Q2 2024 Lennox International Inc Earnings Call

Participants

Chelsey Pulcheon; Investor Relations; Lennox International Inc

Alok Maskara; Chief Executive Officer; Lennox International Inc

Michael Quenzer; Chief Financial Officer, Executive Vice President; Lennox International Inc

Ryan Merkel; Analyst; William Blair & Company L.L.C.

Damian Karas; Analyst; UBS Investment Bank

Timothy Wojs; Analyst; Robert W. Baird & Co. Incorporated

Jeffrey Sprague; Analyst; Vertical Research Partners, LLC

Nigel Coe; Analyst; Wolfe Research, LLC

Julian C.H. Mitchell; Analyst; Barclays Bank PLC

Noah Kaye; Analyst; Oppenheimer & Co. Inc.

Joseph Ritchie; Analyst; Goldman Sachs Group, Inc.

Jeffrey Hammond; Analyst; KeyBanc Capital Markets Inc.

Brett Linzey; Analyst; Mizuho Securities USA LLC

Steve Volkmann

Joseph O’Dea; Analyst; Wells Fargo Securities, LLC

Nicole DeBlase; Anayst; Deutsche Bank AG

Deane Dray; Analyst; RBC Capital Markets

Charles Tusa; Analyst; JPMorgan Chase & Co

Gautam Khanna; Analyst; TD Cowen

Presentation

Operator

Welcome to the Lennox second-quarter 2024 earnings conference call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to turn the conference over to Chelsey Pulcheon from the Lennox Investor Relations team. Chelsey, please go ahead.

Chelsey Pulcheon

Thank you, Allison. Good morning, and thank you for joining us today. We are excited to share our 2024 second-quarter results. Joining me as CEO, Alok Maskara; and CFO, Michael Quenzer. Each will share their prepared remarks before we move to the Q&A session.
Turning to slide 2, 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 relevant indicator of underlying business performance. Please refer to our SEC filings available on our Investor Relations website for additional details, including a reconciliation of all GAAP to non-GAAP measures.
The earnings release, today’s presentation, and the webcast archive link for today’s call are available on our Investor Relations website at investor.lennox.com. Now, please turn to slide 3 as I turn the call over to our CEO, Alok Maskara.

Story continues

Alok Maskara

Thank you, Chelsey. Good morning. I’m pleased to share that Lennox delivered outstanding Q2 financial results and has also made significant progress on multiple strategic initiatives. I’m proud to highlight that we have now achieved six consecutive quarters of double-digit EPS growth. This demonstrates the power of our transformation plan and management’s ability to consistently execute our growth acceleration initiatives.
Turning our attention to slide 3, let’s review some of the achievement of this quarter. Lennox’s core revenue grew 8% and our adjusted segment margin expanded 100 basis points to record 21.9%, resulting in an adjusted earnings per share increase of 11% to $6.83.
We generated $184 million of operating cash flow and our industry-leading ROIC grew to 44%. Home comfort solutions delivered record segment margins of 23.3%, a 170-basis-point expansion over prior year as we started experiencing the end of destocking in our two-step distribution business.
Our building climate solutions segment continued its track record of profit growth. In addition, we manufactured our first units at our new commercial factory in Saltillo, Mexico. As we continue to ramp up this factory, we know that there will be second half inefficiencies, but we are excited about the addition of growth capacity to better meet customer demand by year end.
One of our key accomplishments this quarter was the establishment of our joint venture with Samsung. This joint venture will open up exciting opportunities for both companies by combining Samsung’s global reach and brand strength with our direct to dealer distribution network. This collaboration is expected to significantly enhance our heat pump market share.
Strong first-half results give us the confidence to increase our full-year EPS guidance, raising it to a range of $19.50 to $20.25. Our focus on executing our transformation plan continues to pay off. But before moving on, I want to express my gratitude to our dedicated employees and loyal customers who have made this success possible.
Now please turn to slide 4 for more details on our recent joint venture with Samsung. I am excited to provide more insights on the Samsung Lennox HVAC North America joint venture. Our collaboration is all about accelerating heat pump growth, both for ducted and ductless products.
Let’s start with what makes this partnership a winning combination. Lennox and Samsung are mutually exclusive ductless HVAC partners in North America, combining our strengths to create a comprehensive and integrated portfolio that will benefit our customers. This integration allows us to leverage our direct channel strength with Samsung’s global brand and technology, providing unparalleled value and service to our dealers.
Heat pumps currently make up about 30% of the market, and through our joint venture, we can extend our reach within this fast growing category. Our joint offerings include attractive ductless solutions, and we are particularly excited about our colder climate heat pump homes, which are designed to deliver better performance in the northern US regions. Another key advantage of our joint venture is the enhanced technology. It will provide our customers.
Samsung’s SmartThings controls and home automation platform are at the forefront of innovation, providing seamless integration and superior energy monitoring for homeowners. Both companies are committed to North American specific new product development, ensuring our offerings meet the highest quality standards and deliver superior comfort to our consumers.
In the future, we expect to provide our dealers with combined ducted and ductless offerings in addition to more hybrid heat pump systems. This joint venture is set to accelerate heat pump growth for us through an industry-leading portfolio with advanced technology and strong brands.
Ultimately, this partnership between Lennox, a North American champion and Samsung, a global champion is poised to be a winning combination. We are looking forward to driving growth and innovation together. Now let me hand the call to Michael, who will take us through the details of our Q2 financial performance.

Michael Quenzer

Thank you, Alok. Good morning, everyone. Please turn to slide 5. As Alok mentioned at the start of this call, we are pleased to report our sixth consecutive quarter of year-over-year double-digit earnings per share growth. In addition to delivering double-digit profit growth, we have achieved year-over-year gross expansion in each of those quarters .
The strong second quarter financial performance underscores the effectiveness of our strategies and the dedication of our team. Now, I will share more details on the second-quarter financial results. Core revenue was $1.5 billion up 8%, driven by sales volumes improvements, continued pricing excellence, and benefits from the AES acquisition.

