Lennox International, Inc.

Welcome to the Linux second quarter 2023 earnings conference call. All lines are currently in a listen-only mode, and there will be a question and answer session at the end of the presentation. You may enter the queue to ask a question by pressing star and one on your phone. To exit the queue, press star two. As a reminder, this call is being recorded, and I would now like to turn the conference over to Chelsea Pulsion from Linux Investor Relations team. Chelsea, please go ahead.

Thank you, Ashley. Good morning, everyone. We are excited to have you here with us this morning. Joining me today is CEO Alok Miskara, CFO Joe Reitmeyer, and VP Finance Michael Quinzer. Alok will discuss quarter highlights, and Joe will go into depth on the company's quarterly financial results and our updated guidance for fiscal 2023. After that, we will have a Q&A session with Alok, Joe, and Michael. Turning 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 as outlined on this page. We may also refer to certain non-GAAP financial measures that management considers to be relevant indicators of underlying business performance. Please refer to our SEC filings available on our website for additional details, including a reconciliation of all GAAP and non-GAAP measures. The earnings release, today's presentation slides, and the webcast archive link for today's call are available on our new investor relations website at www.investor.linux.com. Now let me turn over the call to our CEO.

Thank you, Chelsea. Good morning, everyone. I am delighted to share our impressive results from the recent quarter ending on June 30th, during which we delivered record revenues record profit, record EPS, record margins, and record cash flow. These results demonstrate the power of our focused growth strategy and the progress of our commercial turnaround plan. I am grateful to our dealers and customers for their continued loyalty towards our products and services as we remain committed to further improving our service levels and enhancing their customer experience. I'm also thankful for the dedication and hard work of my 13,000 Lenox colleagues, whose relentless efforts have contributed to our outstanding performance this quarter. This successful quarter demonstrates the power of our laser-focused strategy, which builds on our existing strong direct customer relationships, advanced products platform, and our unique distribution network. These factors will continue to fuel our share gain and margin expansion for the foreseeable future. Now, I want to discuss some key highlights of the quarter on slide three. First, core revenues grew 3% and our adjusted segment margin expanded 320 basis points to 20.9%. resulting in our adjusted earnings per share increasing 22% to $6.15. Additionally, our operating cash flow increased nearly 100% to $196 million. Second, we are extremely proud of our commercial team's execution of our profitable growth strategy. Both revenue and profits for the commercial segment hit a record this quarter, driven by favorable price mix and improved production output from our Stuttgart manufacturing location. Third, residential end markets were challenging, which resulted in our residential segment delivering lower revenue margins and profits. Margins were also impacted by lower factory output and absorption as we normalize our own inventory levels post the SEER transition. We remain cautiously optimistic about the second half as we believe that the industry's inventory rightsizing is decelerating. In addition, our recent price increase will enable us to deliver improved margin performance during the balance of the year. Fourth and finally on this page, We are pleased to share the revised fiscal guidance for this year as we anticipate higher revenues, higher earnings per share, and higher operating cash flow for the full year. Joe will review the revised guidance in greater depth later in the call. Now, please turn to slide four for our view on the current business conditions impacting the industry. For the residential end market, we experience higher than expected distributor destocking and a cooler start to the summer selling season. We are now anticipating unit volumes for the full year to decline by high single digits versus prior expectation of a mid single digit decline. Looking at the second half, we expect the impact of distributor destocking to diminish and we have started to see an uptick in our replacement sales, consistent with higher sample temperatures. In commercial, we now anticipate sales to be up low double digits for the full year versus prior expectations of high single digits to low double digits sales increase. The order backlog remains strong, and although delivery lead times remain extended, they are 50% lower than last year, and in line with the industry. Regarding price versus inflation, we are pleased to report that the industry pricing remains disciplined and our own mid-year price increase has been broadly successful. Our outlook on both components and commodity cost inflation remains stable and unchanged, and we expect the second half of the year to deliver a positive price versus inflation spread. Ultimately, our improved service levels and increased commercial production gives us confidence that we are well positioned to gain share in the second half of this year. We continue to invest SG&A dollars towards improving our go-to-market processes while deploying incremental frontline resources to win over more dealers and more key accounts. We believe that Lenox outperformed the industry in successfully launching the product portfolio to meet the new minimum efficiency standards, gaining further loyalty from customers and our dealers. During future regulatory transitions, including the upcoming low GWP refrigerant requirements on January 1st, 2025, Lenox aims to deliver similar outperformance and capture additional share. Please turn to slide five for more details regarding ongoing Lenox activities related to the upcoming refrigerant transition. We are pleased to announce that Lenox will transition to R454B from R410A refrigerant to meet the EPA's requirement effective January 1st, 2025. The R454B choice was driven by our commitment to provide the best option for our valued customers and the environment. Compared to the existing 410A refrigerant, R454B reduces greenhouse gas emissions and has approximately 80% less global warming potential. Lenox has demonstrated a solid track record of successfully navigating regulatory changes and this will be no exception. We have completed most product redesign and are now in the testing phase for this transition. The redesign includes updated compressors and other components for refrigerant compatibility and high efficiency performance. To address safety requirements for the new A2L refrigerant, we will have additional safeguards on all our products that use this refrigerant. These safeguards may include sensors, controls, and algorithms which will mitigate any leaks if and when they occur. Safety of all our products remains our highest priority and our redesign will meet or exceed applicable safety standards. As you know, Lenox has a structural advantage of primarily selling direct to dealers. This enables our team to deliver advanced training to delivers and equip them with accurate information to share with the end consumers. This helps us and our dealers to win during the regulatory transition while addressing all the safety requirements for manufacturing, distribution, and installation. Throughout this transition, we do not expect a significant inventory pre-build as the transition to R454B would likely happen faster compared to similar refrigerant transitions in the past. We intend to deliver a safe, seamless transition supported by appropriate inventory levels. By maintaining strong relationships and timely communications with our suppliers, we will avoid supply chain disruptions. While we are still reviewing this transition's financial impact, we expect it to be neutral or accretive to our margins. We are confident that the increase in the product cost will be offset by price. Overall, we anticipate that once again, we will outperform the industry and garner additional loyalty from our dealers and customers during this refrigerant transition. Now, let me hand the call over to Joe, who will take us through the details of our Q2 financial performance. Thank you, Alok.