Lennox International (LII) 27 Oct 222022 Q3 Earnings call transcript

Company Profile

Participants

Steve Harrison	Vice President, Investor Relations
Alok Maskara	Chief Executive Officer
Joe Reitmeier	Chief Financial Officer
Gautam Khanna	Cowen
Jeff Hammond	KeyBanc
Nicole DeBlase	Deutsche Bank
Julian Mitchell	Barclays
Jeff Sprague	Vertical Research
Ryan Merkel	William Blair
Tommy Moll	Stephens Inc.
Joe O'Dea	Wells Fargo
Josh Pokrzywinski	Morgan Stanley
Steve Tusa	JPMorgan
Nigel Coe	Wolfe Research
Joe Ritchie	Goldman Sachs

Call transcript

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Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Lennox International's Third Quarter Earnings Conference Call. At the request of your host, all lines are currently in a listen-only mode. There will be a question-and-answer session at the end of the presentation. [Operator Instructions].

call recorded. this reminder, a is being As I to Investor Steve like to Relations. conference over turn the Harrison, would now Vice President of Please go ahead.

Steve Harrison

to otherwise Q&A. with and on the highlights After the site slides, available discuss the for give you for I’m to webcast quarter year for and website To CFO, today Thank at questions. XXXX. to joining additional questions take the the today’s the XXXX yourself also financial limit Reitmeier. with CEO, you are our ask mentioned against performance reconciliations, on will our today will guidance non-GAAP through two for Joe discuss or are morning. and will re-queue noted. for and GAAP call The release quarterly time Alok on current that, earnings during will Good Alok follow-ups unless before replay. Alok www.lennoxinternational.com. Joe view Maskara; webcast any company’s for archived everyone presentation here questions prior us. please and comparisons be today’s All link The conference period, Q&A,

be which course and X, Turning that certain the to we would of uncertainties. are statements making will this remind I in forward-looking subject to call, risks everyone like to Slide numerous

these uncertainties, information available see and the risks SEC. For filings concerning Lennox International's with publicly

our day December call outlook an Alok, Wednesday, for me strategy. on our let investor three-year and guidance the annual remind discuss our as to as turn over of I provide when on XXXX we specific update Before upcoming well XX, will everyone

to the CEO, Now, Alok Maskara. call turn over let me

Alok Maskara

employees are serve given exceptionally supply hard, disruptions the thanking want all better I Good morning working everyone. and to customers. to who chain ongoing our our start welcome by

deliver a four X, of was start level. customer our efforts, want service result to I record highlighting key On able messages. Slide their while another quarter to improving Lennox As by

of three all a growth a company $X.XX Adjusted segments. results third XX% of quarter XX% billion. Overall included third record in record of double-digit revenues financial our grew were quarter $X.XX. our earnings First, to revenue record up business quarter third to

for we be X, to Second, January XXXX. the efficiency prepared regulation effective upcoming minimum are on

the us which supply are inventory chain levels, As resiliency. increase replenishing part help also will we preparation, of

build operations a $XXX quarter, Given our inventory was from in down the from ago. cash million million year $XX

is Third, daily and segment output the Stuttgart in a in business progressing factory recovery the commercial our from is steadily well, increasing.

built profit required XX% million is enabling commercial manufacturing over of while segment new Third in margin shortage new commercial components much-needed to provide Fourth, commercial and range. chain us persistent mix year for of the was will The second we and announcing additional products, the the capacity, be Today, are $XXX to the residential factory quarter supply to years. sequentially, expansion. in range guidance full are year-over-year. be also EPS a revising driven inefficiencies, of by The we to XX% commercial Mexico. the next prior our two high-end adverse $XXX total range lower up investment given expected in factory end capital the factory the million up impact for

air to minimum on markets cooling efficiency our January units and required turn level rooftop new regulatory conditioners, commercial XXXX. is changes. minimum preparedness and pumps the residential the Canada, please our Slide discuss to increasing heat and end Now, the for X In efficiency U.S. X, for in

on in For the the of is air change installation. regions, date southwest conditioners and south based

for pumps north regions, the of in and manufacture. the conditioners date rooftop and air for all based is products, change While heat on

higher than price and a of expect to mix new XXXX the offset the double-digit units. For we costs of more compliant the units, benefit

higher our efficiency has again. believe historically these and done optimized better competitive our well aluminum external very we standards efficiency users. efficient we having an more competitively without single for minimum indoor approach during Lennox and so coils end achieves units, to compression, transitions, products, do stage change to making design design includes residential footprint. solution are For This and dealers well positioned

Higher daily Since since profit for for customers which improving service Now manufacturing X increasing met please existing an systematically have supply which our shortages. been XX% levels, since turn update our given for April. our to XX% normal staffing now understanding on mostly output, Slide At a up we in have levels our efforts. recovery are industry-wide talent, who April. retaining achieving up and targets reaching hiring commercial we output facility, our Arkansas normalcy, resulting is of challenges is staffing is

we We capacity customers to increase want are for doing reduce to assure and our are that them utmost our and and lead loyalty grateful times. patience

deploying manufacturing closely and suppliers are and and with additional levels committed We delivering additional output satisfy to talent from to demand our working remain the existing current factory. productivity

lower lines launched standards. we efficiency commercial the product output enable will associated us meet manufacturing our efficiency However, that than as the build efficiency exceed and we products minimum quarter, sequentially expecting to new products positioning cost. residential, our price higher to in and the transition Xion the or to fourth higher Similar newly more offset Enlight, are of

