Q1 2025 Lennox International Inc Earnings Call - Q&A
Speaker Change: Please stand by, your program is about to begin. If you need audio assistance during today's program, please press star zero.
Speaker Change: Welcome to the Linux First Quarter Earnings Conference call. All lines are currently in listen-only mode and there will be a question-answer session at the end of the presentation. You may enter the queue to ask a question by pressing star and one on your telephone keypad.
Speaker Change: You can exit the queue by pressing star and two. As a reminder, this call is being recorded. I would now like to turn the call over to Chelsey Pulcheon from Lennox Investor Relations. Chelsey, please go ahead.
Chelsea Pulcheon: Thank you, Margot. Good morning, everyone. Thank you for joining us as we share our 2025 First Quarter Results. Joining me today is CEO , Alok Maskara, and CSO, Michael Quenzer. Each will share their prepared remarks before we move to the Q&A session.
Chelsea Pulcheon: Starting to slide two, a reminder that during today's call we will be making certain forward-looking statements which are subject to numerous risks and uncertainties outlined on this page.
Chelsea Pulcheon: We may also refer to certain non-GAAP financial measures that management considers relevant indicators of underlying business performance
Chelsea Pulcheon: Please refer to our SEC filings available on our Investor Relations website for additional details, including a reconciliation of gaps to non-Cat measures.
Chelsea Pulcheon: The earnings release, today's presentation and the webcast archives link for today's call are available on our investor relations website at investor.linux.com
Speaker Change: Now please turn to slide three as they turn the call over to our CEO , Alok Maskara.
Thank you, Chelsey. Good morning, everyone.
Speaker Change: Before we get into the details of our quarterly performance, I want to start by recognizing the incredible effort and adaptability of our team and the loyalty of our customers.
Speaker Change: The current trade environment has introduced several new uncertainties and I'm proud of how our organization continues to respond with focus, agility and a commitment to improve our customer's experience.
Speaker Change: The ability to navigate these changes while staying grounded in our core values is what enables us to deliver differentiated growth in even the most complex environments.
Speaker Change: Revenue this quarter grew 2%. Our segment margin was 14.5% a decrease of 140 basis point.
Adjusted earnings per share in this quarter were $3.37 for intense.
Speaker Change: We are seeing steady transitions toward new low GWP product across both home comfort and building climate segments.
Speaker Change: Current order rates in both the segments remain healthy as replacement demand continues to provide a solid foundation.
Speaker Change: In HCS, we did not experience much destocking in Q1, but continue to expect some destocking in the second quarter
Speaker Change: In BCS, we had a slow start to the year, given the expected destocking and the timing of low GDP transitions.
Speaker Change: BCS margins were impacted due to short-term inefficiencies related to the manufacturing transition and new factory startups.
Speaker Change: We now estimate that a full-year adjusted earnings per share will be within the narrowed range of $22.25 to $23.50 [inaudible]
including incremental price actions, inflation, and potential volume softness
Speaker Change: Now, please turn to slide 4 to review the tariff landscape and how it is influencing economic outlook in each of our segments.
Speaker Change: As we navigate the current global trade landscape, I want to highlight why we feel that Lennox is competitively positioned to deliver differentiated growth even during this period.
Speaker Change: Approximately 90% of a cost structure is in North America, which includes the USMCA compliance spent in Mexico.
Speaker Change: This spend is not directly impacted by tariffs, but faces indirect tariff impacts, including price of commodities such as steel and aluminum.
Speaker Change: Approximately 10% of a spend faces direct impact of tariff and about half of that spend is from China.
Speaker Change: Our exposure to China-manufactured products has been declining over the past few years, and the JV with Samsung is another big step towards reducing our exposure to tariffs on imports from China.
Speaker Change: We are actively pursuing longer-term tariff mitigation strategies, including production shifts to better serve our U.S. and Canadian customers.
Speaker Change: We are also working closely with our supply partners on tariff sharing models and leveraging more US-based components to enhance flexibility within our North American network.
Speaker Change: Anything we cannot mitigate through these measures is being offset by pricing adjustments or surcharges.
Speaker Change: Majority of a manufacturing and distribution is in the United States giving us the resilience and flexibility to win during this tariffs and regulatory changes.
Speaker Change: We continue to invest in our supply chain with increased manufacturing capacity and by dual sourcing key components.
Speaker Change: The competitiveness of our supply chain is significantly stronger than it was during prior disruptions including severe weather events and the pandemic.
Speaker Change: Through all of these, our focus remains on being a reliable and a transparent partner to our customers.
Speaker Change: As a trade landscape continues to evolve, we are confident in our ability to adapt while continuing to drive long-term value for all our stakeholders.
Speaker Change: In addition to the evolving tariff landscape, we're also closely monitoring key macroeconomic factors affecting both our home comfort and building climate solution segment
Speaker Change: In HCS, consumer confidence and mortgage interest rates continue to influence homeowner decisions, particularly around new home construction and large renovation projects.
Speaker Change: Our replacement demand has remained relatively stable, and to date we have not observed any adverse trends in the repair versus replaced trade-off.
Speaker Change: In our BCS segment, monthly order rates improve sequentially as destocking ended during the quarter.
Speaker Change: Our full life cycle value proposition for key account continues to gain traction, resulting in incremental share gains
Speaker Change: We are driving positive momentum due to increase availability of our emergency replacement products, but at the same time we are mindful of potential delays and projects low down related to both tariff impacts and the transition to new low GWP products.
Speaker Change: I will now hand it over to Michael to walk you through our financial results and full your guidance.
Michael Quenzer: Thank you, Alok. Good morning, everyone. Please turn to Slide 5.
