some of the overseas new competition coming in.

Because we wanna make sure we remain competitive in the very long term. So that is where to From a cost structure perspective, you know, we are very good with cost structure, as you know. We have done this successfully many times. The large portion of the cost structure and I would say about half of that is gonna come from our distribution network. You know, we have been retooling our distribution network. We added the FTC auto this year, as you saw. And the second part of that is obviously now retrenching and taking out capacity from the region.

Which makes the distribution network overall more efficient We come up with lower cost when it comes to intranet work frame, We have talked about millions of savings opportunity there. You can exit some leases in different location. Including LVD to our stores network And then, of course, there is room for SG&A and we do start getting the productivity benefits from non-negative absorption-- sorry, That was double negative. We do start getting the benefit of absorption back in the picture. So it is a broad based effort. On our part on the cost structure. And not including in this the lower cost of new products or the new tier products.

I just wanna say that is separate because we just look at that as a new offering. Realizing there will be some cannibalization from the current offering. Our aim is to maintain a margin percentage with these lower cost products which will be lower cost and lower price with similar margin that we are experiencing today. Thank you, Alok.

Noah Kaye: I guess you did mention in terms of the CapEx guide some allocation of spending to innovative data center cooling. You know, again, I know that this is very preliminary, but can you share some color on those efforts and, you know, how you see your opportunity, why it makes sense to invest at this point.

Alok Maskara: Yeah. So the investments are all in our refrigeration business. Where we do have the core technology to address large scale cooling requirement What we are working on is an innovation lab has got proof of concept and offering it is on the 2 phase cooling technology. So the technology which is 18 months away perhaps from the current state technology. And we have seen some good early results, good early momentum But at the same time, that is not baked into any of our plans, We are not gonna bake it into our 2027 plan. I mean, from our perspective, that is just maintaining the health of the business going forward.

And if there is any upside that comes in terms of large orders, we will let you guys know. But at this stage, just the investment to make sure that our technology keeps up to date and showcase our 2 phase coding technology, which we are already very good at.

Noah Kaye: Yeah. Makes sense. Thank you very much. I will pass it on.

Operator: We will take our next question from Tommy Moll with Stephens Inc. Your line is open.

Tommy Moll: Good morning and thank you for taking my questions. Alok, I want to start on the topic of the entry tier product. Do you expect to launch early next year? This is not the first time it is been mentioned, but it does seem to have an increased level of importance now and I am curious if there is something you have observed over the last quarter that is escalated that up the list of priorities for you?

Alok Maskara: Thank you. Tommy, thanks for the question. Noah. You are right. This is not the first time you are talking about it. and I trust that this is not the last time you will talk about it either. As we look at overall consumer affordability challenges, as we look at overseas competition coming in, you know, we did a full study, which we had started before Q3. On just tearing apart all the products, looking at our product cost versus other product cost, and given that we are direct to business, we direct to contractors, we know we have an inherent advantage in the supply chain and how we do this. So we ran some pilots in Florida.

Where we went after the whole market including overseas competition. You know, we launched the site discharge earlier in the year at our trade show. And now we are putting it all together to come back with a whole set of SKUs, including the mini splits that we launched last year, And the pilot we did in Florida was around a unitary product that would go head on with unitary product from anybody, including overseas competition. So those all design efforts are now at a stage We can talk about that being inherent part of our portfolio with the full launch coming up in Q1 27.

We just think it helps consumers with the affordability concerns It helps our loyal contractor fight off any overseas competition, whether it is unitary or site discharge or mini split. And give this offering to defend our share in other area, including RNC and AR. So we just think it is an ongoing effort that now we have reached a stage in our maturation that we can talk about it publicly. And start offering to our customers. Thank you, Alok.

Tommy Moll: I wanted to ask a follow-up on HCS volumes. Making what I think are some reasonable assumptions about the fourth quarter on price mix and the other line items there, it looks like we have to assume a double digit decline in those HCS volumes for Q4 which if you look at the compare from last year is rather favorable. So I just wanna see if your math is aligned with mine, and what would what would drive the big decline there? In Q4? Thank you.

