Q2 2023 Lennox International Inc Earnings Call
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Welcome to the Lennox second quarter 2023 earnings Conference call. All lines are currently in a listen only mode and there will be a question and answer session. At the end of the presentation. You may enter the queue to ask a question by pressing star one on your phone to exit the Q Press Star two.
As a reminder, this call is being recorded and I would now like to turn the conference over to Chelsea portion from Linux Investor Relations team Chelsea. Please go ahead.
Thank you Ashley good morning, everyone. We are excited to have you here with US. This morning, joining me today are CEO of local Mascara CFO , Joe Reitmeier N V P Finance Michael Quinn.
Hello, well discuss order highlights and Joe will go into depth on the company's quarterly financial results and our updated guidance for fiscal 2023. After that we will have a Q&A session with a low Joe and Michael.
Just wanted to a reminder, that during today's call, we will be making certain forward looking statements, which are subject to numerous risks and uncertainties as outlined on this page.
We may also refer to certain non-GAAP financial measures that management considers to be relevant indicators of underlying business performance. Please refer to our SEC filings available on our website for additional details, including a reconciliation of all GAAP and non-GAAP measures.
The earnings release, today's presentation slides and the webcast archive link for today's call are available on our new Investor Relations website at Www Dot Investor Dot one dot Com now, let me turn over the call to our CEO .
Thank you Chelsea.
Good morning, everyone.
I am delighted to share our impressive results from the recent quarter ending on June 30th.
During which we delivered record revenues.
Good profit record EPS record margins and record cash flow.
These results demonstrate the power of our focused growth strategy.
The progress of our commercial turnaround plan.
I'm grateful to our dealers and customers.
Their continued loyalty towards our products and services as we remain committed to further improving our service levels.
Enhancing their customer experience.
I'm also thankful for the dedication and hard work of my protein Tauzin Lennox colleagues, whose relentless efforts have contributed to our outstanding performance this quarter.
This successful quarter demonstrates the power of our laser focused strategy.
Which builds on our existing strong customer relationships advanced products taxol, and our unique distribution network.
These factors will continue to fuel our share gain and margin expansion for the foreseeable future.
Now I want to discuss some key highlights of the quarter on slide three.
Bush.
Core revenues grew 3% and our adjusted segment margin expanded 320 basis points to 29%, resulting in our adjusted earnings per share increasing 22% to $6 at 15 cents.
Additionally, our operating cash flow increased nearly 100% to $196 million.
Second we are extremely proud of our commercial team's execution.
Our profitable growth strategy.
Both revenue and profits for the commercial segment hit a record this quarter.
Driven by favorable price mix and improved production output from our Stuttgart manufacturing location.
Sure.
Residential end markets were challenging which resulted in our residential segment delivering lower in revenue margins and profits.
Margins were also impacted by lower factory output and absorption as we normalize our own inventory levels.
The CEO transition.
We remain cautiously optimistic about the second half as we believe that the industry's inventory right sizing is decelerating.
In addition, our recent price increase will enable us to deliver improved margin performance during the balance of the year.
Fourth and finally on this page we are pleased to share the revised fiscal guidance for this year as well.
We anticipate.
Higher revenues higher earnings per share and higher operating cash flow for the full year.
Julian to review the revised guidance in greater depth later in the call.
Now please turn to slide four for our view on the current business conditions impacting the industry.
While the residential end market, we experienced higher than expected distributor destocking and a cooler start to the summer selling season.
We are now anticipating unit volumes for the full year to decline by high single digits.
His prior expectation of a mid single digit decline.
Looking at the second half, we expect the impact of distributor destocking to diminish.
And we have started to see an uptick in our replacement sales consistent with higher simple temperatures.
In commercial we know.
Now anticipate sales to be up low double digits for the full year.
Of course, it prior expectations of high single digits to low double digit sales increase.
The order backlog remains strong.
Although delivery lead times remain extended.
We have 50% lower than last year and in line with the industry.
Regarding price versus inflation.
We are pleased to report that the industry pricing remains disciplined and our own media price increase has been broadly successful.
Okay.
Our outlook on both components and commodity cost inflation remains stable and unchanged.
And we expect the second half of the year to deliver a positive price versus inflation spread.
Ultimately our improved service levels and increased commercial production gives us confidence that we are well positioned to gain share in the second half of this year.
We continue to invest SG&A dollars.
Toward improving our go to market processes.
While deploying incremental frontline resources to win over more dealers and more key accounts.
We believe that Linux outperformed the industry in successfully launching the product portfolio to meet the new minimum efficiency standards.
Gaining further loyalty from customers.
And our dealers.
During future regulatory transitions, including the upcoming LOE GWB refrigerant requirements on January one 2025.
<unk> aims to deliver similar outperformance and capture additional share.
Please turn to slide five for more details regarding ongoing activities related to the upcoming refrigerant transition.
Okay.
We are pleased to announce that Linux will transition to our $4 54, B from our 14 eight ephedrine to meet the Epa's requirement.
January 1st 2025.
There are $4 54 be choice was driven by our commitment to provide the best option for our valued customers and the environment.
Compared to the existing 410, eight refrigerant R 454, b reduces greenhouse gas emissions.
And is approximately 80% less global warming potential.
Lennox has demonstrated a solid track record.
Successfully navigating regulatory changes and.
This will be no exception.
We have completed most product redesign and are now in the testing phase for this transition.
The redesign includes updated compressors and other components.
