LENNOX INTERNATIONAL INC Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Lennox delivered over $5 billion in revenue and over $1 billion in adjusted segment profit in 2024, with both segments achieving double-digit revenue growth.
• Successfully completed the initial phase of the self-help transformation plan, including pricing initiatives, portfolio simplification, and strategic acquisitions, which restored margins and set a strong foundation for 2024.
• Navigated the refrigerant transition effectively, met customer needs, and made strategic investments in sales and distribution channels. The new commercial factory is online and key to enhancing output and productivity.
• AES integration is ahead of schedule, exceeding the original value proposition. Maintained a disciplined M&A pipeline, with decisions not to pursue certain deals safeguarding long-term shareholder value.
• Gary Bedard, President of HCS since 2023, announced retirement; a search process has been initiated to find his successor.

Segment Performance

• Home Comfort Solutions (HCS): Fourth quarter revenue grew 25%, segment profit grew 67%, and segment profit margin expanded 550 basis points. Sales volume increased 21%, with over 50% growth in the two-step distributor channel and low double-digit growth in the one-step contractor channel. For the full year, HCS contributed to the overall strong performance.
• Building Climate Solutions (BCS): Fourth quarter revenue grew 17%. Of this growth, 3% was from inorganic contributions of the APS acquisition. Organic sales volume increased 14% during the quarter. Segment profit increased by $8 million, but margin declined due to $20 million in higher product costs related to new factory ramp-up activities and inefficiencies at the existing manufacturing facility.

Guidance

• 2025 full year core revenue projected to increase approximately 2%, but 2024 prebuy will cause year-over-year revenue headwinds in Q1 and Q4 2025.
• Expect low-single digit sales volume growth in BCS, with 4% mix growth from the introduction of new low GWP products.
• Cost assumptions: ~3% inflation is anticipated to increase costs, ~$25 million in strategic investments in areas like information systems and distribution, and $50 million in cost savings as new BCS factory ramp-up costs subside and material cost efficiencies are realized.
• Adjusted earnings per share expected to fall within the range of $22 to $23.50, and free cash flow projected to be between $650 million and $800 million.

Risks

• Tariffs on materials like steel could impact costs.
• Labor shortages and challenges in the HVAC installation field.
• Uncertainty in consumer confidence, interest rates, and mortgage rates affecting demand.
• Potential impact of pauses in IRA funding on heat pump penetration and related programs.

Question and Answer

Q: Hey, thanks. Good morning and congrats on the nice quarter. I wanted to start with the prebuy. It looks like it was a little bigger than maybe you were expecting. Can you just comment on what you saw and why that was? And then what does it mean for 1Q?

A: Hey, Ryan. Good morning. I don't think I heard the second part of the question properly. But the first part on the prebuy, listen, we are calling out $125 million in prebuy. As you can imagine, it's an estimate, you don't have 100% visibility into the number. And we know there was some cloudiness because we had temporary share gains that happened in Q4 as some of our competitors were out of product. So it's a little higher than we expected, but I would say it's within the range of where our expectations are. Michael Quenzer: And then, Ryan, on the second part of your question, the impact to Q1, really the $125 million the pull forward into Q4 from Q1. So we'll see a headwind there. And then also, you'll see that in Q4 in 2025 is the year-over-year comps won't have that as well.

Q: Hey, good morning, guys. Great year. So look, historically, you guys have tended to guide very conservatively as I look at the components of this bridge in Slide number 10. It seems like, what you're baking in for incremental margins, if I just take into account price mix and inflation is very low, like, I'm calculating something that's like low double-digits. So just help me kind of understand number one, just like where you think there might be some potential cushion in the guide and how to think about that equation between price mix and inflation?

A: Hey, Joe. I think there's some opportunity potentially that Alok just mentioned there on the volume. If interest rates go down, maybe the HCS volume could give us a little bit more that obviously would come through at 30% incrementals. But if you look at the overall guide, it does imply overall margins are approximately flat at 19.4%. The inflation assumption of 3% might come in a little less. But I think right now, it feels prudent to keep inflation up there. And then obviously, we as a group, are trying to drive as much productivity as possible. So from a cost productivity perspective, we're going to focus to drive a little bit higher if we can as well.