Alok Maskara: Sure. I mean, historically, these transitions had a lot of prebuy from the independent channel. But because of the confusing EPA rulings that came out in sort of November, December, I think the channel is — just a little concern about landing up with obsolete products. And since they see the manufacturers being pretty prepared, they may not feel the need higher interest rate works in that environment as well. And the overall given how much inventory people were holding because of the CEO transition just 2 years ago because of the COVID disruption a year ago. Some of the distributors are just working with us and saying, why don’t you manage that for us? Make sure your lead times are low, and I can get it quickly.
I may not want to spend a warehousing space and the cash to build up. Now but listen, if you’re wrong, we will have upside in ’24 and downside in ’25. I mean over a 2-year period, it normalizes anyway. So we will be prepared if people decide to have a prebuy, but based on as we were looking at it, we just said, let’s not take any of that in.
Deane Dray : And then second question, just on the longer-term targets, the free cash flow at 90% seems like you are under promising there because this is not a capital-intensive business. You should be by — from our perspective, closer to 100. And I know you’ve had a big CapEx push over the near term, but are you baking in more capacity expansion in that free cash flow conversion, but it just seems light versus what your potential is.
Alok Maskara: That slide went through so many changes over the past 48 hours. We tried to give a range. We tried to — but listen, if you’re starting the year and you got $175 million of CapEx, you’re not going to reach 100 in a 3-year period, right? I mean, just where we are. But in the long term, I think we’ll get to 100 at some investments.
Joe Reitmeier: The other main driver is as we grow revenue, you’re going to have net working capital growth with that revenue. CapEx to be closer to depreciation by 2025 and 2026. So it’s mostly related to just growing working capital with the revenue growth.
Deane Dray : What’s the working capital — working capital sales target associated with that 90%?
Joe Reitmeier: Upper teens.
Alok Maskara: Yes, 15% to 20%, like it’s higher on our direct model, lower on the indirect side, probably in the range of…
Deane Dray : Upper teens is fine.
Alok Maskara: Yes, it below 20 overall. But listen, 1 thing is our cash flow, we don’t do any adjustments, right? I mean this is our — the checkbook balances.
Operator: And we’ll take our next question from Ryan Merkel with William Blair.
Ryan Merkel : I had 2 questions. First, on the fourth quarter, in terms of weather, how big of an impact was the mild winter? And did you see any lift with the cold snap in January? And then my second question is just on the cadence of commercial margins. It sounds like it might be up slightly year-over-year. Is the first half sort of down a little and the second half is up a little bit? Just any help.
Alok Maskara: Sure. I’ll let Michael answer the second one, and then I’ll come back to the first one. So Michael, why don’t you go ahead.
Michael Quenzer : Yes. So on the commercial margins, yes, we’ll see a little bit of a headwind, though, on the factory ramp up in the first half, but we’ll get the benefit of the mix and a little bit of volume. That should kind of neutralize each other. So overall, margins should be up in commercial, but I think they’ll be kind of flattish throughout the year with those 2 elements adjusting against each other.
Alok Maskara: And I think to the first question on weather. I learned early in my career, Ryan, that never ever talk about weather when you have a challenging number set to be delivered. But based on like where we are, yes, Q4, we had some of the kind of the warmest winter, and that did negatively impact our daily order rates and we track the same things you guys would track on average heating days and cooling days. And yes, Q1 with the cold streak, we have had a good start based on, as you would expect on the weather, but we don’t know what tomorrow looks like or February looks like, but both your statements are correct, Ryan.
Operator: And we’ll take our next question from Tim Wojs with Baird.
Tim Wojs : Thanks for the entry here. Joe, congratulations and it’s been good working with you. Just 2 quick ones for me. First, as you look at ‘25, just given the transition kind of changing from – I can’t remember, just EPA or DOA and – or DOE, allowing the sell-through. Would you expect to still sell through a fair amount of R410A product next year through your own distribution? And then just a second question on the kind of longer-term mix benefits from A2L, I think, Alok, you said 10% to 15%. Is that a change from what you said before? Or is it just kind of some rounding?
A –Alok Maskara: No. I think the second one for us, it’s just kind of rounding because – we give longer numbers, we’ll get some benefit this year as well. So I’ll try to portray what 2025 looks like, right? So that’s just rounding. Maybe I should just stop giving ranges and pick a center line like 15 here. Tim, on the first one, there’s still some uncertainties and EPA is not coming up with the final rule, they have indicated to rules. Listen, our preference would be not to make 410A products. But based on currently the way it’s written; we’ll probably be forced to make some 410A products next year. And that would be then impacting the 10% to 15% number because there will be some 410A products, they’re going through the factories as people can repair outdoor units using new 410A products.