Question and Answer Session

Michael Quenzer

Adjusted segment profit increased by 8 million or 13%. This improvement is largely due to 44 million of price and mix bonus fits and 90 million of organic and inorganic sales volume. These profit gains were partially offset by wage inflation, new fact three ramp-up costs and investments, symbol SG. and A. distribution.
Total adjusted segment margin was a record 21.9%, up approximately 100 base basis points versus prior year. Our second quarter tax rate was 19.9% and diluted shares outstanding were $35.8 million compared to $35.6 million in the prior year quarter. Let’s turn to slide 6 and review the financial performance of our home comfort solutions segment.
The home comfort solutions segment had an exceptional quarter, delivered 5% revenue growth, 13% segment profit growth and an impressive 170 basis point expansion in segment profit margin, 5% sales growth was primarily driven by our continued pricing excellence, which delivered 4% price yield in the quarter. In the second quarter, we achieved volume growth of 1%, driven by mid single digit increases in our two-step distribution channel.
As industry destocking concluded midway through the quarter, sales volumes through our direct to contractor business were flat to prior year. We also experienced a $90 million year over year increase in expenses driven by wage in general inflation as well as critical investments in distribution and sales to further our goal of improving the customer experience. Moving on to Slide 7.
The business climate to growth up 15% this quarter. 6% of this revenue growth is attributed to the AES. acquisition, which was completed in the fourth quarter of last year. We are very pleased with the integration progress to this new business and the substantial synergies we have already realized. In addition to inorganic growth, we achieved a notable 9% organic volume growth, driven by gradual production improvements at our existing stock, our factory.
While these improvements are positive, total production output still limits our ability to fully meet demand. We are encouraged by the progress of our new commercial factory, which remains on track, and we successfully built our first few units in early July. Profit for the segment increased 11 million, although this was moderated by approximately 5 million and ramp-up costs for our new commercial factory and Saltillo, Mexico.
Please turn to slide 8, where I will review our cash flow performance and capital deployment strategy. Operating cash flow generated in the quarter was $184 million compared to 196 million in the prior year quarter. Capital expenditures were 33 million in the quarter, a decrease of $17 million compared to the prior year. In the second half, we anticipate temporary increases in working capital as we ramp up our new commercial factory is Saltillo, Mexico, and prepare for the transition to the new low GWP product.
The team also remained focused on accounts payable and accounts receivable process improvements to drive efficiencies. These factors are all included in our full year free cash flow guidance and long-term cash conversion targets. Maintaining our industry-leading ROIC is an important part of our investment strategy.
Additional factory capacity enhancements, enhancements to our distribution network and smoothed regulatory transitions enable us to consistently deliver results and improve our competitiveness in the market. In addition, we’re continually evaluating M&A opportunities that fit our strategic objectives, positioning us for sustained growth and market leadership. We have a very strong balance sheet with net debt to adjusted EBITDA of 1.2 times, down from 1.8 times in the prior year.
Our strategy for capital deployment remains focused on prioritizing high return capital expenditure investments, increasing dividends annually and share repurchases dependent on M&A activity. We are also dedicated to maintaining our investment grade rating. If we if you will now turn to slide 9, I will review our revised 2020 for full year guidance.
After the second quarter results in more visibility into the second half of the year, we have refined our full year revenue guidance for each segment. In the table on the left summarizes our full year revenue growth factors. Total company revenue still projected to increase by approximately 7%. We now expect a low single digit improvement in sales volume rooms, which reflects increases for both segments Price and mix expectations remain relatively unchanged within the range of mid single digit revenue growth. As a result of our strong first half profit performance, we are raising our full year earnings per share guidance to $19.50 to $20.25 from the previously guided $19 $20.
We are also maintaining our free cash flow guidance at 500 to 600 million. Component cost inflation is now expected to be up low single digits compared to mid single digits in our previous guide. We still anticipate year over year increases in our Form 10 A. refrigerant and commodity inflation.
We anticipate ramp-up costs of approximately $10 million for the new Saltillo Mexico factory along approximately $10 million associated with refrigerant transition across both segments manufacturing facilities. Sg&a expenses are expected to increase in the year.
The result of both inflationary pressures and investments are investments are focused on resources to improve customer experience and distribution growth initiatives. We will also be making investments in both sales and marketing to support our long-term growth targets. Capital expenditures are expected to remain unchanged at $175 million .
Interest expense is still expected to be approximately 50 million, and tax rate is expected to be approximately 20%. Overall, our performance in the first half of the year combined with increased clarity and market risks, has given us the confidence to raise and narrow our EPS guide range without overdose. For an overview of end markets. Thanks, Michael.