Refrigerant compatibility and high efficiency performance.
To address safety requirements for the new each word refrigerate, we will have additional safeguards on all our products that use this refrigeration.
These safeguards may include sensors controls.
In algorithms, which will mitigate any leaks, if and when they occur.
50 of all our products remains our highest priority and our redesign will meet or exceed applicable safety standards.
As you know.
<unk> has a structural advantage primarily selling direct to dealers.
This enabled our team to deliver advanced training to delivers and equip them with accurate information to share with the end consumers.
This helps us and our dealers to Britain during the regulatory transition, while addressing all the safety requirements or manufacturing distribution and installation.
Throughout this transition we do not expect a significant inventory pre build as the transition to our $4 54, b would likely happen faster.
Fair to similar refrigerant transitions in the past.
We intend to deliver a safe seamless transition supported by appropriate inventory levels.
By maintaining strong relationships and timely communications with our suppliers, we will avoid supply chain disruptions.
While we are still reviewing this transitions financial impact, we expect it to be neutral or accretive to our margins.
We are confident that the increase in the product cost will be offset by price.
Overall, we anticipate that once again, we will outperform the industry and garner additional loyalty from our dealers and customers.
During this refrigerant transition.
Now, let me hand, the call over to Joel who will take us through the details of our Q2 financial performance. Thank.
Thank you good morning, everyone. Please turn to slide six.
So Luke mentioned earlier, the company posted strong revenue and earnings growth.
Core revenue, which excludes our European operations was a record 1.34 billion up 3% compared to prior year as price and mix benefits more than offset residential sales volume declines.
Total adjusted segment profit increased $50 million or 22% versus prior year.
Price and mix increases increased profit by $106 million and were partially offset with $43 million from lower volume and $13 million for inflationary effects and investments in distribution and SG&A.
Total adjusted segment margin was 29% up 320 basis points versus prior year.
For the quarter.
Corporate expenses were $25 million, a decline of $2 million as we continue to tightly control corporate spending.
The second quarter, not only achieved record levels of revenue and segment profit, but also marked record earnings per share with GAAP earnings per share rising, 23% to $6.10 and adjusted earnings per share growing by 22% to $6.15.
A record.
Our second quarter tax rate was 17, 6%.
And diluted shares outstanding were $35 6 million compared to $35 7 million in the prior year quarter.
Now I'll turn to slide seven.
As we saw in the first quarter industry wide distributor Destocking continued in the second quarter and the summer season began with cooler temperatures, resulting in a 12% volume decline.
The volume decline was partially offset with 2% favorable price and 6% favorable mix.
Our direct to dealer sales, which are around 75% of our segment revenues experienced a revenue increase in the low single digits.
The remaining 25% of our retro revenue, which goes through distributors was down approximately 20%.
Residential segment profit fell 6% to $203 million and segment margin dipped 50 basis points to 21, 6% driven primarily by lower volume inflation effects in selling and distribution investments.
The headwinds were partially offset with price increases and favorable mix, partially driven by the new minimum efficiency standards.
Turning to slide eight and our commercial business that delivered another quarter of exceptional results.
Revenue was $408 million in the quarter up 24%.
Combined price and mix were up 22% and volume was up 4%.
Commercial segment profit was $103 million.
150% and segment margin more than doubled to 25, 3%.
Price and mix had an outsized impact in the quarter delivering $66 million.
And the total $62 million of the total $62 million of the profit increase.
Last year, we provide guidance on a multi your profit.
Profit opportunity of $100 million and I'm delighted to share that our trailing 12 months segment profit has already surged by $120 million compared to the same period last year.
Our rooftop production output continues to increase and we are maintaining a robust commercial backlog, while steadily improving delivery lead times, which now aligned with the industry.
Moving to cash flow performance and our debt to EBITDA starting on slide nine.
Operating cash flow for the quarter was $196 million compared to $97 million in the prior year quarter.
Capital expenditures were $49 million for the quarter and increased $28 million compared to the prior year.
Our capital deployment priorities were made consistent supporting organic growth investments like our new commercial factory in Mexico.
Driving industry, leading innovation and exploring potential bolt on acquisitions.
In the quarter the company paid $38 million in dividends totaled.
Total debt was approximately $1 6 billion at the end of the quarter and our debt to EBITDA ratio was 1.9 cap.
Cash cash equivalents and short term investments were $58 $6 million at the end of the quarter.
Turning to slide 10, let's review, our 2023 full year guidance.
As a result of our strong first half performance, we are increasing our full year outlook.
We expect core revenue to be up between 2% and 4% for the year and earnings per share of $15 50 per share to $16 per share.
We are increasing our free cash flow target to a range of 300 million to $350 million.
Our guidance for capital expenditures remains consistent with our prior guide of $250 million.
As a reminder that includes investment in a second commercial factory and investments related to the refrigerant transition to take effect in 2025.
Price benefit is now expected to be $250 million and we now expect net material costs to be at 25 million dollar headwind in 2023.
The material cost headwind is driven by component cost inflation of $90 million.
Net of $30 million in savings from cost reduction initiatives, along with a 35 million dollar commodity cost benefit.
Our new target for corporate expenses has a $95 million attributable to higher incentive compensation expenses.
We will continue to manage SG&A expenses tightly while simultaneously, making essential investments in the business to support growth initiatives advance, our innovative products and solutions and enhance productivity.
And finally, we still expect the weighted average diluted share count for the full year to be between 35 and 36 million shares.