Michael Quenzer: In the first quarter, we experienced complexities driven by the regulatory transition and rapidly changing tariff implications. Despite these challenges, we had solid execution and achieved a 2% revenue growth, driven by favorable mix initiatives from our new R454B products.
Michael Quenzer: These initiatives are progressing as expected and are poised to deliver more growth than they come in quarters
Michael Quenzer: Segment Profit was $11 million lower than the prior year, primarily due to the timing of LIFO accounting for tear-related costs which were recognized ahead of benefits from price
Michael Quenzer: Additionally, VCS based cost headwinds due to expected inefficiencies from the new factory ramp up and regulatory transition coupled with increased investments to support our emergency replacement growth initiative.
Michael Quenzer: Let's now turn to slide six to review the home comfort solution segment performance.
Michael Quenzer: Home comfort solutions delivered another solid quarter successfully managing challenging end markets as the industry transitions to the new low GWP equipment. This transition is progressing as expected and our R410A inventory levels are nearly depleted.
Michael Quenzer: Sales increased by 7% termed by positive mix as approximately 50% of our equipment sales in the quarter, where the new R454B product
Michael Quenzer: Price yields for this product were in line with our 10% expectation.
Michael Quenzer: Sales volumes were flat to prior year, as the destocking headwinds from the fourth quarter of 2024 Previ were offset by stocking of the new R-454V products.
Michael Quenzer: Operating Marges to climb due to tariff and commodity related costs to inflation, as well as investments and distribution designed to enhance product availability.
moving on to slide seven.
Michael Quenzer: The building climate solutions segment experienced a 6% decline in revenue with sales volumes down 9% due to expected destocking and delays in customer orders caused by the transition
Michael Quenzer: Our emergency replacement initiative is showing steady progress driving growth in this specific
Michael Quenzer: Additionally, our emergency replacement inventory is well positioned for the upcoming summer season.
Michael Quenzer: Although we encounter some customer order delays with the new R-454B product, the mix yield achieved on this new product met our expectations.
Michael Quenzer: Segment profit decreased by $25 million due to tariff related cost headwinds, anticipated factory inefficiencies, and increased S-GNA investments to support our emergency replacement
Michael Quenzer: Turning to slide 8, let's review cash flow and capital deployment. In the first quarter, operating cash outflow with $36 million, compared to $23 million in the prior year.
Michael Quenzer: After several years of significant capital expenditures to expand factory capacity, capital expenditures have now moderated in line with depreciation. We continue to prioritize our capital expenditure investments in front-end digital systems and initiatives to improve the efficiency of our distribution network.
Michael Quenzer: We maintain a strong balance sheet with net debt to Justin Ibiza at 0.8 times in improvement from 1.4 times in the prior year quarter.
Michael Quenzer: Amid ongoing global macroeconomic uncertainties, we remain committed to preserving a discipline leveraged profile while supporting strategic bold on M&A opportunities and efficiently returning excess capital through share report programs.
Michael Quenzer: If you will now turn to slide 9, I will review our 2025 Full-Year Guidance
Michael Quenzer: Based on the first quarter results and the latest end market outlook, we are confirming our revenue growth of 2% and raising the lower end of our adjusted EPS guidance to $22.25 from $22.
Michael Quenzer: Consequently, our adjusted EPS guidance range is now $22.25 to $23.50. [inaudible]
Since our last guidance, we have three key assumption changes.
Michael Quenzer: First, due to the tariff-related costs, we now expect our total cost inflation to be 9% compared to our previous guidance of 3%. This includes estimates for both direct tariffs and the secondary effects of tariffs on our suppliers.
Michael Quenzer: Second, to mitigate tariffs, we have implemented two new price increases effective early in the second quarter, which will boost our price gains to 7% up from the previous guidance of 1%.
Michael Quenzer: Finally, due to the possible macroeconomic weakness and BCS order delays in the first quarter, we now anticipate sales volumes excluding the impact of the 2024 Pre-Vide stocking to decrease by 4% compared to the previous guidance of a 2% increase.
Alok Maskara: With that, please turn to slide 10 and I'll turn it back up real low [inaudible]
Thanks Michael, nice job [inaudible]
Alok Maskara: To close, I would like to highlight why Lennox remains a compelling opportunity for all our stakeholders even amid today's uncertainties.
Alok Maskara: The attractive growth of our industry supported by steady replacement demand and provides a strong foundation for our growth initiatives.
Alok Maskara: These initiatives drive growth through enhanced customer digital experiences, expansion in the duckless market via our Samsung joint venture, new capacity for commercial replacement product, and the continued growth of our parts and services portfolio.
Alok Maskara: We continue to expand our resilient profit margins to fully capture the benefit of being a manufacturer and a distributor through pricing, productivity and mix optimization.
Alok Maskara: Our recent investment in upgrading our distribution network will further increase customer satisfaction while expanding our profit margins.
Alok Maskara: Our commitment to consistent execution has been evident in how we have managed recent regulatory transitions while gaining share and expanding margins.
Alok Maskara: Over the past few years, we have also delivered higher fill rates and net promoter score, strengthened by customer experience and reduced customer chance.
Alok Maskara: These wins are supported by the continued rollout of our Lennox Unified Management System, which provides a structured operating framework that drives accountability, process excellence and continuous improvement across the entire organization.
Alok Maskara: We are making meaningful strides in advanced digital technology to upgrade both our product offerings and how customers interact with us.
Alok Maskara: Upgrades to an e-commerce platform have simplified the customer journey, increased loyalty and AI capabilities have improved attachment rates.
Alok Maskara: We are also strengthening our competitive differentiation by leveraging our proprietary data assets.
Alok Maskara: These proprietary data assets are best in class within the HVAC industry, given that we have been both a manufacturer and distributor for over 130 years.
