Refrigerant Transition

OEMs reported a strong start to 2025, with most posting earnings that exceeded expectations and made Wall Street very happy. Lennox, for instance, saw a 2% year-over-year revenue increase to $1.1 billion, driven by favorable product mix initiatives tied to its new R-454B offerings.

“The [refrigerant] transition is progressing as expected, and our R-410A inventory levels are nearly depleted,” said Michael Quenzer, CFO of Lennox International. “Sales increased by 7%, driven by positive mix, as approximately 50% of our equipment sales in the quarter were the new R-454B product.”

While Alok Maskara, CEO of Lennox International, believes that the refrigerant transition has been smooth, he did acknowledge the shortage of aftermarket R-454B. “I think all the equipment manufacturers did a good job, so there’s no shortage of equipment. Where there is a shortage is in the retail service canister for R-454B. I think that’s a transitional migratory issue, and we are taking countermeasures, as are other manufacturers. There’s enough refrigerant available in bulk situations, it’s just not available in smaller packages. I don’t think it fundamentally changes the demand profile, nor does it change anything else in the long term.”

In the short term, there may be issues obtaining R-454B cylinders, but as Maskara noted, “In a practical perspective, our units are pre-charged, so if the installation is done right and under normal circumstances, you do not need this, it’s mostly for service and repair. But it’s more about dealers getting confident and not wanting to do a rerun. I expect the industry to be normal by the time we are talking again at the end of Q2 and beginning of Q3.”

Maskara added that Lennox is not experiencing any kind of R-454B shortage for equipment production and that they are working with two suppliers to ensure they get fair and appropriate pricing for the new refrigerant. When asked about the impact of Honeywell’s 42% surcharge on R-454B, he noted, “That does not relate to us. We have a contractual price that we entered into last year, so maybe it applies to people who did not enter into a contractual price or retail canisters.”

Carrier also posted strong first-quarter 2025 results with $5.2 billion in sales -- a 4% decline from the prior year due to divestitures -- and 2% growth in organic sales. Sales in both the commercial and residential segments of Climate Solutions Americas rose by approximately 20%.

David Gitlin, chairman and CEO of Carrier Global Corp., noted that residential had a stronger start to the year than anticipated. “The regulatory mix played out well. About 75% of the mix between 454B and 410A was 454B…with about 10% higher price on the 454B than the 410A.”

When asked about the shortage of R-454B, Gitlin replied, “The short answer is we're okay. I think that most of our 454B is coming from a specific supplier. They import some of the ingredients for 454B from China, and they have talked to us about passing that along. And of course, the team is in discussions about that right now. But if we do have to get into a discussion, we don't think that will be material overall. I think the shortage that everyone's talking about was the canisters that were affecting the overall channel, and we see that resolving itself here in the second quarter.”

Trane did not touch on the shortage of R-454B, but there’s no question that the company had a great first quarter, with reported revenues up 11% to $4.7 billion. As David Regnery, chair and CEO, noted, “We are poised to achieve leading performance and deliver outstanding shareholder returns in 2025 and beyond.”

Regnery noted that about 80% of Trane’s residential sales in the first quarter were R-454B products and that residential demand was strong, with bookings up in the mid-teens and revenue growing by the high teens year-over-year. He added that 100% of what Trane is shipping right now is R-454B equipment.

“Obviously, we’re only manufacturing the 454B right now unless it’s at a component level, but again, that would be more on the repair side,” he said. “As far as the performance in the first quarter, yes, it was strong. I’m very happy. I’m proud of what that team has been able to accomplish. It’s a great start to the year. But again, it’s the first quarter. We’ll see how the rest of the year plays out. For the year, we think we’re going to be at mid-single digits, and that implies that the back half of the year is going to be at the low single-digit rate, based on the high performance that we had in the first quarter.”