With that let's turn to slide 11, and I'll turn it back over to Logan.
Joe.
In addition to solid short term results.
We are also making significant progress towards transforming the company.
Longer term shareholder value expansion.
Last quarter, we shared the key initiatives that we have a clear path towards our 2026 financial targets.
Today, we would like to share three transformation phases that would clarify the execution timeframe of those initiatives.
Collectively these initiatives will deliver on the 2026 targets and set a plan out for even longer term value creation.
We are currently in the third phase of the flat.
<unk> delivers execution consistency to our customers and shareholders.
We have already demonstrated success in our commercial recovery and portfolio simplification initiatives.
Our pricing excellence initiatives will drive favorable margins through improved price setting getting and netting.
We are strengthening our core foundation by enhancing talent and reinforcing culture with an emphasis on accountability.
This stronger foundation will serve as a springboard for accelerated growth in 2025 and beyond.
Looking into 2025 Linux is prepared for growth acceleration in several areas.
Our up to date at <unk>.
Go to market sales strategy will increase our growth capacity and grow our core dealer base with a renewed focus on premium margin products.
As we highlighted earlier.
Anticipate.
Accelerated share gain during the upcoming refrigerant change.
Our technology advantage in core club made heat pump will enable additional share gain.
<unk> ongoing industry electrification.
While we remain committed to delivering our 2026 financial targets. We also recognized the opportunities to continue expanding shareholder value even beyond 2026.
We will build upon our structural competitive advantages with an expanded distribution network to increase our north American coverage.
We will also capitalize on this expanded distribution network to expand our share of wallet through higher commercial service penetration higher attachment rates for box supplies and adjacent products used by HVAC dealers.
In summary, we are committed to our 2026 fiscal targets.
Also have a clear line of sight to strategic imperatives that will continue creating differentiated shareholder value.
Now.
Please turn to slide 12.
I would like to recap why I believe that lead access structural competitive advantage is.
Is poised to deliver long term differentiated shareholder value.
Let me highlight the five pillars of our structural advantage.
First.
Our direct to dealer model uniquely positions us to deliver accelerated growth.
To capture this we will enhance our sales go to market effectiveness.
<unk> elevate the customer experience and make necessary investments in growth capacity to meet market demand.
Second.
Because we own our own primary distribution channel, we can deliver sustainable and resilient higher margins by leveraging scale and technology to reduce cost and increase the efficiency of our distribution network.
Third.
Our balanced scorecard based operating system.
We will source supply chain.
And lean digital processes deliver execution consistency throughout our operations.
The fourth pillar is our advanced technology portfolio that is perfectly suited to serve the north American heating and cooling industry with environmentally sustainable innovative solutions.
Finally.
We have high performance talent and culture that is nurtured by our core values and recently launched guiding behaviors.
We are continuously engaged in talent development and succession planning.
While diligently ensuring that our compensation structure is closely aligned to shareholder value creation.
I would like to close by reaffirming my gratitude to our employees and our customers.
We are proud of our accomplishments in the first half of this year.
And continue to believe that our best days are ahead of us.
Thank you.
Sure, Michael and I will be happy to take your questions now.
Lastly, let's go to Q&A.
Certainly at this time, if you would like to ask a question. Please press star one on your Touchtone phone you may withdraw your question at any time by pressing star to once again that is star and one we will take our first question from Jeff Hammond with Keybanc. Please go ahead.
Hey, good morning, everyone.
Hey, Jeff Good morning, Hey, just.
Just on commercial I mean, the margins were just exceptional so just wanted to understand you know margin sustainability any aberrations in the quarter.
Maybe just speak to the.
The backlog and how much your lead times are improving versus peak and just the level of reduction.
Yeah.
Contributed to the quarter.
Yeah from a sustainability perspective first the backlog remains resilient, it's down a little bit mostly because of the lead times are improving margins within the backlog remains strong reflective of the margins. We saw in Q2. So pricing mix is is solid in that business.
Again, we continue to see output coming out of the factor, which is a good sign for volume growth to continue.
Yes, I think the one thing Youll see Jeff you know for the quarter price and mixed propped up the quarter back half of the year, you should see volume even more.
The commercial segment. So we're excited about the future there once again I think we've achieved getting this business back to the trajectory that it was once on and are excited about our ability to now demonstrate.
Our trajectory of getting into our target margins by 2026.
Okay, Great and then.
And Rajiv anything more than really whether that's informing.
The the lower trajectory, there and just maybe speak to how your destock.
Destocking is going for your company owned.
Stores are thanks.
Sure. This is a look yeah listen Andre I don't.
I want to talk just about weather, but we all know Q2 software.
The distributor Destocking was also more pronounced than we had expected.
But at the end.
Took our volume.
Guide down and talking about high single digits. That's also to just reflect our learning and six months of the year, but have you seen notice we kept our revenue. This aim.
From my perspective, our own inventory Destocking is going fine.
We kicked off another six to nine months to bring it down to more normal levels and that's because internally. If you are just more cautious that don't want to leave.
A lot of people just to turn around and try and hire them, which we know about the struggle in the past.
From what we hear from the distributors.
Most of them expect destocking to be over by Q3, you did a little bit that bleeds into Q4.
To be seasonal products like furnaces, and things that don't sell well in Q3, so that view hasn't changed for us. So overall in dressy its slightly worse than we had talked about last time, but within the overall guide range. We think it's similar outlook to what we previously disclosed.