Alok Maskara: At the same time, we are broadening our ducted and ductless heat pump line-up to meet rising demand and
Alok Maskara: are continuing to embed intelligent diagnostics and controls into our systems [inaudible]
helping our customers operate more efficiently and with greater confidence.
Underpinning all of these investments is our talent and culture.
Alok Maskara: Our High Performing Team is grounded in our core values and guiding behaviors [inaudible]
Alok Maskara: Our pay for performance structure reinforces alignment in powering our teams to focus on the levers that drive profitable growth.
As I look forward,
I remain confident that our best days are ahead . .
Speaker Change: Thank you. We will be happy to take your questions now. Margo, let's go to the Q&A.
Speaker Change: Perfect. Thank you so much. As a reminder, ladies and gentlemen, if you'd like to ask a question, please press star one on your telephone keypads. If you need to remove yourself from the queue at any time, press star two. Once again, that is star one to ask a question. And we'll take our first question from Ryan Merkel with William Blair. Please go ahead.
Ryan Merkle: Hey, good morning, everyone, and good job with the script, giving all the moving pieces.
Wanted to start with the commercial. Yeah, of course [inaudible]
Speaker Change: I wanted to start with the commercial, which was the surprise for the quarter. Just talk about the order delays that you saw. You know, why was that? And then more importantly, are we past that issue? It sounds like orders have been proved. Is that the right read? Yeah.
Speaker Change: Yeah, I think Ryan, that's the right read. We had a very slow start and we talked about beast talking in commercial, but it happened sooner than we had anticipated.
Speaker Change: and essentially for the first few weeks of the quarter, everybody was waiting for the new products to get established, get the tools upgraded and people were just finishing up their jobs with 4-10-A. But order rates...
Improve sequentially.
Speaker Change: Our productivity also took a hit as changing these lines from 410 to 454B while moving some lines from Stuttgart to Saltier. All of that we were able to do because of the slowdown or pause in some of the sales. But yeah, it's largely behind us.
Speaker Change: I would expect some inefficiencies to continue in Q2 but then we start lapping the start-up course that we were having last year.
Speaker Change: So I would think of it more of a one-time event with some inefficiencies carrying into Q2 .
Got it. Okay, that's helpful.
Speaker Change: Can you talk about the decision to lower the REZI volume to now down mid-single digits for flat prior?
Speaker Change: and then commercial, same thing, down low single digits first up mid single digit prior.
Speaker Change: Just curious what the drivers are and are you seeing any of that slowdown in April or are you just trying to get ahead of expected slowdown?
Speaker Change: We are trying to get ahead of the expected slowdown, if there is any. We have not seen any slowdowns. In fact, Michael and I were checking our orders and everything right before the call. No, I mean, we have not seen any slowdown. [inaudible]
Speaker Change: We just read the same news you guys read and if the terrorists slow down the US economy with inflation, we are just prepared for that I mean it's highly uncertain as you said I think the core assumption which we stand behind is that [inaudible]
Speaker Change: If inflation and pricing causes any macro slowdown like you know our results are still going to be managed as we offset. That's it.
Speaker Change: Tarris with pricing and volume declines will again get offset because we have additional pricing that will take effect. But our visibility is no more than anybody else's and just to go back. We have not seen any slowdown in either of the segments right now.
Got it. Thanks a lot.
Speaker Change: Thank you. We'll take our next question from Tommy Moll with Stevens. Please go ahead
Good morning, and thank you for taking my questions [inaudible]
Morning, Tommy.
Speaker Change: A couple of follow ups from me on some of the same themes first.
Speaker Change: 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 here you stay alok one is more meant to offset tariff and one is more meant to offset volume declines or maybe misunderstood there. [inaudible]
Speaker Change: Yeah, let me just clarify. So yes, we've done two price increase. I think the first one which is already in effect was done to offset
Speaker Change: Changes in pricing for aluminium 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 think of mid single digits across both the segments.
Speaker Change: Second one which we announced last week is to offset the direct impact of tariffs and that's another mid-single digit price increase
Speaker Change: Changing a little bit based on the product types but again with single digit overall impact.
Speaker Change: None of them of course is for volume softness because the customers are continue to buy and we have to look at this purely to offset the cost impact of that.
Speaker Change: So two price increase, both mid-single digits and so far, please with a 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 march in profile. Bye.
Speaker Change: Thank you, Alok. And then on the new volume assumptions for home comfort solutions for the year.
Speaker Change: moving from flat previously to down mid-singles. What can you tell us in terms of cell-in versus cell-through? Are you assuming balance there? New home versus replace?
Speaker Change: Market Share Assumptions, any other key inputs into that new Outlook would be appreciated. Thank you.
like driven by future news and future expectations. [inaudible]
Speaker Change: We maintain the fact that there's going to be some destocking in Q2. So yes, we do expect there's delta going between Selin and Chelthru and we think that's going to largely happen in Q2 as 4-10 inventory depletes. Beyond that, there just conservatism built into it.
Speaker Change: based on, you know, everything that we are seeing whether it's about reduction in forecasted growth rate, but they just so many swings, Tommy, if you want to go be wrong, we want to be wrong on the conservative side, especially given some of our pricing actions.
Thank you, Alok. I'll turn it back.
Hey, good morning, guys.
Bye, Jeff.
Speaker Change: So, I guess I'm a destock being more too cute than one cue, just any reason why that is. And I think you had said early on, you know, the pre-buy was pre-substantial and maybe backed off of that and it was more share and I didn't know if any of that change is reflected in the Alok. Thank you very much.