Saltillo, the support to invest capacity it existing will in and customers to will factory market. to second we especially our position operations. lost a our in emergency ahead, regain new near replacement demand, forecasted commercial residential in share, Looking Mexico have The also our increase decided factory us

recover, million production labor although XX% lower be $XXX cost. continues expect facility, this savings those will hourly the Joe at With full and financials We will to offset expect an to as freight new of by X Slide I quarter hand next on higher we some cost segment Overall, full that, commercial guidance years. to over the call for discuss three profit the year. improvement within

Joe Reitmeier

good and you, morning, everyone. Thank Alok

margin currency and quarter segment operating third record XX% record points million. manufacturing XX% products. Looking million $XXX was driven for XX% the quarter rose down was a Revenue GAAP to and a chain chart, record primarily higher segment Total constant basis and rose to up a at third and XX% in inefficiencies constraints the the volume GAAP reported quarter overall, supply by EPS and up third International at profit. was growth XX driven third billion a $XXX quarter quarter up on was to posted EPS as mix adjusted primarily due income third see revenue record end company XX%, Lennox by the profit lower and XX.X% $X.XX XX% up quarter $X.XX. you $X.XX price. record to total

in $XXX up with as to teens million. faster. X% on grew $XXX revenue the of units we construction quarter Residential growing quarter. profit million. was X%, were Residential up unable new construction shortages. to due Volume to third hiring both a to Now Residential see XX% margin Slide replacement were to you contracted moving Segment for XX% lower XX.X% price rose to business to was sales up segment segments record X, starting in the new revenue increase points residential mix XXX high in and due basis component output the profit.

to new our Regarding store locations Lennox Stores, XXX. opened total to we count in bring the third four quarter

the year We with stores. XXX expect approximately to end

Commercial in the Slide in commercial price $XXX up Commercial and quarter factory and to XX% national points to was continues X% up segment segment Commercial well. and growth business, X account was by XXX in to Arkansas margin our strong turning demand basis up and million business. expanded was mix XX.X%. remain XX%. up XX% led backlog strong progress Now revenue recovery was profit

increasing for is factory. and we We we make employees The daily to and hired output productivity. improving need recruited have the the progress on number and of continue processes

up refrigeration in up quarter by XX% points X%, volume as and North demand was was rose impact. million than basis up million X% XXX was growth negative the at margin foreign X up as Slide currency. to the for Now and up turning more led at $XXX business. exchange reported, had backlogs X% to was to for profit remain was Revenue our up XX.X%. Price Overall and Revenue refrigeration revenue currency. XX% and XX%, Europe segment constant segment a third XX% constant up Refrigeration XX% expanded strong. $XX XX%, America reported

XX, to to revenue of for Turning XX%. our of to XX% XXXX expect to year growth Slide now compared range XX% full full prior review We year XX% the guidance. let's the

American and refrigeration unitary For the low digit growth North single in commercial mid-single shipment assume and markets, digit American continue residential to industry, markets. we North in growth shipment

are We of EPS range for GAAP guidance and to $XX.XX the for prior adjusted updating to to year $XX.XX our $XX.XX. the to a compared range of $XX.XX, full

headwind million shortage limit expected constraints higher guidance is headwind is is for million Commodity and a headwind. from $XX prior year, the our million. which from to Residential continue compared puts $XXX that our the be attributed $XXX chain be Price Dave now of year a now benefit million to of supply looking prior mix to takes $XX our Now now our million is down guidance products cost production $XXX expected $XX the be Series. to $XXX a million Lennox of up mix $XX is a XX%, Signature of million, inflation as The changing. are to expected to end the guide yield of million. full prior for at

of of to repurchase stock rate are pension to prior our expected million which the expense year, tax are a component a year, still inventory prior be now factory effective cash to as from expect million. $XX is been invest compared expected now to on headwind. And be year. compared transition, seeing guidance $XX $XXX million our chain approximately of guidance approximately in and related more is prior the guidance continued supply $XXX compared is we million and ahead the full guidance compared we million. now million $XXX $XX materials has Supply efficient of now million $XX be other $XXX completed, XX% price headwind and However, a prior the for pressures free for up will inflationary headwind and Interest prior $XXX buying million flow regulatory for of components headwind. million. And resiliency, guidance million, of to The disruptions guidance $XXX guidance for to increases minimum now

expect Now shares you a approximately not million. be million back Slide $XX share thoughts expect still costs to And I'll talk guidance are on weighted to And expenses XX it for Freight still XX. year. be points turn we time. let's capital diluted with expected million count still to that And at to to the the full this over are our for that, corporate spending. Alok planning $XX turn of average are about We we million headwind. changing. to And $XXX still for a of XXXX

Alok Maskara

Joe. you, Thank

guiding are Day will on Investor that at spend the mid-December, giving I our minutes While headwinds outlook. few our in wanted XXXX today we be on to and specific different XXXX guidance a tailwinds

side, headwind broader replacement we rising decline downturn interest for the On impact from environment rate shipments housing and single-family residential a as economic due well to the as starts, unit and in on are prepared new slowdown. possible units

On to supply chain the continue to we side, expect cost first the also headwind XXXX. of expect current first in the half component some half And inflation. of of we XXXX seeing disruptions the persist

tailwinds, from XXXX mixed minimum the and increase efficiency a regulatory expect commercial. benefits and we For to residential see price both in