Alok Maskara

Let me provide updates on our outlook and share opportunities for both our segments within our home comfort solutions segment. Historically, Consumer Health has been a significant driver of the repair versus replace decision. Therefore, we are diligently monitoring macroeconomic factors, but have only seen minor shifts towards repairs.
Encouragingly, industry inventory levels have largely returned to normal, and recent updates on the EPA ruling have provided greater clarity on the upcoming refrigerant transition in the home comfort solutions segment.
The greatest share opportunities will result from successfully executing the upcoming refrigerant transition, improving overall fulfillment rates and enhancing go-to-market capabilities within the building Climate solutions end market, we continue to watch for any indication of short-term disruptions due to the refrigerant transitions. However, order rates and backlog continue to be stable.
And feedback from our customers suggest that due to strong pent-up demand for rooftop replacements. Why do you have seen project delays in some verticals? We are encouraged by the customer interest in our new cradle to grave services enabled by the recent years acquisition. We remain excited about the opportunity to gain share in the emergency replacement market.
Leveraging our upcoming production capacity itself to the new production capacity at Saltiel will also free up capacity at our Stuttgart plant to target additional key accounts. Overall, our outlook for the year remains cautiously optimistic based on Lennox is history of successful regulatory transitions. We expect to benefit from new product mix and potential market share growth. Now please turn to Slide 11.
As we conclude today’s earnings call, I wanted to reaffirm our confidence in our ability to consistently deliver growth results by focusing on the five elements of our strategic transformation plan. First, we will continue to accelerate growth by improving our go-to-market effectiveness.
Second, we will expand resilient margins through pricing excellence, increased productivity and by leveraging our direct to dealer network code by levering the Lennox unified management system. We moved streamline processes, leverage best practice and consistently execute our strategy. Fourth, our continued technological advancement will enable us to remain at the forefront of innovation for our customers.
Finally, our core values and guiding behaviors are the foundation of our winning culture, supported by our pay-for-performance incentive structure. This comprehensive strategy not only supports our current performance, but also reinforces our commitment to delivering long-term goals. I am immensely proud of our achievements, and I firmly believe that our greatest successes are still ahead of us.
Thank you for listening. We will be happy to take questions now. Madison, let’s go to Q&A.

Operator

Thank you. (operator instructions)
And we will take our first question from Ryan Merkel with William Blair.

Ryan Merkel

Hey, good morning and thanks for taking the questions. I wanted to start on the price mix contribution it up 3% versus the mid single digit guide. Are you expecting price mix to improve in the second half?

Michael Quenzer

Hey, Ryan, this is Michael. No, actually what we’re expecting is the second half of the year to be similar to the first half. So I think we were kind of single digits in the first half. I think our plan slightly mid-single digits in the second half. If you recall, the first quarter, we had some unfavorable mix mostly because of a residential new construction in HCS business.
But overall price mix should continue on similar to what we saw in Q2. Got it. Okay. Then I had a question on the outlook. Just to clarify residential, a lowered it to up five. I think it was up six last quarter, but you raised the volume to low single digits from flat.
Can you just unpack that a little bit and talk about was just clean up some of the guide points based off of the year to date mix that we’ve seen in both Q1 and Q2. Got it. Okay. So nothing’s really changed with the rest of the outlook.
You mentioned minor shift to repair, but not a lot of change. Nonetheless, I just just clean up the guide points. All right. Thanks. I’ll pass it on. Thank you.

Operator

And we’ll take our next question from Damian Karas with UBS.

Damian Karas

Thank you. Morning, Sharon, my opinion, congrats on the JV. Look, maybe I’m just wanted to ask you about that, Howard, how are you thinking about the financial impact of the JV? Tom talked a little bit about it’s really focused on heat pump or opportunity to gain some market share. How much of an uplift to you or your organic growth profile for the up for the residential home comfort business? Do you think that represents? And any other kind of margin our cash flow impact of the JV?

Alok Maskara

We should be talking about. Sure. Yes. Thanks to. So let me start by saying it’s going to impact both the home corporate solution and also the building climate solutions because obviously, we bring many splits to for mostly for MCS, and we bring the RF products mostly from BCS on both sides. As we looked at our long-term goals, we have always talked about that heat pump penetration is a pending opportunity for Nanox. And this essentially closed the gap between our portfolio and what the market.
So leading portfolios were cash flow margins, all that from a JV contribution, it’s not going to be meaningful to what’s going to be meaningful as the margins we make on selling the products, the share we gain by expanding our heat pump portfolio and the increased benefit of having a strong partner like Samsung, as we develop new technology with a score climate, heat pump technology or just simply look at control, such as smart things and total integration for a home or bleeding control for the JV itself.
The way we look at is the financials are not going to be material to our bottom line numbers, but it’s going to be the results of partnering and selling those products that we are super excited about. We went through a long process in all.
We’ve been exploring the business for about two years spoke to several different potential partners. And we do believe Samsung is going to be best partner for us, given that we have they cannot consider ourselves the North American champion and they consider themselves and our global champion. So putting that together, we are excited about the combination.
Makes sense. Thanks for that. And I was asking about home comfort in. I think our investors who are getting pretty pretty bullish just experiencing some of our hot temperatures are thus far this summer. They felt feels like kind of year we are ready. Volumes are a little bit more stable. You did you did raise the expectations for the year at a low single digit.
Could you maybe talk about kind of how your orders at trends have been progressing through the second quarter and and kind of how July is implying outside of our? Sure. So one of the things we Michael, and I true really, really hard not to talk about weather and an earnings conference call.
And I think as I have never seen any upside to talk about whether it’s earnings conference call, but it does have an impact. But listen to you, it is progressing along as we expected, has a simple way to look at it. Yes, there was some price mix cleanup that we did based on results year to date. But overall, the volumes that we expected last year, we talked about destocking ending in the first half. It ended in Q2.
We had visited ended Q1. We think consumer demand is very stable and that’s reflected in our volume guide for the year and our first half performance. So nothing really has changed. What’s exciting there is the upcoming for 54 b. Repligen that the EPA rules and the clarification that EPA rules. So just given us more confidence going forward on what it could be for the same time, there are quite a few uncertainties that remains in the second half, and those are around for 54 transitions.
How competitions we’ll do around that. Will there be a large pre-buy or knock election years could be? We are for consumer behavior. So we are watching out for all of that. So rebid, all of them to reflect that.

Damian Karas

Great. Thanks for your thoughts that the law Sankyo.

Operator

And we will take our next question from Tommy Moll with Stephens Inc.

Timothy Wojs

Good morning and thank you for taking my questions. On a linked army. First question for you on the home comfort solutions and volume. So the the outlook for the year went from flat to up low singles. Can you just tell us what your underlying assumptions are there for two stuff versus direct? And then on the two-step side, any context you can provide as to how the destocking ended through Q2, even if just anecdotal would be of interest? Thank you.