Speaker Change: Yeah, I think so. Especially we had a lot of 410A inventory remaining, so Q1, a lot of the sales, world 410A
Speaker Change: That's the reason we didn't see a significant impact of pre-bite.
Speaker Change: Our view, we haven't changed the numbers because remember we talked about 125 million or so of pre-buy, we talked about 25 or so was probably commercial, 100 or so residential, all with lots of ranges and approximation and our bars.
I think the commercial is behind us.
Speaker Change: I think that's what we saw in Q1, a resident experience it. So either it was mostly shared again and there was no pre-buy impact, which is highly unlikely. I still think there was pre-buy and we're going to experience that in Q2 as others start depleting their 410A inventory. We're going to experience that in Q2 as others start depleting their 410A inventory.
Speaker Change: On the positive side, vast majority of us here are now all 454B, and even the quarter in Q1 was 50-50.
Speaker Change: So it's been a smooth transition, it's been a good transition, but we are prepared for any pre-by impact in Q2. If it turns out to be shared again, then good for us.
Okay, then um...
Speaker Change: The tariff impact in one queue seemed to be a little bit more than kind of what other companies are saying and just given that people have inventory. I didn't know how much of that is the initial Mexico-Canada tariffs that were higher but now we have USMTA compliance.
Speaker Change: You know, kind of exclusion. So I'm just wondering, obviously a lot of moving pieces, but, you know, is there a chance that, that maybe, you know, that, that US Mexico impact gets better, not, you know, versus one cue?
Speaker Change: Jeff, well, we saw in the first quarter, it was a little bit higher than others because we do life-o-based accounting, so we expense that almost as, as incurred, but we saw that mostly from Mexico on copper or on aluminum and steel terrorists coming through through Mexico's where we saw that.
Thank you. Thank you.
Speaker Change: I hope we never have to use the word life on an earnings call again, Jeff, but that's basically what it was. We do expect the impact of tariffs, assuming the rates don't change, to keep going down as our mitigation actions start yielding results. Right now, these are sort of unmitigated numbers that we got impacted by in Q1.
Okay, thanks for the help, guys.
Speaker Change: Thank you. We'll take our next question from Joe O'Day with Wells Fargo. Please go ahead.
Hi, good morning.
Speaker Change: Just on the inflation guide and going from 3% to 9%, can you unpack that a little bit from a dollar's perspective and just sizing the dollar impact tied to
Speaker Change: to medal the dollar impact to China and anything else. And as we think about really trying to tie that to the pricing response to it, and then if you see any changes to tariffs, what that could mean for price.
Speaker Change: It's overall with a 6% increase in the inflation guidance, predominantly on our total cost. So think of cost of goods sold plus SG&A, it's about $4 billion of spend there, annualized.
Speaker Change: and a good portion of it would be Channa, where you can see our exposure is 5%, that cost is obviously doubled with the tariff.
The balance is mostly related then in Mexico around...
Speaker Change: Steele and Aluminum. And then we do see some secondary inputs into the United States. So even though we supply from a US supplier, they have tariff implications that we made some estimates in there as well. But a good, you know, the 50% is is almost related to Channa, which we continue to monitor. Sure.
Speaker Change: and we'll see how that progresses and do pricing adjustments if necessary.
Speaker Change: and sorry, just the pricing that's been put in place in response to that is that in any way.
Speaker Change: tied to terror, such that if there's a change in the China terror threat, that pricing...
changes
Those are kind of list prices.
and you'll decide what to do.
Based on that
Sarah's Change, Noah's
Speaker Change: No, there will be some correlation, right? I mean, we're trying to be fair to all our stakeholders, so the second direct that went into effect, some of that's through surcharges [inaudible] I'm sorry, I'm sorry, I'm sorry
Speaker Change: that could get withdrawn if the Chinatowns go away or changes. So I think there's going to be some impact of that. And then we think from that perspective, our volume assumption will turn out to be more conservative if the Chinatowns go away and some of the economic impact of that is overestimated in our kind. The Chinatowns go away.
Speaker Change: And then last one, just what is it that you source from China and how does your China sourcing compare to competitors in the US overexposed, underexposed? Are you seeing kind of similar type of exposure that requires similar type of pricing?
Speaker Change: Yeah, it depends on the competition, maybe much longer discussion. I mean, I'll tell you what we source
Speaker Change: like a lot of electronics for our control boards. We do buy some motors from China. We do buy some of the smaller components that parts and accessories from China. We don't source things like mini splits that we used to source from China. That's our move to Samsung who makes it in Korea. Let's go.
Speaker Change: Just because we've historically been a more US manufacturer and over the past three years the China spend has come down substantially I mean a few years earlier that would number would have been three to four times as much, but we were focused on dual sourcing and near sourcing pretty aggressively over the past three years. [inaudible]
So, can't say for sure, it depends on the competition.
We also feel very confident that many of these products
Speaker Change: have altered its suppliers and their mitigation strategies in place to continue reducing that number.
Got it. Thank you.
Speaker Change: And one next, we'll go to Chelsey, with Goldman Sachs, please go ahead [inaudible]
Hey guys, good morning [inaudible]
Bye, Joe.
Speaker Change: So I think I'd like to start just on the building climate solutions margins, and I'm trying to think about how these margins will progress sequentially as the year goes on, so if you take a look at slide seven
Speaker Change: You know clearly, you talked about the LIFO impact, product cost, and other was roughly a $22 million impact. How does that look sequentially as we head into the 2PU and then if there's any other color, you can get me on the breast of the year that would be very helpful.
Speaker Change: Sure, I'll start and then Michael will give you exact numbers. I would look at primarily these things as short-term inefficiencies related to manufacturing most. Remember, we do a lot of moves in Q1 from 4 to 8 to 454B, moving some of our standard products to Salty or focusing start guard on
Speaker Change: Retooled Machines, so we can do configured products and create capacity for that. So I would say there is a short amount of inefficiencies that continue winding down. Now as you do sequentially, Michael will get into.