We also annual increased carryover price see significant benefit. and

Our impacted easing manufacturing, be by and XXXX margins will cost. also commodity favorably recovery commercial

our will the that us most the middle year. as chain the by cost meaningful expect of provide material In reduction will inefficiencies supply we addition pipeline behind savings be of

opportunities our XXXX. construction have EPS for businesses softness, expect revenue, demand into Our if all and of Please And still refrigeration us. Slide macroeconomic to XX. are ahead and in Bottom-line, down, units growth LII businesses commercial gain new and strong have even we turn and shared backlog residential margin XXXX.

would leader efficient, I energy opportunity. thoughts I to prepared I narrowly some environmentally climate-controlled before focused and is like believe close remarks LII an summarizing Lennox Lennox attractive solutions. friendly, final For why by is Q&A. why our joined investment in

we products global you. LII to investment compelling direct The demand dealer unique strong potential. We to as Thank And a sustainable, and take beyond, Operator, robust of strong continually let's a summary, I that high with now. during be execution innovative look we uncertainties. Joe, your a advantage. deployment. a to end Our with company operate and that I capital ahead. even is will go providing competitive network, growth reduce believe history has have and replacement economic best warming discipline our provides Q&A. markets questions In days in at resiliency happy opportunity XXXX us are

Operator

[Operator Instructions].

will Please first question ahead. our from go We take Gautam Khanna.

Gautam Khanna

Yes. Couple Hey, questions. you thank guys. of

well, happening First, allocation suppliers and there. evidence the And on getting root high-end was talk better? a, as the relative build I guys And evidence your strong is side, what's you residential the And of are if supply on get b, about facility we to to from on Is product? an wondering chain you aren't any commercial it maybe some of could seeing any think Is just as where of CapEx lastly, likewise of there to cause that? and the the timeline? the required anything you the commercial Thanks. there about competitors? certain new then, getting

Alok Maskara

good morning. Gautam, Sure.

and seeing supply we is fast enough not residential getting commercial, everything the both are are like this times for then as it are. but better, crisis Ukraine so chain side, on I've a hit But the COVID So better. and But they something few maybe yes, that hit once getting said and well. hits things far

our evidence performance. no supply impacting that Second, we allocation is to or show have have issue chain the no concerns

core We are exactly challenges facing, we other believe suppliers. have relationship our as a of with we the And are industry that, long, through the lengthy players. same lot

not we allocations. So of concerned any are the about

split On guidance the on the December now we for give assume are like, factory, to planning that we about purposes, when it's more would the for evenly two be between that Day we spend, We million But $XXX Investor years. the capital XX. on together for you million. new can highlighted to $XXX

Operator

ahead. question come Please Hammond KeyBanc. go from Our will next with Jeff

Jeff Hammond

morning, good Hey, guys.

understand, and the with your Just the from getting there's Asia sourcing a And use across commented back residential you better, getting a lag supply is kind you just like of it want more it I'm seems little seems little of like like but feels better. things this kind seemed it's chain, chain, that are are to on a it's And or wondering, bit creating because worse. people just anything worse. if supply just how bit board, saying getting of

Alok Maskara

that margins. QX make could chain. But QX a look worse. a reach QX that think supply residential in to few the the in frankly, look like made sure chain separate the And year-over-year I it's if serve the wouldn't Because we to I a would at expedite I as situation you purely with conclusion you year-over-year, margins margins we QX materials our decisions a and could as buy indicator, margin change customers indicator supply well. spot especially at our getting of

But year-over-year there of especially our more is healthier, QX challenges high-end lead microelectronics getting on times products, semiconductors. saw better. Our the And think will we inventory that overall, on be down levels are in getting than what our are are improving, dependent less, things remaining, pockets significantly qX. a on our I basis are which and guide implies margins less

So impact different I look one-time factors. a as at multiple of QX

us supply of, that reiterate come expect chains mid aware would year. supply better. our are behind getting of we aren't back I another and So that, next be Jeff shoe drops Unless of inefficiencies we to than no, would kind no the most later chain

Jeff Hammond

associated you're kind of there. the to it meaningful Thanks. much year, and we better then, Can next look seeing started lingering change. are for what us look right maybe about to as with the frame then hear of speak seems into more kind the you just -- regulatory just it. like at if tailwinds way give the that's headwinds we a just headwinds just tailwinds at helpful. to than And the Okay, And pricing changes

Alok Maskara

Sure.

call when into will additional benefits. remain confident talked get But clearly, pricing are new the costs the in which appropriate acceptable for our series channel what. customers product remain than which it's hearing, recover the higher double-digit with on we we're what and we I very make that going the to do double-digit the minimum to benefit. confident that. consistent won't sure I be like get a from that best Currently, more the to that's nuances products, with efficiency partners. associated going mean, and increase. there a Clearly and And we're levels we costs And our price that So about we

Inflation the bullets higher naturally think tailwind, think I the mean, second takeaway. good that it's that give going there Reduction we equation including have on bullets said. pieces interpret yes, demand details hold people are we to the I a labor way would On hold? than repair, is, unknown to the I to conclusion and and Act We how well. I replacement yes, put headwinds. versus past is December. replacement, Jeff, tilt in in the dynamics, But I headwind thought going various But We biggest repair eight side, to there, for a naturally going on you everybody other that's drive three what the towards tailwinds including to replacement The more that about well is which towards talked that's the given drive if more and think fair more replacement. costs we'll the

Jeff Hammond

Great Okay. color, Alok. Thank you.

Operator

Please from our question take DeBlase will next Deutsche We from go Nicole ahead. Bank.