Alok Maskara: Noah. Michael can answer that question. I will just tee it off by saying, our focus this year at this stage, is to make sure we are set up for success in 2027 and beyond. I mean, it is a small quarter. Obviously, we have got lots of puts and takes. But we want to make sure that 2027 is set up for full success and we take all the actions the actions we have outlined on the page. And drive success through that. With that, I will hand it over to Michael to actually answer your numbers question.

Michael Quenzer: Yeah, Tommy, it is smaller quarter. The quarter is off to a bit of a softer start with warm weather in the Midwest as we are focused on furnaces in that region. Overall, the guide assumes a mid single digit total sales decline for the fourth quarter organically Better obviously on the indirect for some of the comparisons and less on the 1 step, but we feel it is a good guide, and it looks like we are focused on closing out the year strong and moving on to 2027. And as you do the math, I would suggest you also look at sales per day as a factor versus sales for the full quarter.

Tommy Moll: Sure thing. Thank you.

Operator: We will take our next question from Nigel Coe with Wolfe Research. Your line is open.

Nigel Coe: Thanks. Good morning. Appreciate all the color. This is really helpful. I want to take another crack, Mike, at the implied 4Q math since we warmed up on the revenues. On the margins, I mean, just doing similar kind of implied math, looks like I do not know, HCS margins down in the low double digits, sort of zone, just want to make sure that is correct. And then how do we think about the confidence in margin expansion in 2027 sounds like first half down, second half up. Any more color around that would be helpful.

Alok Maskara: I will take the second part of the question and then Michael will come back and address the margin thing. I think it is too early to talk about 2027 in that level of detail. I mean, what we did say and we feel confident about is that 2027 will have higher sales will have higher EPS, and higher EBIT dollars. And you need to give us some time so that when we come back in January, we can break that out. I mean, our intent is to go with a price increase that goes into effect, like, you know, early beginning of 27. And that will reverse a lot of the margin pressures we are having.

But let us move through all of the math and be laid out for you at the beginning of 27. For Q4 margins, let me hand it back to Michael.

Michael Quenzer: Sure. So implied in our financial guidance for the full year, about 200 basis points of margin decline at the enterprise. We break that down by segment BTS full year margins, we think are approximately going to be flat We are getting volume leverage with some price/cost headwinds going against that. And within HCS, in the full year,, we expect about 50 basis points of margin contraction, mostly driven by volume declines in the 1-step as well as some price cost headwinds that we have seen through the year. Okay.

Nigel Coe: that is. Noah. that is that is really helpful. Thanks. And then just coming back to the inventories, I think, again, Mike, you I think you quantified $100 million impact. I think that is a year over year impact. Think when we look at the acquisition you closed in the third quarter maybe, I do not know, 3.05 thousand%.

Michael Quenzer: We do see $100 million increase from the acquisitions we completed, 1 in the fourth quarter of last year and then we have also completed 1 in the third quarter of this year. So that added on top of it. Just kind of reiterate, we do see some opportunities still in raw materials and source products. Those are kind of higher than what we would like, and we are going continue to drive some of that down. That will not have an absorption impact. We think the absorption impact was really negligible in the third quarter.

We do not see a lot of that headwind going into the fourth quarter and it actually should turn into a tailwind as we look to increase production levels in 2027 versus 2026.

Alok Maskara: And just to specifically answer your hypothesis, no. We are not building up inventory to get ahead of inflation or anything else. Or organic volumes of inventory, as Michael said, is down 15%. And we feel comfortable with where our overall finished goods inventory is. Yet, in the spirit of continuous improvement and lean that we live in, we will keep pushing on that.

Nigel Coe: But there is no big step change coming. Okay. Thanks, guys. Good luck.

Operator: We will move next to Steve Volkmann with Jefferies. Your line is open.

Stephen Volkmann: Hi. Thanks for fitting me in here. Mike, I think you mentioned some restructuring that was running through the P&L? Any details there on what that might look like in terms of saving benefits?

Michael Quenzer: Yeah. As Alok mentioned, we started to take restructuring actions. it is mostly around some of the acquisitions we have done. Around consolidation of distribution and some SG&A So these will start to materialize next year as additional synergies through the acquisitions we have done as well as SG&A productivity. We still have additional potential opportunities on the distribution network within our 1 step. So we continue to look next year how we can accelerate some of those. We may have some more restructuring as we look to maybe exit some leases quicker than we normally would have done with the new FTC facility that we put in within Dallas.

