Lennox International(LII)2023-01-31 19:12Financial Performance and Key Metrics - Revenue for the quarter reached a record $1.1 billion, up 13% as reported and 14% at constant currency, driven by volume and price growth [2] - Total segment profit increased by $30 million or 30% YoY, with all three segments contributing to profit growth [2] - GAAP EPS of $2.65 was up 17%, while adjusted EPS rose 12% to $2.63 [2] - SG&A expenses were $155 million in Q4, or 14.2% of revenue, down from 15.7% in the prior year [2] - Full-year cash from operations was $302 million, down from $516 million in the prior year, primarily due to inventory cost inflation and supply chain investments [3] - Free cash flow for the year was $203 million, compared to $410 million in the prior year [3] Business Segment Performance Residential Segment - Residential revenue grew 13% to $703 million in Q4, with volume up 5% and price/mix up 9% [4] - Residential segment profit rose 8% to $119 million, but segment margin contracted 90 basis points to 16.9% due to supply chain disruptions and factory changeover costs [4] - Full-year Residential revenue was a record $3.2 billion, up 15%, with profit up 10% to $597 million [4] Commercial Segment - Commercial revenue was $241 million in Q4, up 19%, with price/mix up 17% and volume up 3% [5] - Commercial segment profit rose 79%, and segment margin expanded 390 basis points to 11.6% [5] - Full-year Commercial revenue was $901 million, up 4%, but segment profit declined 27% to $81 million [5] Refrigeration Segment - Refrigeration revenue was $150 million in Q4, up 5% as reported and 10% at constant currency [6] - Segment profit rose 42% to $19 million, with segment margin expanding 330 basis points to 12.5% [6] - Full-year Refrigeration revenue was $619 million, up 12%, with segment profit up 60% to $79 million [6] Market and Strategic Outlook - The company expects 2023 revenue growth of 0% to 4%, with EPS guidance of $14.25 to $15.25 [8] - Free cash flow for 2023 is targeted at $250 million to $350 million, with capital expenditures of $250 million, including investments for a second commercial factory and preparations for the 2025 refrigerant change [7][8] - The company is focused on gaining market share, particularly in the high-end Residential segment, with new products like the Dave Lennox Signature series heat pumps [11][51] - The Commercial segment is recovering, with staffing levels stable and factory output improving, though still 20% below normal levels [55] Management Commentary on Operating Environment and Future Prospects - The company successfully transitioned its product portfolio to meet the new minimum efficiency regulations effective January 1, 2023, positioning it well for market share gains [18] - Management expects a gradual slowdown in the market but remains confident in its dealer network's ability to drive replacement and new construction sales [19] - The company is managing SG&A tightly while investing in growth initiatives and productivity improvements [8] Other Important Information - The company paid $142 million in dividends and repurchased $300 million of its stock in 2022 [3] - Total debt at the end of Q4 was $1.5 billion, with a debt-to-EBITDA ratio of 2.1 [3] - The company has started the process of divesting its European assets, with the divestiture expected to close in 2023 [20] Q&A Session Summary Question: Recovery in High-End Residential Products - The company has replenished inventory levels and is well-positioned to capture market share in high-end products, particularly with new offerings like the Dave Lennox Signature series heat pumps [11] Question: Channel Destocking and Order Rates - The company expects some destocking in its two-step distribution businesses (Allied, ADP, Heatcraft) but believes its Lennox brand is in a strong position [14] - Q1 order rates are consistent with expectations, with no significant slowdown observed [14] Question: Commercial Business Recovery and Share Gains - The Commercial segment is recovering, with staffing levels stable and factory output improving, though still 20% below normal levels [55] - The company lost share earlier in the year but started recovering towards the end of 2022, with expectations for continued improvement in 2023 [55] Question: Inventory Build in Q4 - The inventory build in Q4 was planned to ensure sufficient stock of high-end products and new SEER-compliant products [35] Question: Market Dynamics and Lead Times in Commercial - The company has not observed any significant changes in replacement plans or capital spending among its larger customers, with lead times remaining extended [46] Question: Share Gain Momentum in Residential and Commercial - The company is positioned for share gains in Residential due to fully stocked warehouses and new product offerings [51] - In Commercial, the company is regaining share in the emergency replacement market as product availability improves [50] Question: Noncore Divestiture Update - The company has started the process of divesting its European assets, with teasers sent out to potential suitors and more updates expected in the Q1 call [67]