Nicole DeBlase

Maybe start pricing we with questions. could

just that So is loosely as Alok, maybe in that lead due like the a much you of SEER throughout improvement standard be XXXX. of talk carryover that can And pricing think finer impact is how terms you quantify can the guys when for tailwind of about the into on you attempting benefit to a the there XXXX a the like change? from next to putting price year? pricing point about in annualized, took double-digit sense then, percentage that actions XXXX combine

Alok Maskara

number. full before from give higher this that can pricing and benefits the that be will for would and comes annual But side. in range we a that significant best first there wait we we say we it through, to I will launching be price are From benefit we as changes. lot But expect you will year, this of and mix obviously finished all what financial of than any more half meaningful, the regulatory the point, be increases, stage the mean, there terms, a is at expecting price December, the for give will on a us carryover But year, decline color be price we do a that volume percentage more have like the think to change. are Nicole, indicating SEER in number I at I until could you it's December, probably on we product

Joe Reitmeier

more we be than to expect I add positive here cost will that. in also to we Nicole, price XXXX. were

Nicole DeBlase

Okay. with you respect just And lot inventory That's change. And a this standard channel what's the it's seeing level on to helpful. obviously, about anything SEER understand guys I it. questions the then really that with from think tough to are of maybe of right now, going channel and Got investors. dynamics, there's this inventory with especially

So how about own is do your in as as distribution allied you where inventory things? guys well feel

Alok Maskara

Sure.

we level So in come distribution, but our our from/ still getting is where products. own majority which is think if some which go healthier, I inventory our SEER of as that the have would maintain the higher sales we're products the the we short into it end change, on they more that does of messy. we customers actually make all inventory ensure could, to And, need

experiencing the inventory, And and to now. of efficiency early areas, the for distribution, air not minimum change. I of an we near going by year, cautious change, SEER are majority try driven keep to worry we about driven think post time by something are as and that sufficient independent lead the In healthier. think But those sometime people like pocket being inventory levels may be the pocket, industry I in resize, air which and inventory the people in sort probably are want next improvements, getting future, will On inventory. most that's uses, do the

Joe Reitmeier

more is our go make attributable to one to versus to step dealer distribution the just And air to direct more that through those pocket point, model.

Alok Maskara

us impacts very little. that think We

Joe Reitmeier

Right.

Nicole DeBlase

Thank I'll it pass you, on. guys.

Operator

We Barclays. our Mitchell will take from next ahead. from question go Julian Please

Julian Mitchell

fourth of wanted a morning. a off I Good question start about Thanks. quarter. the just with sort to

across that got, kind QX. the segments the understand you've different wanting QX, than of to you assumption total And then, margin just in in high growth a year-on-year too of the quarter. So the sales or it's teens, in midpoint what is fourth saw mid not sort flattish at

volumes So way and little Is resi. because year-on-year the a in in kind digit think right bit it to better that of resi growth single of still QX? about and that's

Joe Reitmeier

insight made our make And same a And some degree. which refrigeration the fourth fourth see and margins. well. we customers. business to Yes. When to don't the quarter, very higher slightly I expect at expect fourth commercial in residential on for The the investments, of to away on Net-net, more bit look in a the I'll flattish better we we And going fourth came We challenges think that fourth going things fourth business, here, business in simply be continues to in particularly then, biggest margins I the though the of to what quarter, even give that and have up the quarter year that's the little an the quarter serve quarter. margins in sort fourth we of in step procure the at we're give the business, is margins. repeat do inventory year-over-year, to to drag typically cost, quarter sure we impact can because last quarter. we of intentionally in our you had guidance. don't challenges

Julian Mitchell

would much kind then follow Thanks cash of cash be up Joe. my very around flow and uses. And maybe

it's this of CapEx the of from think the new couple understood the running about because years. I net constraints. for chain you're flow of year So And next adjusted at sort have then, conversion the and the cash yes, supply you plan XX% free

it's, we cashflow headline two are thinking for three wise XXX% to years. conversion, or doesn't get probably So back

to it. the Thank context guide. the buyback also any as right in the think And reduction that's to way Just wanted to check about you.

Joe Reitmeier

opportunities X. slack also component increases our market buyback. and we in supply the demand, chain, continue come What and price we what off to few over did look and to to fend the continue months with evaluate will reduction start last I'll Yes, create that January in meet production to end for stick the need is wise

additional So into we adequate we made in had to our going supply important XXXX. that in support time sure make share inventory, lieu investments critically customers with repurchases, in to

that's So of X. things about historically with between and we'll leverage trade-off to there. our one repurchases between to targeting continue desired -- two. and the talked X.X And target share the points do We've

I net years be flow and what think accordingly that the that assumption to cash want that as Julian, of the next cash with to take that good like. the forward, way you respect XXXX. two with commercial approximates proxy, it, going new to income, cash start embark spend closer facility we midpoint on deliver pretty and would the we manufacturing free flow I for incremental do is looks a for should conversion flow free and the And the cash adjust we're then going to flow that, give

Julian Mitchell

very That's Thank you. helpful.

Operator

take Vertical question ahead. from next We'll our Jeff Research Sprague Please with go Partners.