Okay I appreciate the color.
Yes.
Thank you we'll take our next question from Tommy Moll with Stephens Inc. Please go ahead.
Good morning, and thanks for taking my questions.
Okay.
I wanted to follow up with one more on the resi volume trends and outlook are you able to share the volume trends in the quarter for direct to dealer versus Allied and then you've talked on several occasions about the distributor.
Stocking, which I would think it's more an allied driven comment but is there anything on a sell through basis other than like you said look the cooler weather in the second quarter.
That's changed in terms of your outlook. Thank you.
Yeah, So clearly allied and ADP, which makes up our indirect channel they had significant decline.
Sure.
Core Linux business was kind of.
Flattish, maybe slightly down in terms of unit so.
That gives us a lot of confidence that the industry is holding quite well.
And all the current softness is mostly driven by just the distributor Destocking now you've got to ignore things like weather because June was a little colder July is going to be a little bit harder, but that just get washes out for the full year Tommy.
But net net I think overall industry is holding up well and the current impacted almost all driven by channel Destocking.
Thank you that's helpful.
I also wanted to follow up on a theme you highlighted earlier, our Luke just on the accountability.
And growth culture that you really want to drive can you just bring us up a little bit more on what that means and what some of the initiatives are.
Sure.
<unk> has a great culture has always had a great culture.
Seven years.
Thanks to look I appreciate it and I will turn it back.
Thank you we will take our next question from quantum corner with T. D. Cohen. Please go ahead.
Hey, Thanks in great numbers guys.
Thanksgiving morning Gotcha.
I wanted to ask about that refrigerant change next year and when you expect the.
Mixed to transition to that.
To that new refrigerant.
What are the pricing implications.
Of that change you know when when do you start to see the product transition into the channel and.
Is it.
We get another lift like we did this year with this year transition in terms of average selling price and the like.
He got up and this is Michael yet so the transition really won't happen until pretty much January but you will start to see January 2025, some of that price mixed dynamic where it will lift up the price more than offset the costs, but really that'll be more of a 2025 impact 2024 will be preparing for that three inventory.
Preparations and transitioning and preparing the dealer network, but really no financial impact in 2025 or 2024.
Okay, and just a quick follow up on the commercial side, where are you with respect to the emergency replacement market have you kind of re entered it do you have the capacity.
To do that yeah, no I think we're back to Ya you got from the way I would characterize that right now we're still focused on the plan replacement and National accounts segment of of the business you know early innings and Reengaging, an emergency replacement as our factory confused increase output.
By the end of the year will be more fully engaged in that but it's early innings right now and that remains.
A significant upside opportunity force going forward.
Thank you very much I'll turn it back to you guys.
[noise], thanks about them.
Thank you we will take our next question from Nicole the place with Deutsche Bank. Please go ahead.
Yeah. Thanks, good morning eyes.
Good morning.
And suggest maybe on the revised full your guidance. So I think you're kind of implying that sub 50 per cent of earnings going to come in the second half now and you know typically that's more like 55 per cent in the second half. So just trying to understand like the dynamics between potential conservatism in the guidance or something that we should be factoring in from.
What happens is you have.
Yeah, I think you know once again, Nicole we've been accused of being conservative in the past and I think you know even though we've had a strong first half there still remain some uncertainty around the economy and you know certain residential and market you know whether you know it is certainly cooperating now tempered second quarter results a little bit you saw that in our commentary about our.
Okay Ah residential segment, but going forward you know once again I think we probably have upside on the number but once you get you know we're gonna be cautiously optimistic as we move forward.
Got it that's clear thanks, Joe and then with respect to the <unk>. So I guess you know normally margins are kind of flattish sequentially between two and three Q from a seasonal perspective do you guys see opportunity to improve the emergent as we move into the third quarter because of some of those specific headwinds that you cut out on the call related.
<unk>.
Nicole This is a lock on the rescue margins and I was disappointed on where the margins turned out to be so while we understand a seasonal trend and I don't want to pick up like you know a lot of upside in the martyr.
From my perspective margins have a lot more room for the upside if you think about just the things we talked about we need to get bored manufactured margin and distribute a margin.
Who have margin performance, that's much much higher than where we are today.
So I think there's a lot of room are pricing excellent initiative.
Only starts in Q3 from delivering results perspective is gonna have benefit.
Right now the factories, a building less than via cell. So there's a clear negative absorption and back which is going to last through the year. So with the magenta going up in the second half and then I think simple continue in 2024 as well.
Thanks, a lot I'll pass it on.
And we will take our next question from Brian Michael with William Blair. Please go ahead.
Hey, good morning, Thanks for taking the question I wanted to follow up on the commercial margin. Joe You said it was price mix I think that's due to the corner. It seems like the second half of guidance is more like EBIT margin and a 15 16 range. So you can just help us bridge kind of two Q to the second half, but what's changing.
So we don't get real is that gonna have guns, but implied in that there's still some conservativeness, but would you really saw on the first half was a lot of carryover price benefits that we started to get in the second half last year. So you will see some more price benefit and commercial in the first half than the second half, but with that said are are are backlogs still has.
Solid margins and they should.
Reflect that wasted the balance of the year.
Okay that makes sense.
And I had a question on <unk> just the second half sales it seems to imply maybe down one and it seems like what are the big drivers as a destock the celebrating and a bit more price is there anything else.
I think those are the two right ones Ryan as they can.
These talking that cause most of the decline.
