Lennox International Inc. Q4 FY2025 earnings call

• Achieved full-year margins above 20% for the first time in history, reflecting structural improvements and operational efficiency. • Addressed challenges like canister shortages and regulatory changes. • Made strategic investments since 2022 totaling $300 million to broaden capability, streamline operations, and strengthen competitive position. • Expanded sales team, portfolio through joint ventures, and enhanced e-commerce and AI tools. • Upgraded distribution facilities and manufacturing capabilities, including doubling commercial operation square footage and advancing heat pump portfolio. • Adopted FIFO inventory accounting, which simplified processes, aligned cost increases with price realization, and aligned with industry peers.

The Building Climate Solutions (BCS) segment delivered strong results with organic sales growth in down markets and continued margin expansion. Revenue grew 8% as favorable mix and pricing actions offset lower organic sales volumes. The completed acquisition contributed approximately 7% revenue growth. The HCS segment faced volume declines due to weak residential and commercial end markets, with segment margin 17.7% in Q4 and a record 20.4% full-year segment margin despite headwinds.

• 2026 revenue expected to grow 6% to 7%, with organic volumes down low single digits net of growth from parts/accessories, commercial emergency replacement, and Samsung ductless/ducted heat pump products. • Adjusted EPS expected to be $23.5 to $25. • Capital expenditures planned at $250 million in 2026 targeting innovation, training centers, digital technology, distribution network optimization, etc. • Expect approximately 15% growth in BCS supported by industry shipments returning to growth, strong emergency replacement and national account performance, and M&A. • HCS expected to grow approximately 2%. • Inflation expected up ~2.5%, with $35 million in additional operating expenses and $75 million in productivity and cost savings.

• Regulatory changes and market headwinds pose challenges. • Inventory levels slightly elevated, creating absorption headwinds in the first quarter. • Continued uncertainty in residential and commercial end markets, including consumer and dealer confidence, housing recovery, and interest rates. • Tariff impact and inflationary pressures remain risks to margins.

Q: How did HCS trend through the quarter and where was the surprise?

A: November and December were worse than October. The surprise was more on the residential new construction side which performed worse than expected, with both one-step and two-step channels undergoing more destocking than expected.

Q: When do you expect inventory levels to normalize?

A: One-step channel destocking nearly complete in Q1, two-step channel destocking anticipated to be complete in Q2. Inventory levels slightly elevated in first quarter but aligned to meet second-quarter peak demand.

Q: How much of price mix growth is carryover and prospective increases?

A: A little bit of carryover in the first half, maybe close to two points in the first half of carryover mix, then the rest is new price initiatives starting in this quarter and Q2.

Q: Can you talk about seasonality and cadence of EPS?

A: Q1 expected to be down, first half expected to be down and second half up overall. Q4 and Q3 significantly impacted by destocking, with second half expected to be better as destocking is behind us.

Q: How is BCS growth broken down?

A: BCS expected to grow ~15% with mid-single-digit volume growth, low single-digit contribution from M&A, and price mix contributing low single digits.