Alok Maskara

Search, I mean, yes, the full year guide, what we’re expecting on the sell through the direct side is approximately flat for the full year and down the to step up mid single digits like kind of blends to upload low single digit increase. As you recall, we went into the year, we expected the direct side through our Lennox channel down low single digits.

Michael Quenzer

That’s performing a little bit better. And then the destocking, as we mentioned, yes, it definitely accelerated as we went through the quarter and June was better than the beginning of the quarter. So I was pleased to see the destocking ended.

Timothy Wojs

Thanks, Michael. As a follow-up, I wanted to hit on the the reference to product mix and inflation. Um, I look this was on your 2024 slide. I’m just talking to the drivers of some of the end markets, and I’m just curious what was behind that comment and maybe more importantly, a local of Do you continue to view 10 plus percent of the cumulative realization on the A12 product? Thanks.

Michael Quenzer

Yes, let me start with the 10%. Yes, the answer is simple and it’s yes, we continue to expect and plus percentage pricing benefit on that. I think there’s any change in the product mix that we talked about. And Michael represents only a minor. It was more driven by the fact that we do see consumers continue to demand for Ben products

Alok Maskara

And we don’t see the industry are ourselves having a significant share of four or 54 b. sales this year. If we had talked about in Q. one for me, just kind of reconfirming that for 54 b. is going to be up 10% plus pricing increase with the majority of this year. Sales are going to continue to be for Denis even more than we thought previously. And we remain very bullish about for 54 be next year.
As a step change in their industries profile around margin expectations as a step change in technology. And we are relatively confident that we had a strong, strong position to execute well and give up dealers exactly what they want, which is one day one for 10 products as long as possible. And they want to switch to for 54 b. as seamlessly as possible. Thank you.

Operator

And our next question comes from Jeff Sprague with Vertical Research Partners.

Jeffrey Sprague

Thank you. Good morning, everyone. On, hey, speaking of election uncertainty. Could you just level set us on what your of how much of your sales contribution is coming out of your Mexico facilities at this point? We had it sort of in the mid 20s when we did this fire drill in 2018 and 2019. Any update there would be helpful. Thank you.

Alok Maskara

Sure on the BCSID. and O., we are just starting the Mexico facility was close to zero on that one right now on the HCM side or low end products are mostly made in Mexico. Overall, I would say about half how far does come from Mexico. And we have obviously, although standard protections around making sure we had to Machado structure and all that setup goofy, the election goes.
I mean, I think we are in a very strong position. We are taking steps to just starting two years ago to reduce our reliance and sourcing more product out of locally, and we continue to do that. But we do have half our production coming from Mexico, which gives us substantial advantages even when we buy components and bring them from overseas into Mexico.
And I’ll just say that our competition also manufactures in Mexico, very similar to us right now on free cash flow, it’s kind of a modest tweak, right, but estimate of net incomes go on a free cash flow, isn’t it already wasn’t particularly strong free cash flow conversion year? Just kind of what’s going on there.
And maybe we know CapEx is probably going down and 25, which will help on the conversion. But maybe just a little bit of additional color on what to expect things play out the remainder of the year and into the end of the first part of next year. Yes, I think some of that’s just around flexibility. We want to work with the markets and our customers’ business for us in a transition occurs to the four or 54 b. and the ramp up of the of the new factory make sure we have sufficient raw materials and inventory there.

Michael Quenzer

So really, it’s just more uncertainty in the second half of some of our inventory levels, but more folks focused on driving that cash flow for prospective. And then as we get into next year, we’ve set targets at near 90% of cash flow conversion. That’s what we’re focused on right now. Great. Thanks. I’ll leave it there.

Jeffrey Sprague

Thank you.

Operator

And our next question comes from Nigel Coe with Wolfe Research.

Nigel Coe

Thanks, good morning. And so a lot of notable, I have just installed a bunch of Samsung key pumps and that great. So congratulations on that JV. I’m actually going to fight for that by the way it might have been before the JV with phone, but it works really well.
So talking about the the sell through down mid-singles, mid-single for your direct business, June had to Telenor. So and I know you don’t have to talk about the weather, but maybe just address what impact those two facilities might have had on the home comfort performance this quarter.

Alok Maskara

Fuel. And so adding home comfort on the direct side, Q2 was flat to last year. And we are guiding the full year also to be flat. Our original guide was to say we would be down low single digits on a direct to dealer Meta. So implied guide is higher for us in terms of the direct side.
But the two-step, we expect second half to be pretty strong. But as you can imagine, the destocking rent on it longer than we are not expecting that kind of only chain that has happened in our outlook for ACS is midway through the year.
As Michael said, we updated bunch of our guidance points for the reality. The only change has been that we destocking lasted a little longer, but now we are confident it’s over our direct to doing a little better than we expected to be essentially flat compared to last year. And we think for 54 b. is going to be on track and it’s going to be launched and sold mostly in 2025.
But there’s no really change to our outlook beyond that beyond just the GINA impacted that have an impact in the quarter, sorry, which impact have a sound base.
The two facilities that they have an impact? No. Okay, great. And then just digging into the, um, the commercial, the that the Control segments, price mix, I think was pretty flat this quarter. And that’s obviously been very strong. And I know you’ve got tougher comps as we have this overlap, but impact, but anything to call out there? I know you’re still calling for mid-single-digit impact from price mix.

Nigel Coe

I’m just wondering if anything, I intra-quarter that we should think about.

Michael Quenzer

We have some normal transitory mix within that segment. As you recall, we have eight back equipment. We have services and we have refrigeration business when we did see a little bit of unfavorable mix, mostly into service in refrigeration business, but nothing to be concerned about just kind of transitory normal mix. We expect that to continue kind of mid single digits, let’s say, the balance of the year in that segment. Great. Thank you.