Obviously July where there has been a tailwind for us as we move forward.
So I think those would be the two things I would call out.
Got it alright, thanks I appreciate it.
And we will take our next question from Josh Tucker went skiing with Morgan Stanley . Please go ahead.
Hi, good morning, guys pornographic.
So.
One thing I want to follow up on this and we talked about commercial margins a little bit obviously, you know big turn versus where we were a year ago, Oh woke how much of what you're seeing today or what you're seeing this year is sort of a pull forward of you know maybe kind of this three year discussion that you originally laid out.
Last year.
You just had a plan by 12.
12, 18 months is it more of the price cost stuff, which maybe normalizes, maybe walk us through that journey and you know how we should think about linear progression from here.
Sure you know last year about this time before at I think I'd Ryan's conference in Chicago, and we talked about $100 million is Josiah it'd be about $220 million. What happened is the price cost turned out to be a better.
Better addressed as we expected and that's because the team did a really good job of getting the cost benefits getting the right kind of negotiations.
The pricing some of the <unk> the.
The upside continues from a lot of other factors such as manufacturing we are still below historical levels, which we talked about in terms of but I think a factory is still has a lot more room for productivity.
I still feel there's a lot more opportunity for us as Joe mentioned earlier on getting into things like emergency replacement barely scratching the surface and remember we have a second factory that you're spending money on right now with no outward.
So net net.
It's not as we can to pull forward I would say, it's kind of things that just been better than we have communicated now clearly when we promise three years $400 million on external basis.
Plan called for half of that and I'll be a six months I heard of it.
To put that hundred million dollars behind us.
I'd be making a new commitment, but we'll talk about a longterm Martin range of we've always said it'd be one both segments.
To be in the 80, 220% range on a sustainable basis.
And that's what we are going to be focused on.
Okay. That's helpful.
[noise] transitioning to this refrigerant transitions you talked about you know kind of the.
The new equipment coming out in 25, I know next year and there was a big step down in an application for our for 10, a any sense for what you think that does to refrigerant prices or.
The replacement market if folks are like hey, this refrigerants getting much more expensive do I really want to replace something where you know availability is gonna get tough how do you think about it.
<unk>.
Equipment transition being a coupla years away, but refrigerate gaffer, maybe being a little more near term just opened a new question anything on your mind.
Sure a lot in there and I'll tell you we don't have a crystal ball looking into 24 yet.
Each of things that you mentioned is true, but we don't have final price on the <unk> for next year, there's always gonna be inventory draw down that will have to do to make sure we not stuck with the legacy for 10, a beyond what we need.
<unk> from a consumer perspective, I think this is going to be a small change you know we've gone through changes before consumer really don't think about refrigerants, it's more gonna be educating our dealers and a few consumers who are probably more well versed in this than others.
So it's still a lot of movie pieces net net I think.
Danger of over analyzing theirs.
Cause the industry's used to these changes we are very used to this change.
Dealers are now getting used to this change.
That's gonna happen more seamlessly and beyond expect.
It's.
Pluses and minuses, but as Michael said earlier.
<unk>.
Helps our mix upwards and twenty-five but some of them might start happening in 24, if the Ford any pricing is higher than we are.
They can afford to increase our price in conjunction.
So stay tuned lots of moving pieces.
Electronic product design dealer training and truly having confidence in the <unk>.
Transition I think we are way ahead.
Understood. Thanks for the color.
Thank you we will take our next question for Nigel Co with Wolf Research. Please go ahead.
Thanks, Good morning, everyone thinks of the question.
So I guess, beating a dead horse here, but this off for five full b transition investment spending how does that shake out through the next couple of years I mean, he took that and that's.
It's been this year, how does that look into into next year. Clearly you don't know the the mixed impact on it's gonna be posted but it's from your understanding is this an installation deadline was it a production deadline and and do you think there's going to be any sort of channel impacts as we transition to this new refrigerant.
Yeah, I think this would be a situation, where you know maybe a little bit different.
Then the larger transitions.
Transitions, we've had in the past going back to the 10 to 13, so your transition which was traumatic for the industry I don't think that's going to be anywhere near this look mentioned, probably a little bit more seamless. So what is played out the way the <unk>. Once again, we're in great shape, we typically do very well during these transitions because you know we're on.
On the leading edge of innovation and this requires a significant investment $50 million. This year, probably 50 million next year to prepare being able to factory and processes et cetera to make the appropriate investments.
Made some of those investments already and there's a look mentioned or ahead of things. This usually creates opportunities for US you know, there's typically one or two competitors that stumble and they at least I'm sure on the streets. So once again, we're well positioned for this transition. We're excited about what lies ahead in front of us and we typically win win.
These things come to fruition. So we're excited about what the springs for to us.
And I have just to add to that it's it's a manufacturing deep transition.
We don't expect significant inventory better.
<unk> 410 is more expensive next year the delta between 2024 Fries and a 2025 Bryce might be just like a normal price difference a year over year.
And.
I, just don't think that's going to make a meaningful difference door dealers economic calculations.
Mmm, but I'm just wondering contractive as exciting as you, let's you know using this from from refrigerants. It seems like there was definitely some contract out there that might be pushing the full 10, a next year to to customers just just on that basis alone.
They might be and we have $10000.
More in the U S and we can't control, but I think overall I think the flammability concerns a little overblown and.
If you take a.
Kendall and blow their efforts into it the candle extinguishers versus catch on fire. So.
