Lennox International Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Strategic Focus: Both segments delivered revenue growth and margin expansion in a challenging environment, fueled by cost discipline, customer experience elevation, and go-to-market differentiation.
• Product Transformation: Successful introduction of new low GWP R-454B products. Approximately 90% of refrigerant-based product sales in Q2 contained R-454B, driving favorable product mix and profit growth. HCS products: ~70% portfolio to be replaced; BCS products: ~40% portfolio to be replaced.
• Joint Ventures: Partnerships with Samsung and Ariston to strengthen heat pump portfolio and customer experience. Samsung expected to contribute meaningfully to growth in 2026, Ariston in 2027.
• Factory Productivity: BCS factory productivity improved, partially offsetting inflationary pressures, and margins sequentially recovered.
• Demand Trends: Residential new construction soft; more homeowners choosing repair vs replace and trading down. BCS showed early signs of demand stabilization, with healthy order rates and backlog due to steady replacement demand as aging systems approach end of life. Emergency replacement business performing well.

Segment Performance

• Home Comfort Solutions (HCS): Revenue increased 3% this quarter. Despite softness in sales volumes, it was driven by favorable product mix and pricing, with pricing rising by 12%. Sales volumes declined mainly due to contractors and distributors selling through 410A inventory, soft residential new construction, and R-454B canister shortages. Distribution costs were higher due to investments in expanding the network.
• Building Climate Solutions (BCS): The segment achieved a 5% increase in revenue, driven by an 8% benefit from favorable product mix and pricing, offsetting volume declines. Light commercial HVAC, accounting for ~50% of BCS revenue, faced pressure from soft end market demand, but segment sales volumes declined just 3% supported by emergency replacement products and strength in refrigeration and service offerings. Factory productivity improved, partially offsetting inflationary pressures on materials and components.

Guidance

• Raised full-year adjusted earnings per share guidance to $23.25 to $24.25 and revenue growth to approximately 3%.
• Revenue: Now expects full-year revenue to grow by 3%, with sales volumes projected to decline 6% (better than prior estimate of down 9%). Combined mix and pricing benefit expected 9% (below prior estimate of 11%), cost inflation expected to increase total cost by 6% (down from prior estimate of 9%).
• Interest expense expected ~$30 million, tax rate between 19% and 20%.

Risks

• Tariff Uncertainty: Uncertainty around tariff landscape, which could impact costs and pricing.
• Refrigerant Canister Shortages: Shortages of R-454B canisters previously impacted dealer confidence and may lead to partial reversal of market share gain.
• Industry Environment Challenges: Continued softness in residential new construction, inflationary pressures, and customer uncertainty pose challenges.

Question and Answer

Q: Jeff Hammond asked about A2L manufacturing costs and tariffs.

A: Alok Maskara said A2L conversion costs and prices were as expected, driven by factory productivity. Michael Quenzer noted tariffs would increase a bit in the second half but are built into the guide.

Q: Julian Mitchell inquired about margin outlook.

A: Michael Quenzer said full-year margin expansion projected ~50 basis points, with HCS up more than 50 basis points and BCS closer to flat but with factory productivity kicking in. Alok Maskara mentioned Q2 was a better gauge of margin than abnormal Q1 due to Q1 inefficiencies.

Q: Damian Karas asked about Ariston partnership feedback.

A: Alok Maskara said early feedback from dealers on water heater business was positive, with product launch expected in Q1 next year and meaningful growth starting in 2027.

Q: Ryan Merkel asked about BCS volume and commercial bottom.

A: Alok Maskara said BCS industry volume guide was lowered due to Q2 trends but signs of stabilization were seen, with things bouncing along the bottom before potential uptick.

Q: Stephen Volkmann asked about price/mix and repair vs replace.

A: Michael Quenzer said mix still achieved the 10% increase started at the year, and Alok Maskara noted R-454B canister shortage impacted dealer confidence as a primary factor in repair vs replace trends.

Q: Jeffrey Todd Sprague asked about managing price mix and inventory build.

A: Alok Maskara said pricing excellence was a core initiative with data-based tools, and Michael Quenzer explained inventory build was for successful transition to R-454B and would decelerate in the second half.

Q: Noah Kaye asked about inventory build and 25 SEER expiration.

A: Michael Quenzer explained inventory build deceleration in the second half, and Alok Maskara said no significant demand pull forward expected from 25 SEER expiration.

Q: Brett Linzey asked about commercial factory output and repair vs replace.

A: Alok Maskara said balance between factories in Saltillo and Stuttgart was going well, with productivity run continuing, and no numerical evidence of significant repair vs replace parts growth.

Q: Tommy Moll asked about tariffs and EPS guidance.

A: Alok Maskara said tariff impact was less than half of prior estimate, and margin expansion was part of the overall trajectory. Michael Quenzer explained EPS guidance updates were due to more stable consumer demand.

Q: Christopher Snyder asked about back half volume outlook and price retention.

A: Michael Quenzer explained volume decline in the second half was built in, and Alok Maskara said industry would be price disciplined to recoup investments.

Q: Deane Dray asked about emergency replacement initiative and product/service portfolio expansion.

A: Alok Maskara said emergency replacement initiative was in early innings with progress in pilots, and growth levers could include M&A and distribution expansion.

Q: Joseph John O'Dea asked about destocking, market share, and margin.

A: Alok Maskara said destocking headwind was largely played out, and market share was expected to remain healthy. Michael Quenzer explained margin outlook with cost escalation in the second half.

Q: Joe asked about residential volumes and mix improvement.

A: Michael Quenzer said residential volumes had certain trends, and Alok Maskara noted mix would improve in 2026 as all products would be R-454B.

Q: Nigel Coe asked about direct vs indirect channel and inventory.

A: Alok Maskara and Michael Quenzer explained channel dynamics and inventory build was for transition and would be depleted by year-end