Nigel Coe

Thank you.

Operator

And our next question comes from Julian Mitchell with Barclays.

Julian C.H. Mitchell

Morning. Maybe I just wanted to start with the BCS segment. So the top line outlook about sort of solid demand. And you mentioned again these these project delays that you talked about last call. But obviously, if you’ve taken up the volume guide for that segment for the year were little. So maybe just sort of update us, you know, these project delays and kind of more or less the new store, Tom, a few months ago in BCS at any kind of updated thoughts about how we should look at the education vertical within the CDS, just as that as a funding source to sort of wind down over the next couple of years.
Any sort of broad brush thoughts on on on that and maybe too early to threaten Mexico plant impact, but anything you could give us on the top line

Alok Maskara

On the first part on the project delays, I think it’s getting better, not worse. So I think to answer your question, when we called it out in Q1, there was a lot more nine part of it’s everybody read some news articles and we’re trying to interpret own results.
But our backlog remains strong . Order rates remained strong and we are still heavily supply-constrained, not demand constrained. On the education vertical, you know, it’s kind of fairly steady and I noticed was MIRA funding, but we run out. But education has been a good growth engine for us per share at a low. We are gaining share in that vertical that have a food already from October.
If we don’t think that makes a meaningful impact either way for us going forward because we continue to be the end supply-constrained, not demand constrained in our BCS business saw a need . And so just halfway through the year, I don’t know if there’s any sort of pointers even give us for the balance of the year. I think often the for example, the third quarter we get that seasonal double digit earnings decline sequentially.

Julian C.H. Mitchell

I just wonder if they see it might be different because of something going on with the refrigerant change coming off or the Mexican plants are just starting a pilot production. And just on that Mexican plant sort of related, just any sort of pointers on revenue effects over the next 12 months?

Alok Maskara

Sure. So I’ll say on that, let me sort of the Mexican plant, and then I’ll come back to the other part of your question. On the Mexican plant. We had inefficiencies in Q2 and we called it out and imagine we had a 3 to 400 B bond fully on our payroll building under construction or $0. So from that perspective, something similar happened in Q3 as about something that’s sort of embedded and built in into our numbers and died from a revenue perspective, we expect the bulk of the revenue to start coming through early 2025.
We want to make sure these products are really good, highest quality. We are going to test them fully even feel tried them before we sign off mass market content. And of course, there will be revenue in Q4 as well. But I think meaningful revenue from Mexico would be 2025, not much has changed in terms of seasonality. I think the historical seasonality in Q2 and Q3 used to be similar.
We may have had some situations back and forth, but I think that will be similar to what we have to watch out for. Honestly, to think about is there going to be a significant amount of pre-buy afford any prior to that. And if there is demand because the manufacturers have the capacity and ability to make additional for any product that’s out of the uncertainty that concerns us right now, but we sort of embedded died within the range of the guide at this point we gave on what I would expect nothing unusual besides the Mexican plant inefficiencies that we mention.

Julian C.H. Mitchell

All right? So third quarter sort of similar to Q2. And then we have that Mexican caveat this year to watch .

Alok Maskara

Yes, essentially with the normal seasonality between just like last year.

Julian C.H. Mitchell

Thanks so much.

Alok Maskara

Thank you.

Operator

And our next question comes from Noah Kaye with Oppenheimer.

Noah Kaye

Thanks so much for taking the questions. On the Samsung JV, although Can you walk us through the game plan for how this gets operationalized when the Samsung products start to become available to the dealers and in distribution and some of the strategy around how you’re marketing that?
And then, Michael, I believe we’ve already said that it’s not expected to be immaterial contribution this year. But presumably there’s going to be good growth and and equity income at some point from this, you’re not consolidating it, correct me if I’m wrong. So that should show up as an equity income contribution will lead actually show up in the financials. Will that be incorporated will be split among the segments on because Zoom, we’ve got to be margin accretive once that starts coming on?

Alok Maskara

Sure. Let me start on the availability. So to minimize any dealer disruptions, we are going to launch the Sampson products in the A-2 well range. So we will run out with our current products and keep running through that through the fourth, any transition and the Samsung powering the Lenhoff product would be launched. The new are to the director of the year. So until then, for our dealers and non it’s data school, obviously the background.
We are doing everything from making sure we have sufficient inventory in hand, getting the branding right doing test marketing with the dealers going through the technology specs, but essentially revenue in 2025 launch this year. On the second aspect of it in the JV equity income, again is not going to be meaningful.
The whole point of this JV is going to be around technology development and the margins we make from selling the product through our channels and Samsung, we make manufacturing margin, we would make distribution margin, and it’s a great way for us to test and demonstrate how we are going to be a better distributor. Now we already do this with a different vendor. So it’s not new and you’re not going to see a step change anywhere.
If I were to model anything, I would just model grade or heat pump market share for Lennox based on those JVs. The because we think that gives us a very strong offering, great brand name on. It gives us the dealers have great choice to fight against other market-leading companies work currently dominating the space.
And no, and I’ll just add just specific to where it’s going to lead in the P & L, we already have equity income on our P&L. So it will be on top of that. But this is Luke mentioned it’s going to be minimal. The biggest gains going to be within the segments for sales and margins? Yes, very helpful. Tom. That plays into the second question, distribution, you called out some increased investments.