This is not as flammable as they give us some people might feel you have done lots of internal testing and the safety mechanisms are solid.
So I think from that perspective, I believe majority of the contractors.
Well come along with us to say hey.
This is a safe product.
This is a good product and being followed the rules that make the transition seamless.
Okay I appreciate that so loud click on.
Clarify the distribution network expansion.
Is that primarily <unk> expansion, so you're looking at what do you think it's me more of an independent channels.
It's both I think the way we look at it as we're underpenetrated in both on our stores are recent focus is more around increase.
Increasing our put through the current stores and putting more products to that but we are still geographically penetrated in North America.
An independent distributors of course, we have a very low sure. So both of those I think we have significant expansion opportunities once we get through our self help once we get through or get a growth acceleration and put the right amount of feet on the street and the process behind it.
Pretty excited about the expansion phase.
Great Bangalore.
Thank you we'll take our next question from Steve to serve with J P. Morgan. Please go ahead.
Hi, good morning.
<unk>.
So just on on the commercial side. So the I know, there's like differences in comps and things like that but I'm carrier reported you know very very strong Ah volume you guys. I think we're up like 3% you mentioned you still have yet to reenter emergency replacement, but where where do you think.
<unk>. The difference is between you know your growth rate and there isn't anything vertical specific to talk about.
I just need this Michael yeah. So we saw a total volumes of 4%, but if you look at the rooftop production out of stuck our factory that was up significantly more so we're pleased to see that that side of it we had some obviously opposites in different products, but definitely some growth more than the four per cent coming out of our stuck our factory.
Lot of that growth that we saw on the rooftops was on the national Count and it was really broad based across retail.
And restaurants and distributions I really saw that broad based growth from an emergency replacement, although small we did see a little bit of girls in the corner, but it's still very small so that's a good start to to the journey move back into that space.
I would start also say that hey, congratulations for the carrier team I haven't digested urinate.
Great good for them and we are excited that the industrial growth trend continues.
And the industry overall is in good shape, I think that bodes better for us and for them. We you still remain production constrained.
That you know we are producing less than we can sound so excited but continued.
Put increase in Stuttgart, and our new factory in Mexico.
And then just on this since you're kind of delving into the technology here.
Oh, you're you you talked about it not being that big of a change I think in December .
You said you know have I mean, you just chose your refrigerant I guess is what you're saying.
What's the source of confidence that your technology is so much better than the other guys and and also <unk>.
Why do you think you're entitled to share gains in the last Coupla years, it's been very choppy.
Choppy, obviously with what's happened a little bit of a different approach on initiatives relative to what the former CEO did over a 10 year period, a little bit different of a market like what what what where do you think your product is so differentiated versus the other guys.
Sure a couple of things first of all for the past five years I definitely Knox was and.
Difficult spot because of our supply chain was more constrained Bush's others, because we are more reliant on China than others.
NATO severely cramped, our manufacturing ability, especially for the premium products.
And I think the transition on leadership and see that obviously.
It doesn't have attracted back had lots of indirect impact so, but that's not important right now what's more important is your question of why I'd be confident I think I'll direct to dealer network.
Is something that we have under leverage but I've done a great job building up so I think that's the investment that still needs to.
Continue delivering results for a line.
<unk> wise I mean, even the the currency of transition there was a lot of noise about compatibility.
Indoor unit versus the outdoor units, none of new home builders. They put indoor unit first and then they put outdoor units.
<unk> they have to go rip out into units.
If the indoor unit for the older C are compatible and outdoor units were newer soon our didn't have to make that difference because our window units are compatible both with the new <unk> soon.
So the connection to the dealer behalf that helps us make those kind of choices and decisions at.
At the end I can tell you that a compressor is better than a comprehensive pressure because you buy it from the same place usually.
But what we can tell you is our product design, our actual package and the choices we made for our dealers that's one <unk>.
That would be.
Probably more convincing than any of my answers.
Wait a year or two and then you'll answer this question with numbers.
Alright, I'll talk to you and.
[noise] alright, well, we'll take our next question from Jess Frog with Medical Research partners. Please go ahead.
Okay. Thank you good morning, everyone.
Hey, I look you probably accused us of over analyzing stuff, but that's you know that is what we do so yeah.
Yeah, I I appreciate jokes comments and reiterate in kind of the investment for the transition.
Sounds like you clearly know what you need to do so I think might kind of love columns question somewhat on unanswered in terms of.
You know what what's your best guess on you know the increase in cost for selling price.
To customers in 2025 on the transition.
I think the.
Fair enough I'll try and give us more detail of it part of it is we don't know exact numbers I can give you ranges. So there's two things to think about the price increase from current price at like 2023 to 2025.
And then price increase from potential 2024 price 2025.
Reason, we are hesitant to answer that question.
Not that we're trying to be basis, but we don't know the 2024 pricing.
Which could get significantly impacted by our fault and production curtailment that's going on.
I don't think it's going to be 20 per cent I just give you. Some ranges I don't think it's zero percent, either it's likely to be between zero and 10% putting everything together.
And that's just gonna help us all Brazil's our margins and pass on the cost.
Going back with over analyzing it was actually one of the side side Research report it says <unk>.
The industry has become like analyzing storms in a teacup, so I'm not <unk> I actually enjoy it I enjoy reading all of this and I think I've learned a lot and my one year and I think what we have learned is that.
Linux is gonna win because of a tractor dealer networks, because we need to leverage that better because.