So we still see some more opportunities on restructuring going forward, but these should definitely help as we get into 2027 on our cost productivity journey.

Stephen Volkmann: Okay. Alright. Thank you. And then sorry to go back to this but on the HCS share recapture, I just wanna verify that we are just talking about the builder channel there, and I am just not understanding how you think you would do that while also kind of pricing up for the inflation that you have seen?

Alok Maskara: You know, lot of it just comes down to as you said, defending our shares. So that is kind of a number 1 priority. Going back to capturing share, I do think that portfolio of products, including the entry tier product that we mentioned, could. And is suitable to the broader channel. Because in many cases, they are for the lowest first cost. And I think overall, if I take a step back, we are strong with our traditional dealers and have a business model that works very well.

As private equity-backed contractors have grown as RNC has consolidated, We are just refreshing our value proposition I believe and we believe that given our direct to contractor model, we are structurally advantageous to serve these larger national accounts. And now we need to convert that into concrete actions and we are actively working with these national account. with the PE groups and RNC customers to see how can we lower our joint cost to serve to create a win-win model, realizing the fact that we are both a manufacturer and a distributor.

So while I do not wanna play out our entire value proposition on an earnings call, we feel comfortable with where we are and our overall value proposition. And that will get enhanced with the entry-tier product that we are introducing.

Stephen Volkmann: Understood. Thank you so much.

Operator: We will take our next question from Joe Ritchie with Goldman Sachs. Line is open.

Joseph Ritchie: Hey, guys. This is Joseph Ritchie on for Joe. I just wanted to follow-up on the question on the entry level product platform. Curious, how should we kind of be thinking about the margin profile on those offerings as they scale?

Michael Quenzer: Yes. So what we will do is we will cost reduce that product, and what we expect is that after that cost reduction, we will see margins similar to what we have in our current entry level products.

Joseph Ritchie: Okay. Got it. Helpful. And then on Comfort-Aire and Century, now in the fold, and contributing nicely to top line, how are the logistics and SG&A synergies kind of tracking there? And are you still confident that those businesses will be accretive to EPS in 2027?

Alok Maskara: Yes. We remain confident in that. So I remember, first of all, both those brands are entry level brands. So going back to why we have talked about entry tier as a big focus, that is not new. Relationship they have with some of the overseas supplier has provided us some really good strategic insight into the cost structure and strengthen our existing relationship with existing overseas suppliers as well. So in certain products like site discharge, now we have 3 really good partners that we can work with to immediately bring more to our customers. So being a manufacturer and distributor, we do not always have to manufacture on up products. So net is going well.

We are on track for synergies. The big part of SG&A obviously happens next year when we get into our ERP platform. But we are pleased with the acquisition. Pleased with the strategic insights, and we think it is gonna continue driving growth for us above and beyond 2027 as well.

Joseph Ritchie: Great. I will pass it on.

Operator: We will move next to Joseph O'Dea with Vertical Research. Your line is open.

Joseph O'Dea: I wanted to start on what you are planning for on the price cost dynamic as you are moving into next year? When we think about the inflationary side of things, that moved from kind of low single digit to mid single digit over the course of this year on tariffs. Sounds like there is a continuation of headwinds into next year, whether that continues at kind of mid single digit, type of magnitude. And then the pricing side of it, just given the fact that the pricing was a little bit more challenged, middle of this year. Can you explain confidence behind success on pricing as we go into next year.

Alok Maskara: Joe, from an inflation perspective, I mean, obviously,, it is a moving picture. The Section 32 derivative tariffs took us for a surprise in the middle of the year. Otherwise, generally, we are pretty good at like, you know, working with pre purchases, locking in purchases to lock all those things and give you guys a good guidance. This year, we are just an exception because were blindsided with a 32 tariff, including 25% on certain product categories. So too early to give any numbers for 2027 or answer that question in a meaningful way. But as we normally do, we will wrap everything up and bring you a full detailed guidance on 2027. At the end of Q4.