Tariffs

Trane did not hesitate to discuss how tariffs could impact the price of HVAC equipment. Chris Kuehn, executive vice president and CFO of Trane, said that they expect to manage and mitigate all tariff impacts that are now in place through proactive measures, including pricing.

“We estimate the cost impact [of tariffs] in 2025 to be approximately $250 million to $275 million,” he said. “We will take surgical pricing actions to offset tariff impact dollar-for-dollar, aiming to fully mitigate these costs while minimizing the impact on our customers. Net tariff costs are included in our EPS (earnings per share) guidance for the year and are expected to have zero impact.”

Given the dynamic tariff environment, Kuehn said it was premature to build specific pricing into their revenue guidance at this stage, noting that Trane would provide updates as more information becomes available. That said, between February and April of this year, Trane has implemented price increases and/or surcharges, said Kuehn. “Think of them as if it’s a price increase, which gives us a lot of flexibility to be very surgical in how we’re thinking about a price increase. And then a surcharge could be in place, but then also easily removed as we see changes possibly happening here in the tariff environment.”

Regnery reiterated that if there are added costs due to the tariffs, it would be dollar-for-dollar. “We have to offset with price,” he said. “We’re not trying to have this be a profit center, because we think that’s a very bad long-term strategy. We want to make sure our customers know that we’re doing everything we can to make sure they’re getting the most economic value possible for the products and services that we provide.”

Gitlin stated that virtually all of Carrier’s imports from Mexico are USMCA (United States-Mexico-Canada Agreement) compliant. “For the tariffs that are in effect today, China is about 80% of our exposure,” he said. “As reflected in our guidance, we are fully mitigating our tariff exposure through supply chain and productivity actions, with the balance of about $300 million via price, which represents a little over 1% of additional pricing. In addition, given the fluidity of the current market environment, we are taking additional cost containment measures.”

Gitlin added that Carrier has done a great job addressing tariffs head-on. “As we look at the cost actions we've taken, whether with our supply chain or in our own productivity in our own factories or other actions, we've effectively mitigated all but $300 million of it. And that $300 million, we said we would mitigate through price. That is going to be a lot of price in the Americas, and the price will be a lot in residential.”

Lennox is actively pursuing longer-term tariff mitigation strategies, including production shifts to better serve U.S. and Canadian customers, said Maskara. “We are also working closely with our supply partners on tariff sharing models and leveraging more U.S.-based components to enhance flexibility within our North American network. Anything we cannot mitigate through these measures is being offset by pricing adjustments or surcharges. The majority of our manufacturing and distribution is in the United States, giving us the resilience and flexibility to win during these tariff and regulatory changes.”

However, due to the tariff-related costs, Quenzer said that Lennox now expects its total cost inflation to be 9% compared to its previous guidance of 3%. “This includes estimates for both direct tariffs and the secondary effects of tariffs on our suppliers. To mitigate tariffs, we have implemented two new price increases effective early in the second quarter, which will boost our price gains to 7%, up from the previous guidance of 1%.”

When asked if Lennox was worried that rising prices from tariffs and the refrigerant transition might lead homeowners to choose repairs over replacements, Maskara said that was not a concern. Mainly because their first price increase is already affecting homeowners, and the company has seen no change in the demand pattern.

“Keep in mind, the price the homeowner sees is our equipment price, plus the installation, plus the accessories, plus the dealer profits, plus the distributor profit,” he said. “If you put all of that together, a 5% or 10% increase in equipment does not translate to a 5% to 10% increase for the homeowners. In the past, sometimes it was higher than the equipment price increase, because of the significant labor shortage and all the consolidation of the dealer base. In today’s tariff environment, there’s no reason to markup labor and installation, because those do not get impacted by the tariff. So net net, I don’t think there’s going to be a significant impact on the homeowner.”

That said, if consumer confidence goes much lower, homeowners could be looking to save money and opt for repairing over replacing equipment, which is something Lennox watches very closely, said Maskara. “And so far, year to date, we have not seen any signs of that.