Cause we are really focused on one thing and only one thing.
And because.
We are able to design our products just recently got the.
Nine awards, and we want more a large than others.
That's what I have learned more is that everything else matters, but we all do it about the same what differentiates Lennox is what are the last page of my presentation.
Yeah, that's zero to 10 is from twenty-three the twenty-five though just to put that final point on it.
Or or is it a <unk>.
You can not gonna hold me to it yes [laughter].
Yeah, and then just a separate question I know.
Joe likes to kind of Wink and nod and yeah, we're conservative but.
Mean realistically guys like you're you're gonna be at your 2026 Sky. This year right you gotta be at the mid point of it roughly so.
You know.
Clearly, you're you're signaling me upside to that but also are you in fact signaling that maybe there's have heavier investments to drive growth and therefore, we shouldn't.
Kind of extrapolate too aggressively on margins from here, but maybe just give us a little bit more context on how you're thinking about that.
Sure I think the reason I talked about the third phase of the transfer.
Transformation, which is beyond 26 is yeah, there's a high chance that we will get to the 26th targets sooner I won't commit to this year or next year.
Because I mean, our actions remain the same so I think that's one.
Under conservatism side listen that's the only thing that could go wrong and it <unk>. It has gone wrong for us in the past. So we just wanted to make sure that if we are wrong, we are gonna be wrong on the conservative side versus being wrong on the aggressive side.
The investment questions No I think I'm in our current investment rate is kind of what we expect going forward Capex, we'd go down going forward for sure.
The second factories, a heavy lift this here and a lot of those <unk> investment is happening this year and some will happen next year.
And some of this is also we are lapping our cell phone incentives on much lower incentive payout last year nausea incentives below target.
<unk> at least current macho there'll be above target, but that's where the carpet cause desktop P. C.
But <unk>, we are optimistic and we hope to get to the 22 six targets sooner, but renewable <unk> 2046 by sure.
Mmk. Thank you.
Thanks.
Thank you we will take our next question from no. Okay with Oppenheimer. Please go ahead.
Hey, Good morning Love, Joe Michael Thanks for taking questions.
<unk>.
Maybe just to better understand the revised price mix EBIT outlook of 250 million benefits, you've already done $182 million alright year to date so.
Maybe it maybe.
Can help us understand the dynamics for the rest of the year. It seems like maybe a little bit less benefit in commercial because the carryover receiving but.
<unk> clipping along that you know kind of this 40 million per quarter run right you just implemented T I's so.
Just to help us understand.
That revised guide.
You know, it's Michael Yeah, one of the Big drivers as you mentioned the carryover benefit of commercials. So that's an odd size difference between first and second half.
But with that said, we do have a little bit concerned businesses. It looks at some of that would be in the price mixed category, but.
Really what we're focused on is the pricing excellent. Some residential this this new price increase that we've just announced that will start to happen in the second half and again margins look good in the commercial backlog. So everything looks positive for the second half the price next bill, but God may be a little conservative.
Yeah, just the double click on that I mean, how do we think about the incremental benefit of that price increase then ratified.
Yeah, and the last quarter, we raised our price makes sky from 150 to 170 525 milling reflected that additional residential price increase so we already had in the previous 175 God.
Okay.
But that's progressing wallet.
And then you know on the salty you expansion you know just can you give us an update on how the timetable their looks and then just remind us or dimension for us how much that increases commercials, you know revenue capacity.
Sure Yeah, just before the 15 minutes before the call I was with a commercial team congratulating them on an excellent quarter and I saw latest video feed and pictures of the salt to your factory construction.
The ground is all prepared we have roof going up in portions of the business. We are hiring a talent somehow being redeployed from a residential factory and soldier you.
Clearly we are.
Well on the way of altering equipment, given some of the extended lead time.
So.
All indications are green and solid that we will be starting production end of next year.
Nameplate capacity wise you know.
Four years, it could more than double our capacity, but.
But at the same time.
We're not going to put all the equipment immediately so you're gonna get enough then.
Roof space to put more or if you're gonna put equipment on a judicious basis and the last thing you want is industry to have overcapacity on this is ma'am. So we've got to watch out.
And you mentioned earlier this would be focus around standard products shipped by the truckload getting into the emergency replacement.
Where our revenues below what it used to be in a shared it just dismally low.
And we have a huge opportunity to use our distribution network to increase that number. So we can really excited at all systems go there.
Alright, thanks, so much for the call or us take care.
And we will go next to Joe Ritchie with Goldman Sachs. Please go ahead.
Mmm.
Hey, Thanks, good morning, guys.
Thank you <unk> just maybe.
Maybe this along the lines of Jeff's question earlier, and just trying to think about these commercials bargains I know that it was only just a few months ago that you gave us at at 19% to 21% longterm target, but first half of the year you guys are already there.
And actually slightly above it.
I I'm just curious like how how do you kind of think about the trajectory at the margins then from here after that business, maybe even beyond 2023.
You know I think our next Investor day is going to be 2024 and will have to update your long term targets.
There's a lot going well, but I keep in mind that a lot could go wrong as well I think one quarter doesn't make a trend I mean, it's a great sign of progress I think the team has done an excellent job but.
But we need to leave some room for.
Things could slide different ways.
Netflix and we are not doubting anything you're saying I think we need to be cautious and not get ahead of ourselves.
And where we are in the journey.
Yeah, No. That's that's that's fair and I and look at that it's a good position to be in that they'd be able to already be.