Michael Quenzer

You need very clear, but you have a strategy to become best in class distributor, maybe unpack some of the use of those investments you’re making here and through the back half of the year, help us understand how the strategy is progressing. So the strategy is progressing real well. We are pleased with what we are seeing. Some leading indicators such as fill rates have improved substantially. So like an IDN, all of this investment is worth noting. We don’t deliver the appropriate impact to the customer and if it doesn’t reflect in our share.
So all of so things are running positive for us, fill rate, customer share, customer satisfaction on that’s doing well. The investment is around a lot of just our own warehousing logistics, a lot of that on ID Systems and making sure we have the appropriate systems to keep track of our products, do the appropriate sale. And then finally, talent.
And I think we we are now getting to world-class talent level, not from outside some from inside, putting it all together, and we remain committed to putting those. In some cases, we were just behind. We started. This has come for the own factory outlets, and we’re now becoming a distributor and we have raised the bar on ourselves .
But we are real pleased with the progress as we see all the leading indicators, which bodes well for us from continued market share gain going forward into future as well. Thanks very much of those. The color I look forward to seeing the progress. Thank you.

Operator

And our next question comes from Joe Ritchie with Goldman Sachs.

Joseph Ritchie

Hey, guys, good morning. So I think I’m going to start with the in the home comfort solution that you guys. You guys called out that 19 million drag on margin. I know that you’ll get a lot more color in the queue. But maybe if you could just give us give us some of the kind of moving pieces, whether it’s SG. and A. aye. Freight and then also component cost carrier line in your in your end material costs.
And I’m curious how you’re thinking about that through the rest of the swap.

Michael Quenzer

So the component costs are actually in that product cost buckets. We are seeing a little bit better on the component costs, mostly material cost reduction programs, the 90 million of other things, but about half of that related to freight and distribution and a good portion of that being investments in distribution, the other half being SG&A inflation and some of the IT in India investments in headcount, that alone mentioned. Yes.

Alok Maskara

And just as a reminder, and that if I could jump in, I mean, we have broadcast very loudly that be investing in additional sales resources. Our Lennox Residential HVAC business has 20% additional sales resources. We are redoing our incentive comp. So this has all been under works for us. Line and protected by the end of the year. We will we start lapping ourself on this.
Part of these are all necessary and appropriate investments with very attractive payback. Yes, that makes sense.

Joseph Ritchie

I guess maybe just a longer-term question I love and given given the boss announcement on the JCI. assets, whenever there’s any kind of changing and there’s some time some investor anchor as to what that means for the kind of disappointed the industry. I’d be curious to hear if you have any initial thoughts on whether you think this kind of changes, industry dynamics or your ability to continue to kind of gain share, particularly in the residential sector

Alok Maskara

Sure. Well, and everyone, I’ll first start congratulating the management team at Bosch and the management team at GCI. on the transaction, I’m sure it was hours and hours of hard work and loss. Lastly of multiple weekends, not that I’m speaking for experience on the same transaction or anything.
But I just want to I congratulate them and glad that he finally sealed and signed from our perspective. And I think Bosch is a very reputable company. I think they focus on technology. They have done wonderful things by investing in R&D. And as you know, they blow a lot of money back into China, mobile and social causes .
I mean, we are looking forward to borrow joining the list of very disciplined industry players and becoming another one of them. I mean, they are much better than some of the auto Fjord owners of the GCI. assets. And I’m super excited that the industry will remain disciplined going forward and we’ll compete on technology will compete on differentiation will compete on better service and quality. So I’m super excited about where we are. Great. Thanks. Thanks, Philip

Operator

Thank you. And our next question comes from Jeff Hammond with KeyBanc Capital Markets.

Jeffrey Hammond

Hey, good morning. For us an idea just on. Yes, on the refrigerant change, I’m just wondering, have you guys introduced your new a new products and pricing into the market and gotten any feedback? And then we’ve heard from a couple of other competitors that they’ve kind of put out a Ladd Hall for four times a day, which might start to indicate what level of pre-buy you might guess. Just any color on those two fronts?

Alok Maskara

Jeff, it seems just the team that every competition has launched these startups and social media. If you look at a nice pretty picture that we all put out breading from practice, you can buy a four or 54 b. unit from anybody yet. So I think that’s we had a similar situation. Are we ready to launch it? Yes. Have you made a few trial units? Yes. Just like everybody else, we are on track to launch it as customer demand picks up, especially as we get into 2025.
From overall last call perspective, we haven’t made our last call when we are working with our distribution partners and dealers to truly understand what their demand requirements are and Taylor, our manufacturing. According to that, we have a very focused operation, as you know, and we want to remain flexible to give our dealers and distributors what they want.
So for us right now, all production is for M&A and will continue producing until the time go. Dealers want it to that. The law allows us to do it. So I guess the comment on trade down is that as you’re getting feedback from your distributors and dealers that are wanting more of that four times a, but anything else within Canada trade date that the trade down dynamic where consumers are trading down, whether when seats? Yes, the trade down, which is a mixed common, Michael, are saying, first of all, any references mostly just rounding and small.
But yes, the we are expecting to sell more for Denis versus more 54 b., but even beginning of the year, we were expecting to sell mostly for DNA throughout the year. No major dynamics on the consumer as we went from 13 to 14 SEER.
Obviously, there’s some compression in the product line, right? People who are buying 16 SEER as a number of unhappy with the 40. So the bit of an not dropping as we can sell, lowers see abroad, but we don’t see any meaningful trade down. If I think of our sales of method for part of a lead products and signature kind of good, better best, those ratios are relatively the same. I don’t see major trade down on that.

Jeffrey Hammond

Okay. Thanks.

Operator

Thank you. And our next question comes from Brett Linzey with mass. Y

Brett Linzey

Good morning all. I guess one, I wanted to come back to two Bcf for the factor ramp costs unchanged at 10 million for the year. What was the total impact here today? And I guess is the production ramps into next year? Should we think of that capacity getting absorbed in that 10 million becomes a tailwind or a hernias? You have ourselves some and some other under-absorption you’re going to filter?

