Lennox International Inc. (LII) Earnings

Management highlights

• Overall Q2 Performance - Total company revenue increased 3% year-over-year to $1.5 billion, total segment profit increased 2% to $355 million, and adjusted earnings per share remained flat at $7.72 - HCS year-over-year performance improved sequentially from Q1, but end-market recovery remains muted due to elevated interest rates, inflation, and low consumer confidence constraining demand - BCS delivered exceptionally strong performance, with progress across commercial end markets, momentum in emergency replacement, and strong market share gains - The diversified portfolio provides balance across market cycles, and the balance sheet remains healthy, with the company on track to meet full-year inventory reduction targets • Completed Acquisitions and Capital Deployment - The company recently closed a bolt-on acquisition of the Comfort Air, Century, and Coast Air brands, expanding reach into small and mid-sized distributed channels and broadening product offerings - The acquisition enables streamlined ordering, invoicing, and shipping for most HVACR equipment, accessories, and parts for channel partners, and is expected to be accretive to EPS in 2027 via margin improvements from integration, logistics synergies, and streamlined SG&A - This acquisition follows the 2025 Eurodyn and Subco acquisitions and 2023 AES acquisition, consistent with the company's disciplined capital deployment strategy • Strategic Positioning - Short-term headwinds to residential demand (affordability pressures, weather variability, soft consumer sentiment, low new construction activity) are viewed as temporary, with most delayed replacements expected to eventually materialize - The company continues to invest in innovative heat pumps, emergency replacement capabilities, and the direct-to-dealer business model to improve customer experience - Leveraging recent acquisitions, the company is expanding parts, accessories, and service offerings to increase customer touchpoints - Ongoing strategic initiatives include distribution network optimization and strategic partnerships with Samsung and Ariston to grow share of wallet

Guidance

- Full-year adjusted EPS guidance is revised downward to a range of $23 to $24, from prior guidance that was higher; the downward revision is driven primarily by lower-than-expected residential volumes, with stronger commercial growth not fully offsetting this decline - Overall full-year revenue growth guidance is maintained at approximately 8%, with revised segment-level expectations: HCS revenue growth is now expected to be ~1% (down from prior 4%), while BCS revenue growth is now expected to be ~20% (up from prior 16%). The Comfort Air/Century acquisition adds ~1 percentage point to enterprise revenue growth, and ~2 percentage points to HCS growth - Full-year productivity gains are now expected to be approximately $60 million, down from the prior expectation of $75 million, due to ongoing factory absorption headwinds from lower residential volumes and delayed material cost reduction initiatives (resources shifted to tariff mitigation) - Interest expense is expected to increase to ~$70 million and M&A amortization to ~$25 million following the recent Comfort Air/Century acquisition - Full-year free cash flow guidance is maintained at $750 million to $850 million, reflecting continued confidence in inventory reduction plans and working capital execution - Full-year capital expenditure guidance is revised downward to approximately $225 million, from the prior $250 million, due to project timing; core investment priorities remain unchanged - All other guidance assumptions (inflation, investment levels, tax rate, share count) are maintained

Segment performance

1. Home Comfort Solutions (HCS): Revenue declined 7% year-over-year, with a 12% unit volume decline that was partially offset by 3% growth from favorable pricing and mix, and 2% growth from acquisitions. Segment profit declined by $30 million, as $50 million in EBIT headwinds from lower sales volumes (plus $10 million in factory absorption headwinds from inventory alignment) were partially offset by $25 million in earlier-than-expected tariff refunds and favorable fixed pricing that offset most inflationary cost pressures. Revenue contribution for HCS is not explicitly stated, but it represented the majority of the firm's residential-focused business. 2. Building Climate Solutions (BCS): Revenue increased 24% year-over-year, with 12% organic sales growth and 9% growth from acquisitions (primarily Duradon). Growth was driven by strong national account performance, increased emergency replacement activity, and growth in the company's service business. Segment profit increased, with benefits from higher volumes, favorable mix and pricing; inflationary and production cost pressures were partially offset by $5 million in tariff refunds, and $11 million of M&A accretion from Gerodyne offset investments in digital capabilities and innovation.

Risks & headwinds

- Persistently muted residential demand, driven by elevated market interest rates, inflationary pressures, low consumer confidence, and suppressed residential new construction activity, which has been slower to recover than management initially expected, pushing meaningful recovery into 2027 - Factory absorption headwinds from lower residential production volumes, which pressure segment profitability even after pricing actions - Evolving tariff regulations in Mexico and Canada that require ongoing resource reallocation for mitigation, delaying planned material cost reduction initiatives - Intense price competition in residential new construction that has led to larger than expected volume declines from exiting unacceptably low-margin business - Inflationary pressures on commodity, fuel, and other input costs that offset some of the benefits from tariff refunds

Analyst Q&A

• Q: Why is one-step residential revenue down 12%, and what steps are being taken to improve results? /

  A: Most of the decline comes from exiting low-margin residential new construction business, with the impact concentrated in Q2 due to seasonality. Underlying sell-through demand remains weak but is improving sequentially. Management expects results to improve in the second half as the company laps the volume declines from exiting low-margin business and annual comparisons become easier.

• Q: How has Lenox's residential market share performed, especially on the replacement side, and what is your current pricing strategy? /

  A: Lenox has gained small market share in residential replacement over the past 12 months, while losing significant share in new construction from exiting low-margin business. Excluding new construction, pricing actions have offset inflation, and new 232 tariff pricing will take effect July 1 in line with competitor moves. Early receipt of tariff refunds allowed the company to delay some planned pricing actions.

• Q: What is driving the strong performance of Building Climate Solutions, and how much of the strength comes from market recovery versus Lenox share gains? /

  A: A large portion of BCS's current strength comes from Lenox's own market share gains, driven by expanded capacity from a new factory and increased focus on emergency replacement. The commercial end market itself, which declined for 17 consecutive months, is also beginning to stabilize and improve, which adds additional support to performance.

• Q: How much of the HCS revenue revision reflects exiting low-margin new construction versus underlying weaker replacement demand? Will HCS margins improve in the second half? /

  A: Most of the one-step HCS revenue decline, and the downward revision, reflects larger than expected exits of unacceptably low-margin residential new construction business. Margin headwinds in the second half will be smaller than in the first half, as volumes improve and new pricing takes effect. Underlying product mix is positive after exiting low-margin business, but overall second half margins are still expected to be flattish to slightly down year-over-year.

• Q: Is the process of exiting low-margin customer accounts mostly complete now, and are there any remaining expected tariff refunds in the second half? /

  A: The high-grading process is nearly complete; volume exits from low-margin business happened faster than expected, while offsetting growth in other segments has been slightly slower. The company recognized 100% of its expected eligible tariff refunds in Q2, and most of the related cash has already been received, with no additional material refunds expected in the second half.