This comes in January. On the pricing side, you know, going back to what I said, there was just a pricing fatigue in the market. We had done price increase at the beginning of the year. We had done tariff related price increases earlier. We just could not stick the midyear price increase. Quite a few of our national accounts, as you know, have inflation clauses and material riders backward-looking into what all the different prices are And, you know, steel's up substantially. Copper's up substantially. So we feel very good about price capture starting 2027. When many of those contracts have automatic riders built in.

And as we go with the annual price increase in the contractor channel as well. So, you know, Q3 was are disappointed. We are disappointed in the price capture. But we believe this is a short term timing issue. And we will be able to get price cost to be in a much better position starting 2027.

Joseph O'Dea: And then on the entry tier part of your portfolio, just any color on what percent of the mix that is where you think it is gonna go? It sounds like the margin side of that will not be much of a mix headwind. But just in terms of the revenue side of that, how big a portion of the portfolio, it is and where you think it could be.

Alok Maskara: I would tell you it is a small portion of the industry today. it is a small portion of our portfolio. But it is growing rapidly. So part of this is about making sure that we do not miss out on that growth and also that we remain competitive compared to other competition that the new entrants coming in from overseas. So I do not think the numbers move meaningfully in a year or 6 months. We just want to be prepared for future trends in the industry. And defend share of certain areas as appropriate As you know, it is also a regional market. it is also driven by many different things. Such as like, consumer affordability and pricing.

So you are working through all of that. But this is more futuristic to stabilize and make sure as you said, that our portfolio remains competitive. Thank you.

Operator: We will take our next question from Amit Mehrotra with UBS. Your line is open.

Amit Mehrotra: Thanks, operator. Hi, Alok. I just wanted to come back to your comment about changing or resetting the value proposition and sort of explain to me or us how that is you know, not structurally bad for margins? Because on 1 side, it is kind of another way of saying, you know, revenue per unit. Is coming down. And while you can value engineer costs out of that unit, overall in costs are inflating. And so it is it is probably too bullish to assume cost per unit come down on absolute basis So how is that structurally not bad for margins?

Alok Maskara: Yeah. So let me separate 2 different things out. Right? 1 is the. Or maybe 3 different things. 1 is price cost. Which we can talk about. Second is the impact of the entry tier. And third, is the value proposition for these large national accounts. there is obviously overlap in all 3 of those, but I do look at all 3. On the price cost that we talked about, we fully intend to go and capture price in 2027. And that would offset overall inflation.

On a key tier small portion of the portfolio we have introduced products and done pilots which have shown the power of that. it is really important for our contract our distributors to have that as a part of the portfolio. So they can offer it to those consumers who really need it. We do not expect it to grow substantially and take over majority of the portfolio. Lastly, the value proposition of National Account does not necessarily based on price, because we are direct to contractors we can do a lot of things. That a traditional 2 step channel cannot do. I will recap some of those, and we have talked about that in the strategy days.

You know, I believe our digital strategy, digital footprint of providing prognostic, diagnostic, direct contract with the manufacturer is big deal. You are working with at least 1 or 2 of them on topic like lead generation with some of our other industry players do better. And I do not mean HVAC, outside HVAC, the good example of companies like Generac who do a really good job on lead generation, working with their contractors. And then finally, on the logistics side, we can be really good with our FDC.

To deliver mixed loads direct to a certain site and work on that to avoid extra handling multiple transfers and get to a win situation where a joint cost and supply chain comes down that benefits them and us. So I was talking about those set of value propositions that we need to revise. it is not purely just based on cost, Amit. Got it.

Amit Mehrotra: Okay. that is helpful clarification. Thank you. And then just maybe as a quick follow-up, we all obviously all understand the affordability challenges and the macro dynamics. Interest rates, etcetera. But I just. I love trying to get your perspective on have you seen the channel sort of increasingly welcome non US OEMs has that sort of been something that is sort of perked up more recently as these issues have been exacerbated by the macro environment. Can you just comment on that?

Alok Maskara: Sure. First of all, I think non US OEMs are not new. Remember, Goodman got bought by Daikin many years ago. York got bought by Bosch many years ago. So the line between a US OEM and a non US OEM has been blending for many, many years. Now there are many other players who manufacture their product overseas. Including some very established US players.