Speaker Change: is with you in a minute is remember last year factory startup happened mostly in the second half starting in Q2 so we start lapping some of those inefficiencies. [inaudible]
Speaker Change: At the end of the year, we should close at zero inefficiency. I mean, that's our goal [inaudible]
Michael Quenzer: Michael, if you'd like to add to that. So the local mentioned factory inefficiencies that will start to go. The other thing is we'll start to experience a full run rate on our mix.
will start to transition more in the second quarter.
Michael Quenzer: So I'd like to have some volume benefit in the second half of this here from the Merge Surplacement Initiative. All of those should sequentially help margins.
Speaker Change: Got it. That's helpful. Maybe just to follow up on that. Then as you're kind of picking about second quarter specifically and the margin, like it sounds like there's still going to be a little bit of an efficiency there, but like the margins should get materially better sequentially versus the first quarter or that of their statement.
Speaker Change: Yeah, I think that's a fair statement like I hate to give quarterly guide and you know with factories you can't predict exactly which week things start getting back to normal but we have seen improvements and they'll sequentially get better [inaudible]
Okay, great. All right. Thanks, guys.
Speaker Change: Thank you and next we'll take our next question from Nigel Coe with Wolf Research, please go ahead
Nigel Coe: Oh, thanks. Good morning. Alok, I apologize and he just said you don't like to give quality guidance. Thank you.
Speaker Change: Just given that they're kind of the second half, first half dynamics, and extend the beat through from 1Q to 2Q I'm just curious if you would to like try and ring offense the 2Q EPS versus the full year and you know if you just eyeball you know the past you know 10 years like low 30% percentage would be by the right number is that sort of the ballpark?
Speaker Change: I think maybe what we'll do is we'll speak toward the first half, second half revenue guns. I think in the last earnings call I said about 45% first half of the year for a revenue seasonality, 55% second half. Still feels that that's appropriate. I think that implies about a kind of a flat revenue in the second quarter. I think that's the first half of the year.
Speaker Change: As much as we can see right now, that seems like a good guy [inaudible]
Speaker Change: Okay, that's helpful. Thanks, Michael. And then just thinking about the A2L, you know, there's a lot of chatter out there but shortages on the more on the refrigerant side than the equipment size. Just wondering, you know, kind of what, how that's factoring into your sort of second quarter perspectives.
Speaker Change: Yeah, we have, I mean I think the first part, I think the industry, all the equipment manufacturers, they're a good job, so there's no shortage in equipment, as you said.
Speaker Change: Where there is shortage is in the retail service canister for R-454B. I think that's a transitional migratory issues like, you know, we are taking countermeasure, sore other manufacturers. Thank you very much, thank you very much.
Speaker Change: There's enough refrigerant available in bulk situation. It's just not available in smaller packages.
Speaker Change: I don't think it fundamentally changes the demand profile, nor does it change anything else in the long term If in this short term they just scourmage to get those equipment for servicing Now in practical perspective our units are pre-charged
Speaker Change: So, if the installation is done right and in a normal circumstances, you do not need this. It's mostly for service and repair. But it's more about dealer getting confident and not wanting to do a rerun.
Speaker Change: I expect the industry to be normal by the time we are talking again at the end of Q2 and the opening of Q3.
Okay, that's great. Thanks a lot.
Next, we'll go to Julie and Mitchell with Barclays, please
Julian Mitchell: Let's go ahead. Hi, good morning. Maybe just a first question on the operating margin outlook, just total company. So I think
I think that the framework...
Julian Mitchell: But just wanted to check on that and when we're thinking about the sort of rate of change year on year, you know, if you're flat for the year and down...
Julian Mitchell: 140 Bips or so in the first quarter. I think you mentioned a steady improvement, so is the way to think about that sort of flatish margin.
Julian Mitchell: Second quarter year on year, and then you get that growth in the back half, is that the right dynamic on operating margins, just kind of thinking about tariffs and the Mexican plant ramp up and so forth.
Julian Mitchell: Yeah, I think that's pretty much implied in the guide. Right now, we're assuming about flat margins full year for the enterprise. That would assume about a 50 basis point improvement in the balance of the year. Mostly around BCS. I mentioned a few of those initiatives, a wide margin to expand their mix.
Julian Mitchell: Can year-rear investments, tripping those as well as some volume gains as well as factor inefficiencies that's really where the ball the the margin gain is going to happen in the balance of the years on the BCS son. [inaudible]
Speaker Change: Yeah, and Julian, if I could add to that, the good news for the bad news here is that-
Julian Mitchell: This is all internally caused pain, right? I mean, it's other manufacturing moves, we knew this was going to happen again.
Julian Mitchell: We talked about last year as well, starting a new factory, moving production, we're just doing it cautiously to make sure there's no supply chain disruption. So overall, I'm not concerned about any long term challenges here.
That's helpful, thank you, and then just ...
Speaker Change: My second one, just trying to circle back to the slide nine which is very helpful and the pieces there on the price assumption going up six points from previously and the volume assumption coming down I think six points from previously. So just thinking about those two moving pieces.
Speaker Change: Macro and so on, but just trying to understand, you're just assuming a sort of one for one offset or elasticity there of higher price equals the volume.
Speaker Change: Reduction, or is there some other items in there that we need to think about, and just what's the historical experience around price elasticity of volume demand if you could give us any colour there?
Speaker Change: Sure, Julian, it turns out that they turn to be nearly equal, as you said, roughly six percent, right? But if we take the volume piece and we get deeper into that we're going to be able to do that.
