Lennox International Inc. Q3 FY2025 earnings call

• Lennox maintained resilient margins and high customer service levels amidst challenging environment. • Recent investments will accelerate growth and expand margins. • Bolt-on acquisition of AES Industries in 2023 was a success, and recent acquisition of Durodyne and Subco will help accelerate attachment of parts and accessories. • HCS segment faced softer demand with revenue decline 12% due to factors like inventory rebalancing and weak demand. • BCS segment had strong results with 10% revenue growth driven by product mix and pricing, and share gains in emergency replacement. • Disciplined cost actions and strategic investments are key to margin resilience and growth.

Revenue this quarter declined 5%. Segment margin was 21.7%, a record for the third quarter. Operating cash flow was $301 million, lower than last year. Adjusted earnings per share was a third quarter record of $6.98, a 4% year-over-year increase. HCS segment profit margin expanded by 30 basis points. HCA's revenues declined 12% due to weak residential industry and inventory rebalancing. BCS segment profit margins expanded 330 basis points and revenue grew 10% despite weak end markets.

• Adjusted full-year revenue to decline 1% from previous 3% growth expectation. • Adjusted earnings per share in range of $22.75 - $23.25, down from prior range. • Full-year free cash flow revised to approximately $550 million. • Acquisition of Durodyne and Subco expected to contribute ~1% to full-year revenue growth with minimal EBIT impact due to purchase price amortization. • Cost inflation expected to increase total cost by ~5%, down from prior estimate of 6%.

• Soft residential and commercial end markets. • Ongoing channel inventory rebalancing. • Weak dealer confidence following regulatory transition. • Inflation and rising input costs. • Uncertainty from federal energy efficiency incentives sunset.

Q: Can you put the residential volume declines into perspective a little bit more? Comment on what was the performance of one step versus two step? And then if you excluded the destock, any sense for what sell-through volumes would be for resi in the quarter?

A: Michael P. Quenzer said total sales and sell-through down about 10% in Q3, about 20% down on sell-in. Alok Maskara mentioned dealers were holding inventory more than expected.

Q: What's your sense on when those inventory levels will be more normalized?

A: Alok Maskara said destocking would probably be over by Q2 of next year.

Q: Can you unpack the fourth quarter margins assumptions?

A: Alok Maskara said the biggest factor is pulling back on manufacturing to rightsize inventory level, which will lead to less absorption benefit in Q4.

Q: Can you frame the magnitude of the free cash flow guidance cut?

A: Alok Maskara said it's all due to destocking, cut by about $150 million compared to previous number, and expected to recover all by Q2 next year.

Q: What are the efficiencies expected from the new factory in 2026?

A: Alok Maskara mentioned no startup inefficiencies in the second half of the year and labor arbitrage from making products in Saltillo, and Michael P. Quenzer added it takes pressure off the existing factory in Stuttgart, Arkansas.