Jeff Sprague

capacity sense of the productive on us of some this first give base? plant revenue can commercial increase new footage that whether terms comes the to relative with the plant, square in something increase outputs, current kind potential maybe you Look, frame of of that in size it's or the this

Alok Maskara

Yes.

now, listen, at need XX years from backwards capacity that. details. work backwards how through we looked what would customers from work And working think, all is forecast and years the from are I through now five our we and did much we

Stuttgart, lower the are given much very Other capacity, much So the plant the remember, demand. it to availability. labor in nameplate than thing, running local customer's with lower matched the may be challenges start we will and but out capacity,

our want forecast they years sufficient the this the I at give capacity, to plant at least to So serving a to stage, for to if next number. will say need. five it's But don't with give XX this keep customers us

fairly Our the especially receive. us, know by demand, that facilities, exact benefits our start of execute on of customers the to the come given ramp we timelines, construction will years But the the and a we next have a and existing not commercial facility. the ESG I new about replacement impact at But make lot in customers and rest would and remain end around give within sensitivities details. optimistic sure plan two XXXX new assured, pretty the on that regulations detailed production both as, can they rather

Jeff Sprague

Understood. again, mix thinking then, the about and of just the SEER kind change impacts. And

to As you of the the up? subject and, the mandatory was across at business XX, as you exit in minimum percent what country levels step XXXX therefore, SEER

Alok Maskara

more about than I We've always number number similar little is talked XX% in about in mean, the XX%, range. and we probably hovers industry typically a are XX%. XX. is That a higher

the of would use higher short XX as products is somewhat and well. I they a but remain Just because more in use supply microelectronics apply us industry around number that'll end which to and the average

Jeff Sprague

And up talking there XX, issues? components XX one the having the componentry Great. any about SEER you're in then, kind maybe end and the more supply last you're where kind one comment that like, just just so of of is causing higher unit friction on new SEER

Alok Maskara

remember to for that. and our we as good efficient dealer, products. XXXX. products. mean, are as SEER that be seeing like which, a really as make to not get And part we XX, highest of customers have well that getting dealers typically But unfortunately, shortages, XX, we upsell. units been very easing where just at series forces the well are upselling we go that on known XX, see into those I signature energy are and our able we That's constrained more do on

Jeff Sprague

the for Thanks caller. Great.

Operator

We'll take question William ahead. with Merkel from go Ryan next Please Blair. our

Ryan Merkel

your How the equipment look prepared with being competitively does the mentioned lineup you SEER off, change. First other brands? for

Alok Maskara

a keep I changes still the a that believe a, lot Ryan, the are listen, are being box size design our we with of as unveiled. CEO, right? same. always We the best in this, So believe the

our that the dealer efficiency the products, difference are We I So competitive believe the But remains And outdoor better. they put technology to can the change a for that meet important single our [heat] as does standard. we have is aluminum the [ph] gives not advantage. higher most unit. believe indoor exchangers optimized. stage We footprint unit, by changing us have think just

of competitors, unit unit. they our many and to the the For indoor outdoor change got

So biased, a got we've but think solution. listen, great I I'm

users our are And dealers positioned. end be I transition. going looking getting forward well the think to share to through some are and we

Ryan Merkel

Thanks then it. nice for be full And commercial? for production in for say you'd commercial. at production? in increasing that what you job on And did that. mid-XX, Got inning then, I'm are curious we

Alok Maskara

was follow follow we're in early got or no lead we still we third are natural that. in the to that if But way or a in that labor one. meeting inning, are you Listen, the production While inning the full our first second cricket time. we probably if are innings, should on deal. is you improving big baseball, customers acceptable smaller is demand close And I we up challenge, future. us manufacturing finally, level go ramp we our years. near processes have XX%, another are And not our past suppliers that have minimum, led now this XX% suppliers in mean, the our down big few of up productivity. to in and At the often with a these

on the or third But working are baseball inning early probably terminology. we through a second So innings, that.

Ryan Merkel

Very Thank you. helpful.

Operator

Tommy We will Inc. with question take from Moll Please Stephens our next go ahead.

Tommy Moll

for the of around wanted next peak to one comments that helpful. year. follow early The resi up was I on you replacement made XXXX

homeowner like, home context for discretion to Or you slowdown. potential sale? for respect example, some versus mind How is talked there also in to the are some when spend, repair of that, hinting your timing Specifically, where pressure the the existing volume replace of with economic an of in a decides dynamic? context of about at a much you a just in the

Alok Maskara

No, of I much between a think replacement. balance repair it and is pretty all

that believe this non-discretionary is spend. We continue to a

always be working there a conditioner, When would I small replacement, live a purely repair a that's the choose but broken air we're will versus analysis. there think that that it's with think people negligible. we to Now, percentage through still

We looked recessions if economic have versus the in softness, past. we turn time towards is favorably a still replacement, this and And around, there will other think more replacement. at environments repair the uncertain

uncertainty. of time believe it nobody towards it's in do non-discretionary, we continue replacement. think versus And scenarios it, we'll how And all is to to dive that change economic a much I around So have going best we to our more knows. just is repairs replacement trade-off of answer and

Tommy Moll

Yes.

Okay.

I helpful. think that's

Joe Reitmeier

toward to in repair one XX variables the minimum to it's think not of there's ultimate still dynamic change. efficiency significant punitive other towards is that find a if going be refrigerant. XX there's units installed, where, -- difficult be some a I is the our point versus that replacement play more where repair? Secondly that also number things scenario, unnecessary Should

lower that also, So a price us I bit. pumps, towards and for scenario, of heat think costs tag think all escalating little that will a maybe And incentives a electrification government to repair incentives, then all help I in compared a replacement that points with for situation.