I think from our perspective, we have found that certain products, site discharge, including lower cost utility products, including mini splits, provide the consumers an alternative when they need it for certain application, like zero lock lines, new lower tier consumer homes, small sections of the house, whether it is garages or bedroom and lock conversions, And obviously to a dealer it gives them the opportunity to bring value, good, better, best, as a full offering versus just taking with good, better, best. And potentially losing out on the value tier. So I think that is what we are working towards. Is making sure our good, better, best portfolio has entry level good, better, best as 4 tier offering.

So consumers who are very challenged could choose the entry level portfolio. So, again, I do not think it is new. Is just the first time we put it all together in a package. And we believe in a really good shape with the heat controller acquisition, our partnership with Samsung on mini split, and some of the pilots we have recently run on that. Including a manufacturing cost out as a result of all those actions.

Amit Mehrotra: Right. Brett. Helpful. Thank you very much, Alok. Appreciate it.

Operator: We will move next to Steve Tusa with Wells Fargo. Your line is open.

Stephen Tusa: Hi guys, good morning. Hi, Steve. So I am just still trying to kind of figure out where last quarter, I think you guys talked about the resi like resi new home pressure. I am just really trying to figure out how broad-based the new entrants are in this. Like what percentage of the market? I think newest product is really this hybrid side discharge, you know, thing. I do not think ductless is really making it. it is always been competitive.

But this new hybrid side discharge product is it that or is it like, 410A units that are coming in as, you know, replacement components and, you know, impacting the low end And if it is the side discharge, like, what percentage of the market do you think it is today? And where do you think it goes in the next, you know, call it, 3 years?

Alok Maskara: Sure. So I mean, just backtrack and confirm. So from our perspective, the entry tier has 3 different products. Right? And everybody can make assumption on how big. I do think ductless acts as an entry-tier products in certain areas. I do think the hybrid/side discharge is the second 1. The third 1 is also lower cost unitary products. Especially as some of the overseas competition is bringing those in and have certain advantages. So our focus is all 3 of those, Steve. The side discharge which you have seen has been success in fact, it is been even better than we expected. Both in 1 step and 2 step, and we have reinforced that in the heat controller acquisition.

I guess on market numbers,, but for at least for heat pumps, it is becoming substantial portion of heat pump sales on the ducted side. But at this stage, do not have the market numbers handy to give to you. I am sure you have your own analysis and research to pull together. Our point here is we want to make sure we are fully prepared in all 3 of those. And then as the market evolves and grows, our contractors and our national account customers should benefit from choices. The entry-tier has our good, better, best following that.

Stephen Tusa: Right. And I guess as far as the approach to, you know, how is this, like, mechanically working on the ground? Are you losing share to established U. S. Players that have these products? Or are you losing share to kind of these new entrants? And I will I will I will consider, you know, Bosch 1 of those new entrants, or a Madea or somebody like that. Where do you see the most of the fight from market share perspective.

Alok Maskara: Sure. So first of all, since this comes down to, like, we might lose share because we were just not in that market. Over the past 2 years, we have entered the market. So it is not that we are losing people and leaving us because we do not have it. What I would say, those lines have always blended. And they continue to blend as many of the established US players often buy and relabel products as well. And it not very clear to us at how many of those are relabeled and how many people are self manufacturing.

And I would say those lines are very blended. it is very hard to answer your question in a definite a or b. it is kind of A and B, established players who are blending the line, or overseas player who are selling it under their own brand.

Stephen Tusa: Got it. Super helpful color and appreciate all the detail on the slides. it is a it is a helpful conversation to kind of parse through what is happening out there. So appreciate it. Thanks. Thanks, Steve.

Operator: We will move next to Nicole DeBlaseBlase with Deutsche Bank. Your line is open.

Nicole DeBlase: Yes, thanks. Good morning, guys. Hi, Nicole. Hello. Just wanna come back to the discussion around price. Look, I think a couple of minutes ago, you said you fully intend to capture price in 2027. I guess if you think about the inflation that you guys have seen so far and the impact of tariffs, how much price do you think you need? Like, is this kind of a normal you know, 1-2% ish pricing environment that you are seeking in 2027? And I guess what happens if the market does not follow suit? And how do you think about the trade off between share and price into 2027 if you have to make that choice?