Speaker Change: We have taken a significant slowdown in new construction, both in HCS and BCS and we see some of those signs already in industry data.
Speaker Change: Consumer confidence, softness, mortgage interest rates, and all the other things we see around decline in consumer confidence.
Speaker Change: Our products are mostly replacement and they are like a necessary must-do have. So the impact to us is going to be lower than some of the other discretionary spend since it's not discretionary.
Speaker Change: given limited visibility. We just want to draw a line in the sand and have the dialogue with that we are having right now. [inaudible]
Speaker Change: I mean, this could all change if the China tariff gets withdrawn tomorrow and impact is less and then we would look simply look at no uprising in higher volume in that case. We just want to give you the framework to analyze and get our thoughts together.
Great. Thank you.
Jeff Sprague: Thank you, and next we'll go to Jeff Sprague with Vertical Research. Please go ahead.
Jeff Sprague: Hey, thank you. Good morning, everyone. I just want to come back just thinking about the destock, you know, happening or continuing into Q2. You know, on a kind of a gross dollar basis, I mean, your sequential inventories to me don't look too different than what's normal.
Jeff Sprague: So this kind of one understands the view on the Q2D stock, right? You're out of 410A.
Speaker Change: You're selling 454B now, so your view is just in the channel, there's still excessive inventory that kind of backs up to you on the demand side in Q2, if you could elaborate on that at all, I appreciate it.
Speaker Change: Sure, so Jeff, I think your last statement is what we are trying to reflect is that in the channel, which I remember 20% of us say of the R.
Speaker Change: There is 410A that everybody would try and get out of NQ-2
Speaker Change: and they may pause or drink 454B product, especially given the Q2s heavy and that's where the cooling season, difficulty in reality works. A lot of the distributors are going to try and run the entire cooling season with 410A, if they have enough inventory, because remember it's still lower cost to them.
Speaker Change: So, that's our the assumption. We don't have any further visibility compared to when we spoke last year, where we said hey.
Speaker Change: Over all 125 BCS roughly 25 that we are confident is behind us
Speaker Change: It's CS is 100, it's going to be less than 100 because some of it was shared again [inaudible]
Speaker Change: and when we shake start by the end of Q2, we'll have greater visibility, but we do think there's some impact or air pocket in Q2 as distributors run out of 410A, and only then they start at 454B.
Speaker Change: Yeah, it doesn't sound like there's any reason to believe though they make it through the whole season on 410A, right? They're just not enough out there.
Speaker Change: So I guess a lot of this hinges on just doesn't get hot and all those sorts of things in terms of when they pivot back to kind of refilling on 454b is that the way you're thinking about it?
Speaker Change: Yeah, there's also a rule within the transitions that they have to sell by the end of the year, so I think that it also helps to make sure this is all going to sell through. We expected to sell through in the second quarter into the third quarter.
Speaker Change: And you're generally right, there's not an affordance last the entire cooling season unless we have a really really cool summer you know.
Okay, great. Thank you guys, appreciate it.
Thank you.
Speaker Change: Thank you. And next we'll go to Noah Kay with Oppenheimer. Please go ahead.
Noah Kay: Thanks. I was just going to follow up on just questions. So can you talk about the behavior of the direct versus the two steps in one queue? What the volume behavior was like in those two different parts of the home comfort solutions? Yeah.
Noah Kay: Yep, so in the home conference solutions of the first quarter we saw total revenue, up 11% of the two-step, 5% of one-step so we continue to see some of that sell through the 410A and the two-step in the first quarter
Noah Kay: Okay, and you're thinking that that kind of ripper is just here in 2Q, just toh
on Patrick's part. Yeah, that's the underling assumption right now.
Noah Kay: A scenario might look like if USMCA exemptions were no longer to be in effect, at least the kind of discussion that you've had with customers around that and what we might expect to see from the company.
Thank you.
Noah Kay: Yeah, I mean, that's a very hard thing to speculate on but I'll tell you because there was certain days when we woke up and we thought that exactly was going to happen in the end.
Right. I have an artist's question that customers have. [inaudible]
Noah Kay: In that scenario, there's going to be some mixed impact because products made in U.S., which remember we have a majority of a manufacturing still in U.S.
Noah Kay: We'll probably accelerate and products from Mexico. We will still offset it through productivity. Pacer will probably decline, that will help us offset some of those particular pieces there as well. And then we'll have to offset that price.
Noah Kay: So I think that will make our mix go more towards premium products which are more likely to meet in US and to the higher margin for us versus lower tier products in Mexico. But it's going to be a series of
Noah Kay: short-term and long-term actions that we have already outlined and we kind of have it in a back pocket if that happens.
Speaker Change: and Tua Lee to kind of speculate through that. I mean, it's almost like we were hoping that's not the announcement that comes in while we are on a conference call. I mean, that was a Michael the Nambo's nightmare that there'll be a tweet that we missed while we are sitting on the call. Yeah.
Speaker Change: But, but we have multiple scenarios planned. We have key action-ighted plan. The team is very disciplined. The dealers have tons of confidence in us right now that we are doing the right thing by protecting their business, protecting the supply chain and being fair in passing on those costs of the appropriate. Let's get started.
Speaker Change: Yeah, if anything, the news for getting this morning suggests we may be going the other way, which is a positive so I would appreciate the thoughts and thanks again.
Speaker Change: Next, we're going to go to Chris Snyder with Morgan Stanley , please go ahead
Chris Snyder: Thank you for the question. You know, I guess just maybe on the topic of consumer elasticity in the repair verse replace.
Speaker Change: You know, of all the price that's coming through, whether it be the refrigerant change over or, you know, the tariff commodity related price.