So dynamics more were I think those are economic aligned they than tough times. in previously, closely

Tommy Moll

have frame keenly like could any there an all curve, year, your is personally We'll I there. these expense that of sure. to analysts after you And next I'm there, based with you look contexts system, the the headwind know might interest terms RXX circle as did want rate, back interest one some rate about way of aware now next call of so for debt maybe dynamics, of year? floating ask or the know Joe, what the for in your the expense on information is I

Joe Reitmeier

to clarify do wait have our lot to don't for all December you of until et in work going cetera, mind. if you, still of that. We a on that to I'm plan,

pieces, of So scenarios down we're moving whittling that various this time. there's at lots

that stay be where than won't it I So it'll think different don't is higher but than be will significantly higher, be today. it to wanting significantly

Tommy Moll

in again December, turn everything. and I'll for back. talk We'll it Okay. thanks

Operator

question with We ahead. will take Fargo. Joe O'Dea go Please our Wells from next

Joe O'Dea

start And maybe if sort anticipation component up, of side. investment costs of have of an seeing inventory the might you go part I think heard on correctly, cost but you that of clarify to that. been COGS, the I raw source of wanted I sort related that. to components of think And then about you versus that, sort within have, the kind -- materials you of the balance when the exposure can

you moving come forward? materials some what expect see down there? anticipation Would move in So down. or your the sourced of mean, to price raw think sort coming I higher is be I we seeing, you But terms as of of flat even components? Do likely you that guess,

Alok Maskara

Sure.

I go bit. we inventory Listen, the mean, a as piece. shift we little with mean, start that I mix probably me will Let forward,

have our more supply lead fixed, chain given more have final raw we'll lead less times we times. material, and So the goods, chain -- finished own higher Right raw now material. supply

So I think reaching overall, are little we levels. inventory that's But bit. going to a shift fairly normal

my So in way. them we we more we majority same material, I customers do historically. it And to break don't trending And the raw But the and we have right now. challenged to always warehouses in future, that of to to our I we say, And serve level. see hey, think normal will think in need better. goods out finished finish that buildup was our less we have factories, back would returning go won't

Second lag component year. negotiated supply mean, cases, a a will and in cost no one, contracts, XX-month pricing this excellent commodities. creates side, expecting pricing are And we that I some continue year, commodity our few they inflation index team, maybe on we there's always expecting the six that some for to has lag. always which inflation, means next to months, for

that I we material initiative, will together. that components, year. all our would next on commodities, this inflationary. year, components negative think continue positive expect put we if versus But be it reduction to take based a a cost being

year in that to negative net was this us. So, a terms of headwind in

December. that year, a in us will Next package tailwind for and putting you the break to whole be out together we'll

Joe O'Dea

to and about, you portfolio And and so about the if bit? XX% a at is efficiency help don't be math minimum kind the would pumps just of know of level right that to helpful. up applies do much heat right in just resi. That's talked minimum the to the so conditioning air maybe like going on terms wanted step back sort of kind and all XX% of pricing us that really say we but efficiency and then, of I what of circle I little is we that percentage the math how through that total think to XX% just

Joe Reitmeier

complicated Yes. December particularly just where XXst by still transition A way North. than to year. this XX can the sell on the of that It in more manufactured be residential, had little SEER the is given you

a it. I not because that's think going number So scale math I'm bit. I'm the that to not give will of back that you certain something

not I'm are hands back very difficult I thing get table. just play going units to XX% is of roughly revenue, dynamics the the those it you of But our around minimum to because So XX% the on efficiency. want lay to once it a to again,

consider December, that. around like and a the and the of need residential not tighter versus then you the give side do may I'm there up around you number We said, the North way that that timing South more color at I on to start that you to this out but transition prepared to in laid So it's in particularly with time. come

Joe O'Dea

Got it. Thanks very much.

Operator

take our Morgan Josh from Pokrzywinski next question We will ahead. Stanley. Please from go

Josh Pokrzywinski

reduction, hand, I decided like about profitability of one for talked think commercial Alok, to that you of million you Yes. with the sound along that drove hit because remedied. and the milestones increments of should you way mentioned it been the kind you the CO they'd on guys startup then on [ph] $XXX what restoring what sort about here think few is a reasons and stuck, we the

are the and you sort as that? of with watch profit I'm next think of sort would buckets what's restorations that wondering correlating there thing any to So about of like,

Alok Maskara

we balance. Joe and COO right to he of got Commercial, and Yes, President before the met call, Nassab, said, strike our a I

still to celebrating over words be and A and work that higher lot the that at I to from just making of going come $XXX acknowledging output improvements we on capacity still only come to going going XX%. lots have on to progress number that’s So manufacturing increased are use next a sure to nameplate efficiency. I'm way we two but output his we below ahead Stuttgart, that’s three hard but just still have lots of with demonstrating by us. is of of staffing our lot The because mean, shows is spread our million going by XX%, years. output

you with be benefit robust So more manufacturing processes. then, simple that I And without mean, to state there's don't from any the labor, April lot to just adding that. in manufacturing a XX% we we get make on our comes math more improving products processes. should able got

So deliver all take are to I mix need those to commit had be we SEER of but three it's at establish in about our step also we it change, we it two towards going mean to applies delivering less, benefit finally, it to of constrained in $XXX I residential, some And think to Put the talked as national we account we in three. levels. together, confident forward where hope or on the the we that then, artificially years price contract us processes. million, pricing in our least commercial,

Josh Pokrzywinski

apologize times But Got this the it. I couple IRA And of points covered on prepared if the helpful. I earlier, out That's, you’ve then, cut during remarks. a heat pump some and expense of lean you more of at heat think peers towards probably that the would little your furnace watch, out there. comes some pump. bit I to a imagine than I guys

a maybe kind opportunity have technology think about other guess, here? what how you both in they of do pumps North, historically. help than terms and incremental the to more the that bit benefit I positioning you on little in channel product execute On though, hand might heat would the think of I

Alok Maskara

Sure.

peers, So it pump a growth pumps. versus we that for higher I just have few our penetration. to share less is opportunity you're North heat pump correct South. our quarter, previous than increase the this in look or heat mostly quarters We a because the exposure heat serve huge some like strong had of as us in

heat to is you few goes heat Reduction heat pump remaining us a believe and gives and a pump often going South to climate Inflation pump work not Inflation use well an to from Reduction make Act edge may competition meaningful I to cold where for heat system Act difference in new penetration over have where increase furnace pump the but with to penetration technology dual months heat our North. go the for And pump coldest work the a as us in very nine ten months. fuel areas Our

our the more during our gives show of But the the us talk think cold and opportunities rest pump and more us, benefit Investor to heat for penetration ahead for low I lot more of us pretty love some climate, it Day. opportunity and these given industry the of are exciting there So favorable points technology.