Alok Maskara: Sure. Nicole, this is a great question, and there is still a lot of moving pieces. So I will tell you it is more than the traditional 1-2. And that is what we will be aiming for. To the second part of the question, we do not know and we cannot speak for competition. But this is driven by just significant increase in steel significant increase in copper, significant increase in tariffs for any important component. We do not think we are uniquely positioned in the industry and facing any abnormal inflation compared to every other player. So you know, from our perspective, this is about recovering our cost.

And I believe everybody else in the industry who manufactures products that are very, very similar to us. Facing the same pressure. And would likely do their own efforts to recover those. So from our perspective, we will wait and see I cannot speak for competition. But at this stage, you know, it is very important and we feel confident about recovering that price.

Nicole DeBlase: Okay. Understood. Thank you, Alok. that is very helpful. And then just as a follow-up, the discussion around resizing capacity, focusing more on productivity, etcetera, any thoughts on the potential magnitude of that resizing? And maybe from a cost perspective, how much that could potentially impact your cost base if you are going that route starting next year.

Alok Maskara: Yeah, no, we are working through all of that, and it is many of these cases, I would rather talk to our own employees first before discussing that and public earnings calls. So they just. But there is a lot of actions that we are working through. I highlighted a few areas already, like distribution. And I think that is gonna be an area where it is sometimes about just reducing intra company freight cost, we are looking at leases on those. And then, of course, we do believe in the spirit of continuous improvement. But because we can share a lot more of that when we give you details in January for 2027 guidance.

Note that on top of that, we will continue to focus on manufacturing absorption as well as tariff mitigation as we go into next year as well.

Nicole DeBlase: Understood. Thank you both. I will pass it on.

Operator: We will move next to Christopher Snyder with Morgan Stanley. Line is open.

Analyst: Hi. Thank you for the question. I just wanted to ask again on like the mitigation efforts and some of the investment in the JV. Is there any sense on how that impacts mix from both the margin dynamic and the dollars per unit?

Alok Maskara: First of all, we are pleased with our JVs we are early stages of all the JVs. the Ariston JV with water heaters, the Samsung JV, to really drive our penetration into the ductless area. Both are doing well. As we have talked about in the past, we do not expect those to be margin dilutive and we are look. Working through that and making the appropriate investment and trade off to take that forward. It does add to our growth, The Samsung 1 does add to provide customers and consumers a different product options. And water heaters is a brand new category for us, so it is all upside.

But we do not expect it to be margin dilutive. it is gonna be similar to our overall margins. Comes down. And would it be similar from a dollar basis there, or would there be any kind of slowdown in the dollars per unit? Well, they are facing similar inflationary environment like they are also made out of metal and face a similar environment. Impact. So, no, I think even on a dollar basis, we would see the same trend that we see in the rest of the portfolio. Thank you. And then on parts and accessories, some of the investment there indicative of some of the some of the repair dynamics in the market?

Are you seeing any acceleration in repair demand there and that brings opportunity for further growth? The repair was a R&R dynamic to say that is pretty stabilized at this point. I mean, what we saw last year is no longer valid. So they are not choosing repair more than replace, I think we have reached a status quo steady state there. So we are not worried about degradation there. Our effort on parts and accessories was about our own attachment rate. You know? I mean, the timing was good in a way because, yeah, there was a short term pickup and repair.

But overall, where we are is our attachment rate we talked about in the investor day is hovering around 15%. We think it should be twice that much. So as we take that forward, that continues an opportunity. Again, only next year, we would be launching new capabilities there and are super excited about that remaining of growth engine. Just to go back to all the growth things, right? We have talked about our heat framework. Heat pump continue to be a growth opportunity. Some of the entry tier products that we talked about fit in that category. Emergency replacement for commercial, remains a growth opportunity. You have already seen strong results.

Attachment rate, as we just talked about for parts and services remains an opportunity. And the JVs help us with expanding our TAM. So from our perspective, none of that has changed What has changed is the short term price inflation dynamic that is impacting us, especially given the uncertain amount of tariffs and what we got surprised early in the year. So we just have to work through that, and we are confident that we will. Super helpful.

Analyst: Thank you again.

Operator: Since there are no further questions, this will conclude Lennox's 26 Third Quarter Earnings Call. You may disconnect your line and have a wonderful rest of your day.

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