Speaker Change: I'm just wondering, how much is the homeowner feeling of that today?
Speaker Change: because it seems like that is still a bit on the horizon for them and as that cost or that higher price comes through, you know what do you think of the risk on a maybe a more significant volume response just as that price hits them or maybe it already has. Thank you.
Speaker Change: A few things to keep in mind, right? The price of the homeowner sees is our equipment price, plus the installation, plus the accessories, plus the dealer profits, plus the distributor profit offense. So if you pull all of that together,
Speaker Change: A 5% or 10% increase in equipment does not translate to 5% or 10% increase for the homeowners.
Speaker Change: In the past, sometimes it was higher than equipment price increase as there was significant labor shortage and there's a lot of consolidation on the dealer base. In today's tariff environment, I think it's going to be lower to the homeowner because there's no reason to mark up labor and installation. There's a lot of consolidation.
Speaker Change: because those don't get impacted by tariff. So, let net, I don't think there's going to be a significant impact on the homeowner. This will remain a non-discretionary spend.
Speaker Change: The impact that we are baking in is mostly around the new home construction and general slowdown in home sales because some of the
Speaker Change: sales do happen, poster, home sale event if it's a used one.
Speaker Change: The repair versus replace, we called it out on the script. That is a possibility, because your confidence goes much lower and people are going to be looking to save cost. And we monitor for that very closely. And so far here to date, we have not seen any signs of that. [inaudible]
Speaker Change: Thank you. I appreciate that. And then, but I guess it's kind of following up, you know, if you guys started shipping the 454B, it sounds like in maybe the back half of Q1.
Speaker Change: and then you put through the tariff-related price increases at the start of Q2, I believe you said in the script. Like, as that kind of flows through the channel and ultimately finds its way to the consumer, does that start hitting in Q2, or do you think those prices start hitting in Q3? Because I know there's just some lag between when you guys sell it and it finds its way.
to the homeowner. Thank you.
Speaker Change: It'll start happening in Q2. It's already happening. Our first price increase is already making it to the homeowners and we have seen no change in the demand pattern.
Thank you, I appreciate that [inaudible]
Speaker Change: Thank you and next we're going to go to Brett Linzey with Mizzouho, please go ahead.
Brett Lindsey: Hey, good morning all. I wanted to come back to the commercial business in the R-454 transition delays. Was this solely product availability or are you seeing some price sensitivity on the new products and the price uptake there?
Brett Lindsey: No, it was not product availability, at least not for us, and I think that's generally true for the industry as well, Brett. It was mostly driven by people finishing the 4-10-8 jobs.
Brett Lindsey: and then getting that people slash employees trained in the new 454B and some hesitancy when nobody wanted to be the first one to install a 454B on a rooftop and people trying to make sure that the jobs when you do rooftop will pay spend that they have.
Brett Lindsey: Paul A.D. of the rooftop in 454B. They didn't want to mix rooftops in there. So I think a lot of this was around key accounts.
Brett Lindsey: Sensors and tools and all together. So we think of it in short-term air pocket little worse than we had hoped for but not completely unexpected.
Speaker Change: Got it, some more of a learning curve. And then maybe just on commercial volumes in the first quarter, the down nine, how that track relative to expectations and then maybe any any color by vertical. I know the full year outlook for commercial it does contemplate some accelerating in the two year stack. Is that just the emergency replacement capture that you see ramping there? [inaudible]
Speaker Change: Yeah, within the first quarter, about half of the 9% volume decline was the de-stocking flood, happened as expected. The rest was the order delays, which Alok just mentioned, kind of brought across most of our large national counts. And then, going forward, yes, we do expect to see as you get into the season Q2 and Q3, we'll start to see that emergency replacement initiative. Yes.
and start to bail off.
Speaker Change: And if I could just piggyback on that, we are very optimistic based on the emergency replacement rollout, the pilots and the early signs that we have there. So that's one reason we are looking forward to more optimism, especially on our piece, even if the industry is slowed down because for the first time in...
Speaker Change: multiple years, we have the products in stock, we have our folks trained, we haven't delivered within a day and courts back within two hours, so we're pretty optimistic on that right now.
I appreciate the detail.
Thank you. Good morning, everyone.
Thank you.
Speaker Change: I'd like to circle back on the surcharges. It came up a couple different times and can you just clarify when you talk about the two price increases are those full pricing increases because the assumption is a surcharge gets rolled back at some point. So clarification there and when and how do you use surcharges?
Yeah.
Speaker Change: It really depends a lot on the business, but to be overly simplistic with the answer so
Speaker Change: Think of the first price increase as a price increase, a traditional one.
Speaker Change: and the second one more as a surcharge, and I think numbers will come back to the second one.
Speaker Change: because there was mostly around the 10% global import duty and the China tariffs. We did that as a surcharge. Again, not all of it as a surcharge, because some customer systems can deal with surcharges.
Speaker Change: But we would think of the first one as more permanent and second as transitionary slash, open to adoption and changes as a tariff environment, adoption changes [inaudible]
Speaker Change: Okay, that's really helpful and thanks for that clarification and then...
Speaker Change: Just to circle back on the emergency replacement, Michael said you're expecting the inventories now in place, you got people trained
Speaker Change: What is the timing of the lift that you're expecting? Like how much of your mix should it be on a run-right basis by year end?
Speaker Change: Right now, it's still a very small piece of our business, but we're going to continue to see it grow. And again, it's a seasonal product. So as we get into the second and third quarter with the inventory we have, that's where we should really start to see some of that growth come in for the season.
Speaker Change: Michael's right, overall remain the small portion, right? I mean a long-term growth aspiration start delivering results this year, but this should be a tailwind for multiple years.
