LENNOX INTERNATIONAL INC Q1 FY2025 earnings call

Key Sections

• Team and Customer Focus: Recognized team effort and customer loyalty in navigating trade uncertainties.
• Financials Overview: Revenue grew 2%, segment margin 14.5% (down 140 basis points), operating cash usage $36 million, adjusted EPS $3.37.
• Product Transitions: Steady transition to new low GWP products in both segments. HCS had minimal destocking in Q1 but expects some in Q2. BCS had slow start due to destocking and manufacturing transition inefficiencies.
• Tariff Impact: ~90% of cost structure in North America, ~10% directly impacted by tariffs. Actively pursuing tariff mitigation strategies like production shifts and US-based components.
• Capital Deployment: Operating cash outflow $36 million, capital expenditures moderated, focus on digital systems and distribution efficiency, strong balance sheet with net debt to adjusted EBITDA 0.8 times

Home Comfort Solutions (HCS)

• Delivered solid quarter, sales increased by 7% driven by positive mix (approx 50% of equipment sales were new R-454B product). Sales volumes flat to prior year. Operating margins declined due to tariff and commodity-related cost inflation. Revenue contribution: Not explicitly stated as a percentage but was a key segment.

Building Climate Solutions (BCS)

• Experienced 6% decline in revenue, sales volumes down 9% due to destocking and transition delays. Segment profit decreased by $25 million due to tariff-related cost headwinds, factory inefficiencies, and increased SG&A for emergency replacement. Revenue contribution: Not explicitly stated as a percentage but was a key segment

Guidance Points

• Full year adjusted EPS range revised to $22.25 to $23.50.
• Revenue growth expected at 2%.
• Cost inflation revised from 3% to 9% (annualized $240 million additional cost).
• Two price increases effective early in Q2, boosting price gains to 7% from 1%.
• Volume expectations revised: sales volumes excluding 2024 prebuy destocking now expected to decrease mid-single digits vs prior flat/up expectations

Risks

• Tariff Impacts: Indirect and direct tariff impacts on cost structure, with ~10% of spend directly affected.
• Macroeconomic Uncertainties: Potential volume softness due to inflation, pricing, and possible macro slowdown.
• Refrigerant Supply Chain: Shortages in retail service canisters for R-454B, though not affecting equipment demand fundamentally
• Manufacturing Inefficiencies: Short-term inefficiencies in BCS due to factory transitions and new product ramp-up

Q: Hey, good morning, everyone, and good job with the script, given all the moving pieces. I wanted to start with the commercial. Just talk about the order delays that you saw. Why was that? And then more importantly, are we past that issue? It sounds like orders have improved. Is that the right read?

A: Yeah. I think, Ryan, that's the right read. We had a very slow start, and we talked about destocking in commercial, but it happened sooner than we had anticipated. And essentially for the first few weeks of the quarter, everybody was waiting for the new products to get established, get their tools upgraded and people were just finishing up the jobs with 410A. But order rates improved sequentially. Our productivity also took a hit as changing these lines from 410 to 454B while moving some lines from Stuttgart to Saltillo, all of that, we were able to do because of the slowdown or pause in some of the sales. But yes, it's largely behind us. I would expect some inefficiencies to continue in Q2 but then we start lapping the startup costs that we were having last year. So I would think of it as more of a onetime event with some inefficiencies carrying into Q2.

Q: Good morning, and thank you for taking my questions. A couple of follow-ups for me on some of the same themes. First, on pricing, Alok, you -- or perhaps it was Michael in the prepared remarks, mentioned there were two increases effective early in the second quarter. What additional detail can you give us there? And did I correctly hear you say, Alok, one is more meant to offset tariffs? And one is more meant to offset volume declines? Or maybe I misunderstood there?

A: Yeah. So let me just clarify. So yes, we have done two price increase. I think the first one which is already in effect was done to offset changes in pricing for aluminum, copper. And I would call it that was to offset indirect impact of tariffs because tariffs was still a moving bogey at that stage. So that's in effect, and we have seen a good stick rate I think of mid-single-digits across both the segments. Second one which we announced last week is to offset the direct impact of tariffs, and that's another mid-single-digit price increase. Change is a little bit based on the product types but again, mid-single-digit overall impact. None of them, of course, is for volume softness because our customers are -- continue to buy, and we have to look at this purely to offset the cost impact of that. So two price increases, both mid-single-digits, and so far, pleased with the stick rate. And it's consistent with what we have seen other industries and the competition do as well. So from our perspective, this is all about just staying neutral and maintaining our margin profile.