Alok Maskara

Yes, a year to date, it was 7.5 million in Q2, 2 million in the first quarter, and that’s exactly right. So as we fully ramp up that factory to full efficiency, second half of next year, we’ll start to see the efficiencies that those inefficiencies go away.
Okay. Great. And then just on the name of the pilot units in early July, so you’re making the necessary factoring of our gasoline, but we have made most of the investments. So acute to exit run rate would reflect most of the investments made in there.
We were hiring starting kind of curious for last year and over the past three quarters of Q4, Q1, Q2, we have made the necessary investment and it is reflected in our Q2 exit rate. It’s gone very well. And then we are excited about the increase in our boots on the growth. We’re excited about the process discipline that we are bringing along with that. We also super excited about sort of putting our customers and dealers in a position to win again and getting them.
The confidence are around our own availability, our lead time. And now we had in the process of setting up distribution points around the country to make sure I got we can satisfy emergency replacement demand the same day in most cases and next day at the worse because that’s sort of the critical portion of how you win this.
So we know we had in that portion that some of the distribution investment that we mentioned earlier, appreciate the insight vessel up.

Brett Linzey

Thanks.

Operator

Thank you. And our next question comes from Steve Volkmann with Jefferies.

Steve Volkmann

Hi, good morning, guys. Most of my questions have been answered, but just a couple of follow ups on what is how should we think about your heat pumps share now and in terms of trying to think about what the upside could be under the JV?

Alok Maskara

Yes. I think we mentioned that heat pumps in U.S. are around 30% of sales. We are closer to 2025% of sales. If you think about that, like, you know, there’s a significant delta between our sales and whether industrious share depends on obviously different players. I won’t comment on shares, but think of dot five to 10 point difference between us and the industry as an opportunity for us to win that amount and accelerate our growth is going to come from. two things I wanted to Sam’s and BJ’s second is also launching on a unitary side of the DR site.
Combined products are just more products on the heat pump that maybe the cold climate requirement. And that’s all going to happen in the first half of next year. As currently, all our innovation teams are focused on E2M and wants to take a breather out of it. We have a new lineup of heat pump ready to go on the unitary side has now just super excited about what this brings to us and our ability to claw back and get into the industry average for a pump share.
So we acquired behind. Perfect. Okay, thanks.

Steve Volkmann

And then are you at all concerned that a change in administration might have some impact on the two-well transition, either in terms of timing or amount or anything like that?

Alok Maskara

You know, we are not this is kind of baked into law this stage and some of these changes happened when the administration was under different political party. So I think this data is absolutely no chance of that happening.

Steve Volkmann

Great. Thank you.

Operator

Thank you. And our next question comes from Joe O’Dea with Wells Fargo.

Joseph O’Dea

Hi, good morning. And can you just give the cadence of the refrigerant conversion cost that 10 million you called out on how we how we see that kind of fill turn over the course of the year? We haven’t experienced any of that yet, and it will be kind of equal Q3 and Q4.
Okay. And then Hello. Can you just expand a little on how you think about the ROI attached to the 20% increase in sales resources from what it is that primarily focused on kind of emergency replacement and with the new facility coming online on? So overall, kind of what your time line is, how you’re thinking about that ROI. and the markets that you’re going after. Sure. From an ROI perspective?

Alok Maskara

I think Michael talks about this, right. I think our internal investments had the best ROI and adding these resources has a better ROI than putting in new machinery is in our factories. So it’s a pretty quick ROI. Most of these are two years or less be back.
Most of the payback is around hiring process, getting people trained and ramp up, and they’re not really very efficient for the first six to nine months and they get pretty efficient after that. There’s good ROI and a 20% comment. Remember, it applies both in our BCF and HCS for ACS. It was about being a better distributor supporting our dealers better at NBC.
Yes, yes, it was about four focusing on it, emergency replacement and getting our districts fully staffed up to do that while maintaining our key accounts and investing in our key account from process and digital and separating those out in an appropriate way. So quick payback, super excited about it, what we need as production capacity.
And finally, glad to see it U.S. RTO factory with a roof on known with suite, some units roll through the conveyor belts.

Joseph O’Dea

Got it. Thank you.

Operator

Thank you. And our next question comes from Nicole DeBlase with Deutsche Bank.

Nicole DeBlase

Yes, thanks. Good morning, guys. Fine quotas. And so most of my list has been answered. I guess maybe I’ll ask one two-part question. So ECS margins, I guess, is the expectation for continued year-on-year contraction in the second half as the plant ramps up and and I think you guys had expected kind of move modest expansion for the full year slash in that still the outlook.
And then ditto on the residential side, I think you are also looking for modest expansion in margins in that segment for the full year. Just wondering if there’s been any action that. Thank you.

Michael Quenzer

Now that’s generally what’s implied in our guide overall. If you look at our total guide, we’re projecting about a 50 basis point margin expansion for the enterprise. And yes, there’ll be some contraction in the second half, mostly because of that ramp up costs, both to transition to the new refrigerant and the second factor BCS. But those are the kind of headwinds we see in the second half have a little bit of a margin decline, but overall full year margins up.

Nicole DeBlase

Thanks, Mike. I’ll pass it on.

Operator

Yes, thank you. And our next question comes from Deane Dray with RBC Capital Markets.

Deane Dray

Thank you. Good morning, everyone. Just had a quick quick first question on the emergency replacement share opportunity. Just make sure I understand what where does that stand today? What has been lacking? What what are you intending to do better to capture that opportunity? Sure. Thanks, Deane. I mean, that’s an important portion of our future growth opportunity, both from revenue and margin. So thanks for bringing it up.

