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Summary of Lennox International FY Conference Call (September 11, 2025) Company Overview - **Company**: Lennox International (NYSE:LII) - **Industry**: Residential and light commercial HVAC (Heating, Ventilation, and Air Conditioning) Key Points and Arguments Competitive Advantages - **Direct-to-Contractor Distribution Model**: This model allows Lennox to operate as both a manufacturer and distributor, enhancing profitability through dual margins [3][4] - **Focus on Contractor Support**: Emphasis on fulfillment rates, technical support, and training for contractors to improve their efficiency and market share [4][5] Market Dynamics - **Sell-Through vs. Sell-In**: 75% of sales are direct to contractors (sell-through), while 25% are sell-in. The company has noted volatility in sell-in due to various market pressures [11][12] - **Temporary Market Inflection**: Current challenges are seen as temporary, with expectations of a return to disciplined growth in the long term [12][14] Product Innovation and Technology - **Investment in R&D**: All R&D efforts are focused on HVAC, leading to superior product efficiency across various categories [6][7] - **AI Integration**: AI is being used to enhance customer experience on e-commerce platforms and improve technician support through apps [27][28] M&A Strategy - **Acquisition of NSI Industries**: This acquisition aims to enhance Lennox's parts and accessories offerings, which currently represent 20% of sales, with a goal to reach 40% [29][30] - **Future M&A Plans**: The company intends to pursue further acquisitions in the aftermarket to bolster its distribution capabilities [33] Market Challenges - **Regulatory Changes and Tariffs**: The company is navigating challenges related to tariffs and regulatory changes affecting inventory and pricing strategies [11][41] - **Consumer Sentiment**: Homeowners are currently hesitant due to economic uncertainty, but the company believes that HVAC systems are essential, leading to eventual replacements [16][52] Growth Outlook - **Positive Trajectory in Light Commercial**: The company is seeing recovery in share and growth in emergency replacement initiatives, supported by new factory capacity [18][21] - **Ductless and Water Heater Opportunities**: The company anticipates significant growth in ductless systems and plans to launch water heaters, which are expected to converge with HVAC technologies in the future [47][48] Pricing Strategy - **Rational Pricing Environment**: The industry has maintained rational pricing despite cost pressures, with expectations for price increases in the upcoming year [45][46] Dealer Relationships - **Long-Term Relationships**: The company emphasizes the importance of long-term relationships with dealers, which helps maintain market share and stability [10][53] Additional Important Insights - **Technological Integration**: The company is working on integrating various products into a unified app for easier management by dealers and homeowners [24][25] - **Market Sentiment**: Dealers express confidence in the long-term necessity of HVAC systems despite current market challenges [53][54]

Financial Data and Key Metrics Changes - Revenue for the second quarter grew by 3% compared to the previous year, with a segment margin reaching a record 23.6%, an increase of 170 basis points [6][11] - Adjusted earnings per share (EPS) for the second quarter was $7.82, with operating cash flow reported at $87 million [6][11] - The full-year adjusted EPS outlook has been raised to a range of $23.25 to $24.25, reflecting strong execution in a challenging environment [8][20] Business Line Data and Key Metrics Changes - Home Comfort Solutions (HCS) segment saw a 3% revenue increase driven by favorable product mix and pricing, despite a decline in sales volume due to inventory destocking and market conditions [12][13] - Building Climate Solutions (BCS) segment achieved a 5% revenue increase, supported by emergency replacement products, although overall market demand remained weak [15][16] Market Data and Key Metrics Changes - The company noted softness in new construction demand and industry-wide refrigerant canister shortages impacting sales [6][7] - The transition to low GWP refrigerants is ongoing, with approximately 90% of refrigerant-based product sales now utilizing the new R454B refrigerant [12][21] Company Strategy and Development Direction - The company is focused on executing its transformation strategy introduced in 2022, with an emphasis on digital customer experience, ductless technology, and expanding its product portfolio through strategic partnerships [25][26] - Joint ventures with Samsung and Ariston are expected to enhance product offerings and customer experience, with significant contributions anticipated starting in 2026 and 2027 respectively [9][10] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to navigate ongoing challenges, citing improved factory productivity and a strong operational execution [23][24] - The outlook for the second half of the year is cautiously optimistic, with expectations of stabilization in demand and continued margin expansion [20][21] Other Important Information - The company has authorized an additional $1 billion in share repurchases and increased its quarterly dividend by approximately 15% [16][17] - Inventory levels are expected to normalize in the second half of the year, following temporary investments to support the transition to new products [16][92] Q&A Session Summary Question: Can you discuss the price and cost dynamics, particularly regarding A2L manufacturing costs and tariffs? - Management indicated that both cost and price are in line with expectations, with productivity improvements driving margin expansion [30][34] Question: What are the volume assumptions for the second half? - Volume guidance for HCS is expected to decline by about 8%, while BCS is projected to decline by about 4% [35][36] Question: Can you confirm the margin outlook for the full year? - The company is projecting about a 50 basis point expansion in margins for the full year, with both segments expected to show margin improvement [40][41] Question: What are the expectations regarding the Ariston partnership and market share? - Early feedback from dealers on the water heater business has been positive, with meaningful growth expected starting in 2027 [54][57] Question: How is the company managing inventory and what is the outlook for the second half? - The company plans to reduce inventory levels to normal by the end of the year, with a focus on balancing supply and demand [92][93]