Josh Pokrzywinski

Do be opportunity ringfence able we sort -- or Investor you are IRA Day? think you'll at the of quantify to

Alok Maskara

to probably of part regulation. local going it you think kind it it, I yes, if don't hard it come be to states to remain themes quantify hasn't I'm he's actual actually to Potentially exact nodding any the is, know it's We going sort us, to their going of utilities own the it's very looking of states how to each We quantification. hard, down with it's can flow our peers still up be know give and needs to can of states just to flown I and of impact, because Joe implemented. and at point down and positive. and

Josh Pokrzywinski

appreciate Got it. it. Understood,

Operator

go ahead. take question our next will We Tusa with Steve Please JPMorgan. from

Steve Tusa

that the quarter know did all, was I perform pretty you of in channel, was the first what it So quarter? resi. independent how last in for big up

Alok Maskara

go then the the would was channel. similar historically was on and Board. Lennox across Allied to I it out independent the growth through similar We serve we and don't the Board. say but with now Heatcraft mostly the the right break across do the We direct growth

Steve Tusa

out in no, anymore? that, going that is not disclose breaking was it think XX-Q, to you're your I or

Joe Reitmeier

the our remarks, do is talking was prepared formal presentation break about XX-Q, it we referring Yes, to. in what out that's and he's Alok in what

Steve Tusa

Got it.

Okay.

Joe Reitmeier

think Yes. performed To each on par I other channels Alok’s both quarter. almost with point, this

Steve Tusa

Okay.

Alok Maskara

for point it to out meaningful not They're here. enough us

Steve Tusa

Great. follow-up one And then question. just

today price replacing everybody for the years in are what is ago, the basically increase everybody up to consumer artificial repairing. in relative going is basically in much there's with money kind you're HVAC now zero elasticity of zero is return couple of generally that versus another that to XX%, mean, spending market. prices So get guess a industry to I residential I and XX% saying the

saying what I'm So elasticity that residential? bulletproof like, kind of you're perspective, on kind of just is fundamentally this market hearing is from

Alok Maskara

don't that market pricing is I the said No, think elastic. we

saying that to do we shift. solution. our serve repair what is customers was there'll sure I'm think we be right as players, The the replacement make I have no dynamics. a with not industry best

market call, In any we we may replacement fact, and favor in doing XXX% preparing is do that. think the about be given there potential earlier price talk are ever a the repair what current don't that elastic. shift more dynamics of versus in I did But for associated are those talked that's we it, industry factors lot real I associated I artificial. the regulation think mean, but is about. SEER with with costs is change that whole pricing There don't it's benefits the I think real there's there driven real. of unknowns. impacts it, by some

leaders different factors those and of react Our be for the shareholders interest is unknowns our job Steve. as play in prepared best those to as on,

Steve Tusa

Yes. regulation I guess or any that. what I about of doesn't care consumer really was just was the that saying

and them, and cost not not there's increasing that not worried that's a XX% they’re for payback really your with about it. price increase, just associated So another are

fleet. for the of your replace consumer is your and in I'm these what systems, kind new one install you So, things as what you. of cost that look more If It's now, one average of I'm average, What your efficiency view kind the of a replacing, to channel? is the cost? in in average across question just now,

Alok Maskara

of And install. obviously cost of on lower their the a all, may so bills on cost. consumer Most consumer, meaningful is the benefit view than often can, and bringing pieces substantially benefit total energy because of than cost is our installing not there don't to see first aware with less City. energy consumer, at a of. Kansas, daily and that for are substantially in number, what's say on years. but consumption of depends and But cost the the last higher electricity sometimes. of as is in supplies the is on to you as sure mean, the less over labor the Topeka, few based that you SEER half vary obviously New it in equipment up when well well So would me to of varies data that give you're to it, changes of cost not I are consumers cost let are the install of in But cost install, terms given or average I'm cost past a aware out of in the put We up other cost a that I terms may because there high average that record the have gone be that. industry that labor. fully York thanks lower of the of whether equipment whether on to the you and does to consumer is that a or thing the of much But has prices

Steve Tusa

really appreciate I it. That’s Great. of the sort color.

Operator

We next Please from Coe go Nigel with our will ahead. Wolfe take question Research.

Nigel Coe

So I think repair. about the as look, alternative you that pricing point the a driver raised replaced versus of

seeing replace pay prices this and can not at got a of lower is refrigerants this really point. in field. et the it's something in at [ph] prices are an drop think because [R-XXX, R-XX to I mean, about debate, we R-XX much important like that a you have Are cetera, that haven't similar. that hear we happening? There lot performance I debate R-XXX] very

So I'm on view just wondering the what is that?