Alok Maskara

So pre disruptions in Stuttgart. So think of like an upgrade 21, 22, we had a small share in emergency replacement, and that went to essentially zero during those are guard disruptions. We have started selling into emergency replacement now, but we are still selling dribs and drabs.
We look at that as a significant opportunity for us for the full Industrie emergency replacement is up to half of the revenue, depending on which can you talk about. So think of us so far being focused only on the other half and having very little or no share on the emergency replacement fees.
So what a multiyear horizon, we think it’s a huge opportunity. Next year, we’ll start making significant dent on it. And overall market share will still remain very low from a compared to the other large players. Remember, we are taking the total fourth largest player in the industry. So from that perspective, I’m not worried about disrupting the market because the whole industry is still running short on capacity.
Will that be a data point you’ll be providing on a go-forward basis or just provide color? Will this provide color? I don’t want to get that going to have too much into quarter-by-quarter or emergency replacement shared or trends versus share because it could be lumpy.
None of the emergence of the business side on the key account side where we are often big projects and some of it becomes giving away competitive dynamics as milestone.

Deane Dray

Got it. And then just a quick question on the colder climate heat pump technology. Is that something proprietary to Landec’s? It just give us some color there, what that edge is and what the efficiency is in terms of how it works and colder climates.

Alok Maskara

Sure. As you know, all colder climate comes up that using the vapor injection technology with the lack of appropriate compressors in the. So that part itself is not proprietary because the entire industrial user, the exact same technology, what’s proprietary around that is the value of the control shows the algorithm behind those controls.
And those are all proprietary to us. And obviously, on the mini spread, VRF, those would be proprietary to Samsung. So I want to separate out the controls technology, which is proprietary versus the compressor Endo repeat injection technology, which is fairly industry-standard used by all of us.
I know everybody buys compressor from the same two or three vendors. So that’s kind of where we’ve done. It impacts us the most because our market share in the northern US is higher than our market share in the southern US. Some of the leading industrial industrial players have higher market share in the south easy warm regions and lowering the No. So for us to just becomes a more meaningful change in the penetration of heat pumps that impacts us more than others.

Deane Dray

Understood. Thank you.

Operator

And our next question comes from Steve Tusa with JPMorgan.

Charles Tusa

Hey, good morning. five state sector if the demand on just on the commercial, first of all, just on the on the EPS as a follow-up to Julien’s question, I think the normal seasonality is maybe down and EPS, but you said effectively flat in line with normal seasonality. Is there something that’s info? one thing that or maybe I’m maybe seasonality is tough to nail down over the last several years, but then I just want to get a little more precision on that 10s or better than normal seasonality flat sequentially yet?

Michael Quenzer

So I was talking about flag. We were referring to inefficiencies and other things such as the ramp-up costs and other pieces does look like.
But no, we do expect normal seasonality. Steve flat-out reference to down sequentially since you’ve got the pieces that get normal revenue seasonality.

Alok Maskara

Okay. So EPS Flat Top Down three here, but you’re just going to have the headwinds of the ramp up investments that we talked about that are going to be similar in Q3, Q4? Yes, and yes, as you know, Steve, we don’t give quarterly guidance and EPS.

Michael Quenzer

We don’t want to be kind of caught out trying to give you the. Okay. I think you could have I just said it before would have went to push success . So I just have a process I probably would have pushed anyway. So moving on moving along on the commercial business.

Charles Tusa

So what what is the revenue breakout of that today from an end-market perspective?

Michael Quenzer

Yes, it’s about 50% age back 30% refrigeration, 20% service. But then like end market wise, what I meant I’ll end market yet on or even though we’re not hit our commercial equipment within commercial equipment. We talked about majorities key account, liberating emergency replacement. We don’t break it out by vertical.

Charles Tusa

If you’re looking for like auto, what’s education? What’s Okay, got it. All right. Thanks a lot.

Operator

Thank you. Our next question comes from Guatemala Karma with TD. Cohen.

Gautam Khanna

Hey, good morning, guys. Thanks, Peter. Wanted to ask about the state program to utilize some of the IRA incentives. It looks like a handful of states have been approved. And I’m wondering if you’re actually seeing it in on how you guys are going to market, how your dealers are going to market? Is it actually stimulating sales at this point?

Alok Maskara

First of all, I think it’s went better than expected. Got them. Last time you had guided, I thought we never seen that money, but the fact that went to the states have actually applied in making progress. So that is better than we expected second half, which is we are very well positioned given our direct to dealer and a lineup draws on our engines with calculate all the rebates and incentives, all of that put together a proposal for dealer, I think you’re better positioned than most.
Thirdly, we’ll have to really answer your question. No, we haven’t seen a meaningful impact of that yet. Current trend continues. It states keep getting the approval. It put that through its toward the end of the your slash early next year. But as you start seeing some of those come through, this is a technical hurdles to be managed through that. But the progress on mostly better than the skeptical side of me, but I thought it would be six and so on.
That’s helpful. And then just a follow up on the third party channel. I’m just curious, given the higher rate environment we’re done with destocking, and do you think there will be any meaningful restocking or will they be reticent to carry much inventory given that the carrying costs are higher has still an unknown there? I mean, honestly, I would say none of those folks think more in terms of dollars versus units and dollars might still be up given the inflation impact over the past two years.
So I think folks are going to be more disciplined than, let’s say, the R-22 transition in other places. But I think there could be a meaningful amount of people building up inventory just because of uncertainty.
And the history of some of the manufacturers don’t always get this transition, right? So I think it’ll be less than that, but a higher rate environment. We didn’t bake in a lot around pre-buy and anything else in our forecast because of exactly what you said, got them about the interest rate environment. But if industry starts not meeting demand, there is some disruption that’s coming in there.
Attribute to that typically risk-averse and they will start building up. Inventory capital is still available, just costs a little more. So thank you

Gautam Khanna

Thanks.

Operator

Thank you for joining us today. Since there are no further questions, this will conclude with a seamless access 2020 14 second-quarter conference call. You may disconnect your lines at this time