LENNOX INTERNATIONAL INC Q3 FY2024 earnings call

• Lennox delivered a record quarter with double-digit revenue growth, operating margin over 20%, and strong free cash flow. - Core revenue grew 15%, adjusted segment margin was 20.2%, adjusted EPS increased 24% to $6.68. - Generated $452 million in operating cash flow, up 44% from last year. - Both segments had 15% revenue growth. - Made progress on manufacturing capacity, front-end redesign, digital processes, and distribution technologies. - CLO transition with John Torres retiring and Monica Brown taking over as Chief Legal Officer effective January 1, 2025. - Building Climate Solutions segment successfully integrated AES acquisition ahead of schedule. - Cash flow performance solid, with capital expenditures $40 million. - Free cash flow deployment strategy focused on dividend growth and bolt-on acquisitions. - Low GWP refrigerant transition with preparations completed, new products launched, and ongoing manufacturing cost headwinds into Q1 2025. - Strategic transformation plan with five key elements: accelerating growth, expanding margins, unified management system, investing in digital and heat pump technology, and strong culture.

Lennox's core revenue grew 15%, with adjusted segment margin expanding 90 basis points to a Q3 record of 20.2%. Both segments, HCS and BCS, achieved 15% revenue growth. Core revenue was approximately $1.5 billion. The Home Comfort Solutions segment had 15% revenue growth, 25% segment profit growth, and 170 basis point expansion in segment profit margin. The Building Climate Solutions segment had 15% revenue growth, with 6% attributed to inorganic growth from the AES acquisition. Operating cash flow was $452 million, a 44% increase from the same quarter last year, and ROIC was 47%.

• Raised full year revenue guidance to approximately 10% growth. - Raised full year earnings per share guidance to $20.75 to $21 from $19.50 to $20.25. - Raised free cash flow guidance to $575 million to $650 million. - Interest expense estimated at approximately $45 million.

• Uncertain consumer confidence posing challenges. - Trend towards more value tiered products may negatively impact mix. - Higher cost for new products creating complexities in repair versus replace dynamics. - Destocking in first half of 2025 as distributors sell through R-410A pre-buys. - Competitors may gain share as they overcome availability challenges. - Inflationary pressures for commodities and component cost. - Increases in healthcare and employee benefit costs.

Q: Tommy Moll asked about the A2L commentary, magnitude of pricing mix tailwind, and conviction in realizing it.

A: Alok Maskara said both the magnitude of the pricing mix tailwind and conviction in realizing it are as previously thought, and competitive share gain confidence is higher.

Q: Ryan Merkel asked about assumptions for 65% A2L next year, risk to upside/downside, and magnitude of pre-buy.

A: Alok Maskara said risk is balanced around 65%, with factors like pre-buy in 410A and competitors' inventory affecting the number. Michael Quenzer added pre-buy impact on Q3 was not the largest factor, with restocking and share gains being bigger.

Q: Joseph O'Dea asked about market share comments, net-net share position, and 454B pricing.

A: Alok Maskara said share gains reversed, confident in gaining and retaining share, and 454B pricing is supported by 10% plus price increases into 2025.

Q: Jeffrey Hammond asked about res and commercial unit market growth in 2025.

A: Alok Maskara said resi is flat to slightly up, commercial remains supply-constrained but industry figures show slight growth.

Q: Jeff Sprague asked about share gain dynamics and state of distribution.

A: Alok Maskara said share gains from competition stumbles, and distribution inventory at normal levels with Q1 pre-buy impact.

Q: Stephen Volkmann asked about commercial facility ramp-up and pricing for 410A.

A: Alok Maskara said commercial facility startup costs fade by mid-2025, and 410A pricing in 2025 will be higher due to demand and supply.

Q: Joe Ritchie asked about inventory levels and pricing for 410A.

A: Alok Maskara said inventory levels of 410A will carry into Q1 2025, and 410A pricing in 2025 will be higher.

Q: Julian Mitchell asked about margins and pre-buy.

A: Michael Quenzer and Alok Maskara said margins expected to expand next year, with mix benefits and investments considered.

Q: Noah Kaye asked about acquisition pipeline and ROIC.

A: Michael Quenzer and Alok Maskara said looking at bolt-on technologies in commercial, distribution, and smart products, with ROIC above cost of capital considered.

Q: Deane Dray asked about emergency replacement business and ROIC.

A: Alok Maskara said emergency replacement business requires working capital, and ROIC driven by disciplined investments. Michael Quenzer added ROIC from bolt-on acquisitions above cost of capital.

Q: Brett Linzey asked about 2025 low GWP incremental and new housing.

A: Michael Quenzer said 30% incremental mix and volume, Alok Maskara said new housing showing green shoots and share strong there.

Q: Steve Tusa asked about industry volumes, share gains sustainability, and repair versus replace.

A: Alok Maskara and Michael Quenzer said industry volumes flat to slightly up, share gains sustainable but some may be temporary, and repair versus replace impact expected in future years.

Q: Nigel Coe asked about repair versus replace and emergency replacement market share.

A: Alok Maskara said repair versus replace impact in future years, and emergency replacement market share not sized yet but significant opportunity.