Speaker Change: Was it a cash flow drag in terms of positioning the inventory? [inaudible]
Speaker Change: A little bit, but the HCS and the others inventory kind of made up for it in terms of, we were building up support NA in the past, it wasn't significant, Dean.
Thank you [inaudible]
Speaker Change: Next, we'll go to Nicole DeBlase with Deutsche Bank, please go ahead
Yeah, thanks. Good morning guys.
Thank you. Thank you.
Speaker Change: I guess I also wanted to ask a follow up on emergency replacement. You guys have been making the investment in the Salesforce. I think it was an 8 million drag in the first quarter. Are we kind of coming to the end of that Salesforce investment or is that something that's going to continue throughout the rest of 2025?
Speaker Change: No, it's ended. We made all those investments last year. I mean, right now it's more that we did not have this investment last year. So when a year over your basis, by the time to get to the second half, we'll be lapping itself on the investment, but there's no more incremental investment required at the stage. [inaudible]
Speaker Change: Okay, got it. That's clear of things. And then just on buybacks, I saw you guys did like 85 million in the first quarter markets obviously been weak. I guess how are you guys thinking about the rest of the year in terms of repurchase activity? Thank you.
Speaker Change: Yes, sure. So we have programs to buy back for delusions that kind of continues on and then thereafter we're going to be opportunistic. We're going to continue to look at bolt-on acquisitions and obviously we're going to be very disciplined on that and put cherry purchase opportunistic cherry purchases will be a portion of our diploma strategy.
Speaker Change: You can expect a lot more buyback than we did last year, especially at these prices, right?
Makes sense, thanks guys, I'll pass it on [inaudible]
Speaker Change: Thank you, and we'll next go to Steve Tusa with JP Morgan, please go ahead [inaudible]
Thank you.
Hi, good morning.
Bye, Steve.
Um, just trying it.
Speaker Change: Honeywell is out with obviously a pretty dramatic price increase. Maybe that's what you're referring to on the retail side. But maybe just describe what you're seeing in the channel. And I guess you're saying that you do not expect this to impact industry volumes at all given it's kind of a, I guess, an aftermarket thing. [inaudible]
Speaker Change: Yeah, it is an after-market thing. I mean dealers, it impact dealers' confidence because they want to carry. So everybody might be experiencing different things, right? Let me just talk about Lennox. So we have no shortage of 454B for our production and we obviously working with our suppliers.
Speaker Change: The two suppliers we have to ensure that we get appropriate fair pricing because some of them are impacted on tariffs and any indirect impact of tariffs through that is already captured in our overall inflation number [inaudible]
Speaker Change: What we have heard from our dealers and contractors is there is shortage of retail canisters, so these are the Wordington made tanks that they carry in their truck for service and repairs.
Speaker Change: They're not enough of 454B of those. I think that's where the shortage is. It's unrelated to the Honeywell announcement, which also impacts the retail and there's just a shortage of that [inaudible]
Speaker Change: purely driven by filling capacity and purely driven by availability of tanks. And we think both of those should be behind us and the industry by the end of Q2.
Speaker Change: So then what is the Honeywell price increase of the 40% increase they put through? What is that related to?
Speaker Change: It doesn't relate to us, so that's probably something different. You'll have to ask them Steve, but it does not relate to us. I mean, we have contractual price that we entered in last year.
Speaker Change: So maybe it's applied to people who did not into actual price or retail canisters [inaudible]
Speaker Change: Yeah, that makes sense. And then just lastly on commercial, I guess you guys are saying this is temporary and not really a macro thing out there. Were there any particular verticals where you saw more of a pre-bi than others or more of a kind of a destock than others?
Speaker Change: We thought pretty uniform across the different verticals. I mean, clearly the retailers have more control over these projects on doing a full floor sweep.
So yes, it was on the key account. [inaudible]
Speaker Change: look at a full roof replacement. Our volume assumption and what we saw, we did built in slow down in commercial new construction, which is only a small portion of our sales, most of our sales are replacement. So that's why we sort of built in. And obviously, since we didn't have Q1, so we built in the Q1 impact into the full year guide as well.
Okay, great, thanks for the colors always.
Speaker Change: Thank you, and our last question comes from Damian Karas with UBS. Please go ahead.
Hey, good morning, everyone. Thanks for squeezing me in.
Good morning, Damien.
Damien: Good morning, Luke. So it sounds like you've taken a few rounds of pricing actions so far, the ladder in response to tariffs. Could you just maybe talk a little bit about how your pricing actions have been aligning? [inaudible]
Speaker Change: with what you're seeing from your peers. I mean would you say it's been a pretty tight range out there? Are you seeing any notable deviations in pricing behaviors? [inaudible]
Speaker Change: I think just like we've seen in the past, there's been a fairly tight range you know sometimes the announcements language that is public could lead to a different conclusion but when we get market intelligence back I think everybody's in very tight range here [inaudible]
and it's...
Speaker Change: In some cases, we are at a competitive advantage since we buy our mini splits from Korea. I think that puts us in a better position than others
Speaker Change: But that just more supply chain related impact on pricing. But if we bought stuff from China, we would do the same price increases others are doing. So fairly tight range.
Speaker Change: Okay, guys, that makes sense. And then just a model cleanup question here. So you saw a pretty nice step down in the corporate expense in the first quarter. Just wondering if there's anything to that and what's a good way to think about that line item going forward. Thanks.
Speaker Change: Yeah, that's just related to some timing of the expenses and the allocates, so for the full year still expected about flat to slightly down to 2024.
Speaker Change: Thank you for joining us today, since there are no further questions, this will conclude Linux 2025 a quarter conference call. You may disconnect your lines at this time.
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