Release Date: April 23, 2025
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Lennox International Inc (LII, Financial) reported a 2% revenue growth in the first quarter, driven by favorable mix initiatives from new R-454B products.
- The company has successfully transitioned to new low GWP products, with approximately 50% of equipment sales in the quarter being the new R-454B product.
- Lennox International Inc (LII) has implemented two price increases to offset tariff impacts, which are expected to boost price gains to 7%.
- The company is actively pursuing tariff mitigation strategies, including production shifts and leveraging more U.S.-based components.
- Lennox International Inc (LII) maintains a strong balance sheet, with net debt to adjusted EBITDA at 0.8x, an improvement from 1.4x in the prior year quarter.
Negative Points
- Segment margin decreased by 140 basis points to 14.5%, primarily due to tariff-related costs and manufacturing inefficiencies.
- The Building Climate Solutions segment experienced a 6% decline in revenue, with sales volumes down 9% due to expected destocking and order delays.
- Operating cash outflow increased to $36 million compared to $23 million in the prior year, due to inventory investments.
- The company has revised its full-year volume assumptions downward, anticipating a decrease in sales volumes by 4% compared to previous guidance of a 2% increase.
- Lennox International Inc (LII) faces ongoing challenges from tariff impacts, with total cost inflation now expected to be 9%, up from previous guidance of 3%.
Q & A Highlights
Q: Can you explain the order delays in the commercial segment and whether the issue has been resolved?
A: Alok Maskara, CEO: The slow start was due to destocking and the transition to new products. Order rates have improved sequentially, and while some inefficiencies may continue into Q2, the issue is largely behind us.
Q: What led to the decision to lower the residential volume outlook to down mid-single digits?
A: Alok Maskara, CEO: We are trying to anticipate a potential slowdown due to macroeconomic factors like tariffs and inflation. However, we have not yet observed any slowdown in orders.
Q: Can you provide more details on the two price increases announced in the second quarter?
A: Alok Maskara, CEO: The first increase was to offset changes in aluminum and copper pricing, while the second was to counteract the direct impact of tariffs. Both are mid-single-digit increases.
Q: How are you addressing the inflation guidance increase from 3% to 9%?
A: Michael Quenzer, CFO: The increase is due to higher costs from tariffs, particularly from China and Mexico. We are implementing pricing adjustments to offset these costs.
Q: What is the impact of the 454B refrigerant transition on the commercial segment?
A: Alok Maskara, CEO: The transition caused some order delays as customers completed 410A jobs and trained for 454B. This is a short-term issue, and we expect improvements as the year progresses.
Q: How do you view the potential impact of USMCA exemptions being removed?
A: Alok Maskara, CEO: If exemptions are removed, we have mitigation strategies in place, including shifting production and adjusting pricing. We are prepared for various scenarios.
Q: What is the expected timing and impact of the emergency replacement initiative?
A: Michael Quenzer, CFO: The initiative is expected to grow, particularly in the second and third quarters, as inventory and training are in place. It remains a small but growing part of our business.
Q: How are your pricing actions aligning with competitors?
A: Alok Maskara, CEO: Pricing actions are within a tight range compared to competitors. Our supply chain advantages, such as sourcing mini-splits from Korea, provide some competitive edge.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