Alok Maskara

the along such compressors in and age many factors refrigerant the to equipment, motors. you the as R-XX of Specifically life the the of left cost the consider unit, have potential to other with the

it talk efficient with Inflation a more base, that with our for to opportunity refrigerant upcoming Reduction I higher potential a homeowner much just we that. the to not that's warranty, an benefits Act I friendly from cost replaced look mean, right. due that environmentally be refrigerant gives replacement can significant of the rebates. you're the is fact terms as and dealers how So the it's with mean more installed anyway in at about unit,

If our package, answer, is team goal models. versus terms nobody before And a part we repair a and Yes, to So I that of talked look replacement as different think have a debate, it's -- together. all and you you chooses to huge talk think we'll all consumer, whole replacement of I you it are drive I then they're the dynamic towards it got repair and talk knows in consumer there debate, to about and want make the shifts -- the shift that's that to and beneficial the possibilities. with come be towards are prepared any we to to repair, parts if them seeing. we'll sure but we the we about here in provide the

Nigel Coe

a XXXX? productions more and as just think I budgets, actually when a a on beat is and more on IRA, this But we is, quick do alluded this certainly, death. to start government you thinking benefits? contractors you CDO COGS this than these the customers thing, your disbursements Right. lot, here And one don't XX of and slowly, then turn we breath, you [ph] selling can at your one is are the go XX. mean look the hold But dealers much the out if this

Alok Maskara

to faster and which this roll like coast next I are expect states it think see sooner. some out you of some do states the year along and might in the starts I it in the --

it's But impact to opportunity just ’XX I of be in starts actual it yet. to in states that the with mean, it a are piece rebate now. us mean, start already it IRA. But hard is go talk releases some to the able of available this from good be you if there our being and I used competition, out to from see it to tied press for I dealer roll IRA, knowing Some and without that into gives to of all be will an XXXX. and already consumer goes dealers about talking not details utilities about quantify existing. rebates our a and our already think are ‘XX may full and it’s

Nigel Coe

that. Well, thanks a Great. Appreciate lot.

Operator

question next from Sachs. Joe Goldman come Our Please will go Ritchie ahead. with

Joe Ritchie

the growth you on missed came have that'd also, And any commercial might this versus be pricing commentary then, How quarter I this can this orders, there's much helpful. So through but earlier commercial volumes? out quarter? parse if

Alok Maskara

Yes.

for pricing that order X% our mean was of was currently and think orders XX% I growth you unit above sales X%, But We and it mentioned remain healthy think so from commercial break total pricing. XX%, don't core I the information. rate. volume typically at are we out or the from the script the in

And as many So or planned demand in of there's to customers into down our a working are versus replacement anticipated have our decision replacements to on up. backlog as service, we build through meet replacements addition a than key us and backlog they continues the their book, to insights account ESG sophisticated very national the about also criteria. at coming least need huge potential here repair there's with here because break

positive So into in insights terms orders it's is all picking I book the on good orders in of, strong beyond volumes we pricing and think and up, have what's holding book. future the

Joe Ritchie

in the and XQ these Got it, of an or least margin margin there's quarter, some to and that's XQ progression are expansion margins level quarters. a lower kind the the helpful. see seasonality that margins the here, And tend know you're nice business? commercial. because a this at it kind as sequentially of back of expect I mean of lot curious, can was you basis to from I business then seasonality just both hold seasonally absolute in I'm the be in that sequentially through step take from of the do thinking year-over-year

Alok Maskara

of are in Lennox, going margins up right. to couple for a our the go future. Overall, So things,

minimum were years what two levels products, a margin from the quite change shut the step resi we'll to Investor through lower hinted that lines talk are on year lines to our little quarter the a on factors one-time be a Day. back, few but planned the the mix But go reworked listen on think commercial expect as products. over take the of three of that’s are new going our support impact. transition than a margins, from we and some especially and now, disappointed are QX, the factories QX, this years So efficiency to I now we margins understand we low about but or from the down current seasonally side. to in margins shift more I just a commercial Hence, now manufacturing where specifically with right, you're margins overall and and need that may we

optimistic are at cautiously beyond. about are QX we We the as Like future. but in XXXX guarded we for look and margins

Joe Ritchie

quick have ensure dynamics construction non-residential we're much to How or HVAC maybe going basically you adjust will in you're place leeway be changes are Right in to XXXX? if commercial that knows commercial that's -- you one I one, XXXX? adding in commercial different coming facility to that a you point in said where the is, strong. market to able Who significantly do online the the that are be now by, market we're XXXX. Got return? more to of question kind if going the high your end it. not Thank orders I capacity and What markets to I on fully think you to your in expect just be you have decremental will to operational taking adjust guess capacity you to margins that for much the on facility? you're

Alok Maskara

through. of equation now I the short-term from concern that which of know part was the a us be years would may know. softness none went that and There two we

us residential labor at of close a optimizing be moving would at I International. us we the gives to if facility all, it new to my our labor collectively, an that our the lot new of think facility, mentioned First labor hourly lower Lennox as current XX% flexibility I around flexibility. new facility costs facility. between our which need in script the gives is cost facility the than hourly Also, in

margin have based facility two ensuring have factors. we yes, minimal things Having decline in of through done had to south than think flexibility go only degradation any we economically. us volume that terms significant flexibility when past, went a external lot the on is as we will will one give So as react if in I more we

Joe Reitmeier

to I In product variable it addition -- everyone remind costs. XX% when these think our you, also are are to roughly comes that knows variable costs

be high capital-intensive decline. should where margins So business, to it's catastrophic it volume not would a decremental

Joe Ritchie

you. Thank Okay.

Operator

reached That our was Q&A. Thank last now and We That question. may you today's time for presentation. our for concludes disconnect. your allotted have participation you

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