Operator: We’ll take our next question from Joe O’Dea with Wells Fargo.
Joe O’Dea : On the kind of commercial mix, can you just talk to how — what percentage of the mix was emergency replacement in 2023 and how you’re thinking about that stepping up in 2024. I think normalized as maybe something like 30%, but I think still on sort of a migration toward normal.
Alok Maskara: Yes. So listen, we were close to 0. I think we hit double digit in ’23 in terms of trying to get to emergency replacement. Barely, I would say, high single digit, double digits in 2023, and that includes both our direct and going to through our distribution partners. And we still think there’s a lot of room ahead. We probably won’t move that needle until Saltillo comes in production in the second half of this year. So expect us to hover in high single digits, low double digits until Saltillo comes online.
Joe O’Dea : Got it. And then what are your thoughts on when we think about the residential side and the direct demand sounds like trended better than anticipated in ’23 indirect sort of worse. And so how do you align those 2 things? Is your assessment that channel inventory is just thinner than historical averages? And why would direct trend better and indirect destock headwinds trend worse?
Alok Maskara: Listen, as we talk to our distribution partners, and we’re very close to them. It’s not the channel inventory had more talk than we thought. And yes, with the EPA ruling and then everything, the channel essentially flows in Q4, especially they’re worried that for a while remember the fear was that you would not be able to sell 410A products, unless it was replacement starting December 2024. So I think that ruling created just a freeze mentality in our channel, which I’m glad EPA issued some clarification and coming up with final ruling. But the direct business holding out better than we thought was actually a positive. I mean, which means the consumer is being resilient, and we were pleased with that resiliency.
Now being the CEO of Lennox, I also think we gained share, so that’s something we will watch out for as numbers normalize. It’s hard to figure out share dynamics right now given things are unclear on how much of it is us winning share and how much is the fact that we are going direct, but I mean, from numbers that we see, I mean, we gain lots of shares. We just need to figure out how much of that is transitionary versus rail.
Joe Reitmeier: And I’ll just add on the direct side, we executed very well on the minimum SEER transition.
Operator: We’ll take our next question from Gautam Khanna with TD Cowen.
Gautam Khanna : I wanted to ask about the IRA and how well defined it is in the states in terms of the tax rebate.
Alok Maskara: IRA has become such a topic for the past 12 months with very little to show for you kind of stopped banking on it and one aspect of IRA, which was through the SEER tax credits that’s kind of flowing through in some cases, some states are renewing it on their own. I don’t think any of us saw the big impact we were expecting from IRA, but we’re starting to see drips and dribblers. If the government really gets their act together and figure out this whole income qualification criteria to get the IRA piece, which there’s no practical way to do it for a dealer right now, then I do think there’s upside left, but we’re not counting on it right now, especially given the election year, I don’t know if the government will put this as a priority to figure it out with the state governments and dealers on how to make that work. But the rest of it is kind of slowly dripping in.
Gautam Khanna : Got you. And then given the confusion, I guess, the phase-in of the new refrigerant resi systems in ’25, what are your updated expectations for pricing over the next 2 years, average pricing in the past, we’ve talked about something like 15% off of the ’23 levels. Do you think that’s still valid or do you think it’s lower now?
Alok Maskara: Yes, that’s a valid.
Joe Reitmeier: No, it’s still valid. I think that’s still just working through the entire process, and that was the comment earlier as well maybe getting some of that this year, especially with the 410A numbers that we talked about this year. But at that number over 2 years still totally valid.
Gautam Khanna : Okay. And given the potential slowdown in unitary that you mentioned and what we’re seeing in resi. Have you seen any evidence anywhere in the industry of intensified price competition? Or is everyone still just getting — pushing through price and getting that.
Alok Maskara: It’s more the latter on an overall basis. But listen, if I speak to 1 salesperson in 1 corner, they will convince me that there’s an intense price competition in their own territory, and that’s why they’re not meeting their numbers. But if you ignore those individual data points and you look at a broader trend, right now, the price seems to be sticking across the board. And it’s no accident. I mean, the costs are going up too. I mean if you look at the overall margins, margins expanding nowhere close to what the pricing number we talk about. So some of it is just recovering the cost that we went through and are continuing to have to burden as we look at higher SEER products, new A2L refrigerants, better efficiency compressors and the labor and material inflation. So I don’t see that going backwards because manufacturers have to offset the extra costs we are incurring.
Gautam Khanna : And one last one for Michael. I just — maybe could you further quantify the new facility costs in Q1 and Q2? And just — like what are you specifically unabsorbed cost, if you will? What are you implying on that.
