Lennox International(US:LII)2022-10-27 17:58Financial Data and Key Metrics Changes - Company revenues increased by 17% year-over-year to a record $1.24 billion, with adjusted earnings growing by 21% to a record $4.10 per share [10][24]. - GAAP operating income reached a record $186 million, up 14%, while total segment profit rose 15% to a record $189 million [24]. - GAAP EPS increased by 17% to $3.99, and adjusted EPS rose by 21% to $4.10 [25]. Business Segment Data and Key Metrics Changes - Residential segment revenue grew 17% to $835 million, with volume up 7% and price up 10%. Segment profit rose 7% to $154 million, but segment margin contracted by 190 basis points to 18.4% due to component shortages [26]. - Commercial segment revenue was $253 million, up 20%, with segment profit increasing by 31% and segment margin expanding by 100 basis points to 11.7% [28]. - Refrigeration segment revenue was $157 million, up 14%, with profit rising 54% to $22 million and segment margin expanding by 370 basis points to 14.3% [29]. Market Data and Key Metrics Changes - North America saw over 20% revenue growth in refrigeration, while Europe experienced a 2% increase as reported and a 20% increase at constant currency [29]. - The company anticipates low single-digit shipment growth in North American residential markets and mid-single-digit growth in commercial unitary and refrigeration markets for the industry [30]. Company Strategy and Development Direction - The company is investing in a second commercial factory in Mexico, with expected capital requirements of $125 million to $150 million over the next two years to increase manufacturing capacity and enable margin expansion [13][21]. - The company is preparing for new minimum efficiency regulations effective January 1, 2023, expecting double-digit benefits from price and mix to offset higher costs [15][36]. Management's Comments on Operating Environment and Future Outlook - Management noted ongoing supply chain disruptions but indicated improvements are being made, with expectations that most inefficiencies will be resolved by mid-2023 [42][48]. - The company expects revenue, margin, and EPS growth in 2023 despite potential declines in residential unit shipments due to economic factors [38]. Other Important Information - The company revised its full-year EPS guidance to a range of $13.80 to $14.20, down from the previous range of $13.80 to $14.50 [30]. - Free cash flow is now expected to be approximately $300 million for the year, down from prior guidance of $400 million [33]. Q&A Session Summary Question: Supply chain improvements and allocation issues - Management confirmed that supply chain conditions are improving but acknowledged challenges remain, particularly with high-end residential products [42]. Question: Residential supply chain concerns - Management clarified that Q3 margins were impacted by decisions to expedite materials and that overall supply chains are improving [46][48]. Question: Pricing changes due to regulatory changes - Management expects a double-digit pricing benefit from new minimum efficiency products, confident that it will offset additional costs [50]. Question: Inventory dynamics - Management indicated that inventory levels are improving but remain short on higher-end products, with potential air pockets expected early next year [60][61]. Question: Fourth quarter expectations - Management anticipates flattish to slightly improved margins in Q4, with commercial business facing the most significant challenges [67]. Question: Free cash flow conversion outlook - Management expects free cash flow conversion to approximate net income, with adjustments for new manufacturing facility spending [71]. Question: New commercial plant capacity - Management stated that the new plant will be designed to meet customer demand over the next five to ten years, with production ramping up by the end of 2024 [75]. Question: Heat pump market opportunities - Management sees significant opportunities for increasing heat pump penetration, particularly with the support of the Inflation Reduction Act [106].