Be ready to update those targets. So congrats on the progress there I guess, maybe my quick follow up question. The piece of your business. The corner of your business that goes through independent distribution. I think you guys. It was down 20% how much we're volumes down versus the pricing that came here and in that business.
Whoa volume of documents Lenny messy, because remember we sell a lot of coiled in that business. So I think that often skew the volume number for us.
In a negative way, but in general I would say they were more.
Likely better than what you would look at on the AHRI data I mean, you guys all look at the Internet data.
So I think we did better than what you saw on the internet data, but slightly better.
Okay, great. Thank you guys.
And we will take our next question from Cal Okay with Wells Fargo. Please go ahead.
Hi, good morning.
I wanted to just start off by the.
Commercial manufacturing you you've sort of noted that there still further manufacturing improvements to make in the back half of the year any any details around that that you could outline for us any major sort of goalposts, there and what's the timeline for when you expect factory output to hit targeted levels.
Sure.
Good question on that.
We started the year, we hardly had any production in January because we were taking some drastic improvement actions be rationalized 65 per cent of our Sku's we.
Looked at different lines and reconfigure the line to make the products that give us the best way to serve our customers. So starting from almost zero in January until the end of the first task you have reached progressively higher numbers.
And are starting to hit daily reads that.
Consistent with what the factory used to doing the best.
I think our first half <expletive> kind of thing.
Linear progression from zero to get into the right and second half I think that like you know we got a obviously maintain right then continue driving the improvements going forward.
The team's doing well there I mean labor challenges are behind us.
No longer struggling to track labor.
I would say supplier challenges are kind of 70 580 per cent behind us.
We still feel like we are playing racquetball sometime.
Could we have done a good job at getting dual source supplier or working with our suppliers to better communicate guilty.
The appropriate before and transportation.
So things are going well it could go better is the way I look at it.
Got it that's helpful. And then you know just circling back to the 25.3% commercial margin how does that compare to kind of internal expectations for the quarter and then when when we think about seasonality going forward I mean, any sort of variances to be mindful of versus typical seasonality in the back.
[noise] half.
Yeah, I could tell you my answer but had handed over to Michael to add to the risk.
And my expectations are always higher than the team deliver so.
But put that aside like I think Michael can give you more at better answer on this this is the speed the recovery a little faster than expected and a lot of this on the price makes benefits. So we're we're pleased to see that side of it but it was a little better than what we had expected mostly just because of the price makes the speed of recovery.
We saw.
And then.
Seasonality that you've.
I inquired about there's always a natural choppiness in the commercial business because of a lot of its project nature. It doesn't really have you know the perfect seasonality that we sometimes see in a residential demand patterns. So I'll just leave that out there you know sometimes the second quarter can be a little bit more of a you know a <unk>.
Leading quarter forest in the third quarter, but it all depends on projects.
But nothing nonrepeat really in in the quarter to be mindful of in terms of.
Sort of calmed down the back half.
Okay. Thank you.
Well it looks like the next question from Gillian nature with Barkley. Please go ahead.
Thanks, very much thanks, the squeezing a day and then just for anyone overly sensitive definitely that's T. Top comments were not meant to denigrate diligence.
In terms of you know I I suppose sort of dying.
Okay.
I sort of enjoyed that comment and I use that often so I thought it was.
It was a great way to look at bigger picture, while continuing to analyze the storm in a teacup so [laughter].
[laughter], yeah, so let's see how the the <unk> plays out I suppose but the in the very very short mm mm.
We sort of economy away from 2025, but when you're trying to think about <unk> H vac columns, and you'll die, you're assuming sort of down low double digit third quarter, and then down sort of low single within fourth quarter is that the way to think about it a year on year.
On the Internet site.
Maybe but no not on the overall basis of volumes in our town. So that much I don't know if you look at the.
Current branch envy short 12 per cent on the <unk> side Juliet.
You Gotta keep that's probably the worst.
That you would see it during the year.
<unk> if you think the number just gets better from there on.
Okay. So even with the Destocking in Q3, it's still a narrow it year on year decline then.
Exactly exactly but I think some destocking started happening in Q3, very little and we do think Destocking is decelerating as we mentioned in a comment.
So I will look at that number being much lower in Q3 two four.
That's perfect. Thank you and then I just wanted to put a finer point on the <unk> guide of sort of up to three per cent total company for the year did.
Did you clarify the the price.
Tailwind within that I I see the price makes ebay guided benefit, but just wonder if you clarified any revenue benefit from price mix and that sales guide.
We did not I think a lot of that is there are so many different types of mix in there I mean, we look at channel makes me look at.
Products like equipment versus box versus coil, we look at obviously mixed based on the sphere, we did say that about half of them mixed benefit in residential was because of <unk> and the other half was one of the other factors in there.
Still a lot of uncertainty out there, but we are pleased with where we are in July .
That's helpful. One last quick one commercial backlog, how do you see that moving from here understand that lead time should normalize does that put much pressure on the backlog or the the market. This sort of strolling off it should stay stable.
<unk> yeah. So we saw our lead times approved 50 per cent, obviously, our backlot didn't decline that much the order rates continue to remain strong everything we see on plan a replacement for national accounts still remains strong so really no indication yet of a backlog decline except for just because of lead time so shortened.
That's great. Thank you.
Yep.
And thank you for joining us today since there are no further questions as well can Cleveland second quarter Conference call. You may disconnect. Your line at this time and have a wonderful day.
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