Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Lennox International Inc (LII, Financial) achieved six consecutive quarters of double-digit EPS growth, demonstrating strong execution of their transformation plan.
- Core revenue grew by 8%, and adjusted segment margin expanded by 100 basis points to a record 21.9%, resulting in an 11% increase in adjusted earnings per share to $6.83.
- The company generated $184 million in operating cash flow, and their industry-leading ROIC grew to 44%.
- The joint venture with Samsung is expected to significantly enhance Lennox International Inc (LII)'s heat pump market share, leveraging Samsung's global reach and brand strength.
- Strong first-half results led to an increase in full-year EPS guidance, raising it to a range of $19.50 to $20.25.
Negative Points
- The new commercial factory in Saltillo, Mexico, is expected to cause second-half inefficiencies as it ramps up production.
- Wage inflation, new factory ramp-up costs, and investments in SG&A and distribution partially offset profit gains.
- The company anticipates temporary increases in working capital in the second half due to the ramp-up of the new factory and the transition to new low GWP products.
- Component cost inflation is expected to be up low-single digits, with anticipated increases in R410A refrigerant and commodity inflation.
- SG&A expenses are expected to increase due to inflationary pressures and investments, impacting overall profitability.
Q & A Highlights
Q: I wanted to start on the price mix contribution. It's up 3% versus the mid-single digit guide. Are you expecting price mix to improve in the second half?
A: Hey, Ryan, this is Michael. No, actually what we're expecting is the second half of the year to be similar to the first half. So I think we were low-single digits in the first half. I think our plan slightly mid-single digits in the second half. If you recall, the first quarter, we had some unfavorable mix mostly because of residential new construction in HCS business. But overall price mix should continue on similar to what we saw in Q2.
Q: Just to clarify residential, lowered it to up five. I think it was up six last quarter. But you raised the volume to low-single digits from flat. Can you just unpack that a little bit and talk about what you're expecting in the second half?
A: Yeah, let's just clean it up, some of the guide points based off the year-to-date mix that we've seen in both Q1 and Q2.
Q: Congrats on the JV. How are you thinking about the financial impact of the JV? Talked a little bit about it's really focused on heat pump or opportunity to gain some market share. How much of an uplift to your organic growth profile for the residential home comfort business do you think that represents? And any other margin or cash flow impact of the JV we should be thinking about?
A: Sure. Yeah. Thanks. Let me start by saying, it's going to impact both the home comfort solution and also the building climate solutions because obviously, we bring many splits mostly for HCS, and we bring VRF products mostly from BCS on both sides. As we looked at our long-term goals, we have always talked about that heat pump penetration is a pending opportunity for Lennox. And this essentially closed the gap between our portfolio and what the market leading portfolios were. The cash flow margins, all that from a JV contribution, it's not going to be meaningful. What's going to be meaningful is the margins we make on selling the products, the share we gain by expanding our heat pump portfolio, and the increased benefit of having a strong partner like Samsung as we develop new technology with a score climate, heat pump technology or just simply look at control, such as smart things and total integration for a home or building control. For the JV itself, the way we look at is the financials are not going to be material to our bottom-line numbers, but it's going to be the results of partnering and selling those products that we are super excited about. We went through a long process. We've been exploring this for about two years, spoke to several different potential partners, and we do believe Samsung is going to be best partner for us, given that we have -- consider ourselves the North American champion and they consider themselves and our global champion. So putting that together, we are excited about the combination.
Q: Could you maybe talk about how your orders -- trends have been progressing through the second quarter and how July is playing out so far?
A: Sure. So one of the things Michael and I try really, really hard is not to talk about weather in an earnings conference call. And I think there's a -- I have never seen any upside to talk about whether it's earnings conference call. But it does have an impact. But listen, year is progressing along as we expected, is a simple way to look at it. Yeah, there was some price mix cleanup that we did based on results year to date. But overall, the volumes are as we expected. Last year, we talked about destocking ending in the first half. It ended in Q2. We had wasted ended Q1. We think consumer demand is very stable and that's reflected in our volume guide for the year and our first half performance. So nothing really has changed. What's exciting there is the upcoming 454B refrigerant. That -- the EPA rules and the clarification that EPA rules. So just given us more confidence going forward on what it could be. But at the same time, there are quite a few uncertainties that remains in the second half, and those are around for 454 transitions? How competitions we'll do around that? Will there be a large pre-buy or not. Election years could be weird for consumer behavior, so we are watching out for all of that. So we built all of that uncertainty into our second half guide and tried to reflect that.
Q: First question for you on the home comfort solutions volume. So the outlook for the year went from flat to up low singles. Can you just tell us what your underlying assumptions are there for two step versus direct? And then on the two-step side, any context you can provide as to how the destocking ended through Q2 even if just anecdotal would be of interest. Thank you.
A: Sure, Tommy. Yeah, on the full year guide, what we're expecting on the sell through the direct side is approximately flat for the full year and down the two step up mid-single digits, like kind of blends to a low single-digit increase. As you recall, when we went into the year, we expected the direct side through our Lennox channel, the down low-single digits. That's performing a little bit better. And then the destocking as we mentioned, yeah, it definitely accelerated as we went through the quarter and June was better than the beginning of the quarter. So I was pleased to see the destocking ending.
Q: I wanted to hit on the reference to product mix and inflation. Alok, this was on your 2024 slide. I'm just talking to the drivers of some of the end markets. And I'm just curious what was behind that comment. And maybe more importantly, Alok, do you continue to view 10%-plus as the cumulative realization on the A2L product? Thanks.
A: Yeah, let me start with the 10%. Yes, the answer is simple, and it's yes. We continue to expect 10%-plus percentage pricing benefit on that. I think there's any change in the product mix there we've talked about and Michael referenced earlier were minor. It was more driven by the fact that we do see consumers continue to demand for 10 products, and we don't see the industry. We are ourselves having a significant share of 454 b sales that we have talked (technical difficulty) We talked about in Q1, are we just kind of reconfirming that. 454 b. is going to be 10%-plus pricing increase. With the majority of this year, sales are going to continue to be 410a, even more than we thought previously. And we remain very bullish about 454 b. next year, as a step change in the industry profile around margin expectations and a step change in technology. And we are also very confident that we are in a strong, strong position to execute well and give our dealers exactly
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
