Lennox International Inc. (LII) Q4 2025 Earnings Call Transcript
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Overview
The overall sentiment is negative due to revised downward guidance for revenue, EPS, and free cash flow, reflecting lower sales volumes and elevated inventory levels. Despite cost inflation mitigation and strategic investments for 2026, the current guidance revision indicates immediate challenges. The Q&A reveals concerns about residential volumes, channel performance, and absorption headwinds, further supporting a negative sentiment. The market outlook for 2026 provides some optimism, but the immediate impact of reduced guidance and financial performance is likely to result in a negative stock price reaction.
Key Financial Performance
Revenue (Q4 2025) $406 million, down 11% year-over-year due to weak Residential and Commercial end markets, deeper channel destocking, and soft Residential new construction activity.
Segment Margin (Q4 2025) 17.7%, impacted by volume declines and expected absorption headwinds.
Adjusted Earnings Per Share (Q4 2025) $4.45.
Full Year Revenue (2025) Down 3% year-over-year, driven by volume headwinds from destocking and softer end markets.
Full Year Segment Margin (2025) 20.4%, a record high, despite tariff impacts and other inflationary pressures.
Operating Cash Flow (2025) $758 million, down from the previous year due to temporarily inflated inventory levels.
Adjusted Earnings Per Share (2025) $23.16, up 2% from $22.70 in 2024.
Free Cash Flow (2025) $640 million, above prior guidance of $550 million, supported by strong collections and disciplined payments.
Inventory Levels (2025) Increased by $300 million compared to December 2024, partially to support key growth initiatives.
Capital Expenditures (2025) $120 million, invested in strategic priorities.
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Operating Highlights
Low GWP product portfolio: Successfully converted product portfolio to meet low GWP requirements in 2025.
Heat pump portfolio: Continued advancement for long-term electrification trends.
Commercial emergency replacement growth: Ramped up in several metro regions despite a declining Light Commercial HVAC industry.
Samsung ductless products: Growth initiatives supported by inventory management strategy.
Operational efficiency: Achieved record 20.4% segment margin in 2025, reflecting structural improvements in production capacity and operational efficiency.
Distribution facilities: Expanded to enable a hub-and-spoke network for improved speed, reliability, and fill rates.
AI-enabled tools and e-commerce: Improved dealer support for quoting, ordering, and receiving.
Joint ventures and acquisitions: Invested in Samsung Ariston joint ventures, Duro Dyne, and Supco acquisitions to broaden product offerings and increase market share.
Self-help transformation plan: Entering the expansion phase in 2026, focusing on scaling footprint, broadening product portfolio, and extending market reach.
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Risk or Challenges
Regulatory Changes: The company faced significant disruption due to regulatory changes in 2025, which required timely conversion of the product portfolio to meet low GWP requirements.
Market Demand: Softer demand in Residential and Commercial end markets led to an 11% revenue decline in Q4 2025 and a 3% decline for the full year. This was exacerbated by channel destocking and weak Residential new construction activity.
Channel Destocking: Deeper channel destocking significantly impacted industry volumes for Residential products and contributed to revenue declines.
Dealer and Consumer Confidence: Low dealer and consumer confidence, coupled with a lack of housing recovery, further complicated market conditions.
Light Commercial HVAC Decline: The Light Commercial HVAC industry experienced a 17-month consecutive decline by December 2025, impacting the company's performance in this segment.
Tariff Impacts and Inflationary Pressures: The company faced tariff impacts and other inflationary pressures, which affected margins and operational costs.
Inventory Management: Elevated inventory levels, partially due to growth initiatives and seasonal demand, created absorption headwinds and impacted cash flow.
Economic Uncertainty: Economic uncertainties, including fluctuating mortgage interest rates, influenced housing recovery and market conditions.
Product Cost Headwinds: Product cost headwinds, including absorption pressure and inflation expense recognition under FIFO, affected profitability.
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Guidance & Outlook
2026 Revenue Growth: Total company growth of 6% to 7% is expected, with organic volumes down low single digits. Growth will be driven by initiatives across parts and accessories, commercial emergency replacement, and Samsung ductless inducted heat pump products. M&A is expected to contribute mid-single-digit revenue growth.
Segment-Level Growth: HCS is expected to grow approximately 2%, reflecting down but improving end markets and a low single-digit contribution from M&A. BCS is expected to grow approximately 15%, supported by industry shipments returning to growth, strong emergency replacement and national account performance, and a high single-digit contribution from M&A.
Cost and Inflation: Inflation is expected to rise approximately 2.5%, reflecting tariff carryovers and moderating price cost pressure. Productivity cost actions are expected to deliver approximately $75 million in savings.
Capital Expenditures: $250 million will be invested in 2026, targeting innovation and training centers, digital technology, distribution network optimization, ERP modernization, and AI tools.
Adjusted EPS: Expected to range from $23.50 to $25 for 2026.
Free Cash Flow: Expected to be between $750 million and $850 million, driven by inventory normalization and higher profitability.
Strategic Investments: Investments in training centers, customer experience centers, distribution capabilities, testing and certification labs, digital and AI solutions, and new product pipelines are planned to support future growth.
Market Conditions: Cautious optimism for 2026 as end markets stabilize, channel inventories normalize, and housing improves due to lower mortgage interest rates.
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Shareholder Return Plan
Share Repurchase: During 2025, Lennox repurchased $482 million of shares. This was supported by a strong balance sheet that continues to enable repurchases, disciplined M&A, and a healthy leverage profile.
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Key Q&A
Q:How did HCS revenue trend in the fourth quarter, and what were the surprises?
A:HCS revenue in the fourth quarter was down 21%. November and December were worse than October. The surprise was on the Residential new construction side, which performed worse than expected. Both the 1-step and 2-step channels underwent destocking, with the 2-step impact being more significant but expected.
Q:Can you explain the tailwinds into 2026 and the guide for HCS up 2%?
A:The HCS guide includes a mid-single-digit decline in volume for the full year, with more decline in the first half due to continued destocking, especially in the 2-step channel. Growth is expected in late Q2 into Q3 and Q4, normalizing and creating a positive inflection in the second half.
Q:When do you expect inventory levels to normalize?
A:Inventory levels are expected to normalize by the second quarter. Currently, there is $200 million more than seasonally normal inventory, with $100 million for customer experience investments. Destocking in the one-step channel is expected to complete in Q1, and in the two-step channel by Q2.
Q:What is the bifurcation between carryover effect and prospective price increases for price mix?
A:There is a carryover effect in the first half, contributing about 1 to 2 points, with the rest coming from new price initiatives launched in Q1 and Q2.
Q:What is the seasonality and cadence of EPS for the first quarter?
A:The first quarter is expected to be down due to tough comps and challenges in the HCS and BCS segments. The first half is expected to be down, with the second half showing improvement.
Q:What are the key assumptions for residential volumes in 2026?
A:Residential volumes are expected to be down mid-single digits for the full year, with more decline in the first half. Key factors include consumer confidence, interest rates, housing sales, and dealer confidence. Destocking is expected to be behind by the second half, improving performance.
Q:What is the pricing outlook for residential in 2026?
A:Mid-single-digit price increases are expected, driven by new pricing and carryover effects. The mix shift from 410A to 454B refrigerants also contributes to the overall price mix lift.
Q:What is the outlook for one-step and two-step channels in 2026?
A:The one-step channel is expected to be flattish to slightly up, while the two-step channel is expected to be down due to continued destocking until Q2. A hot summer could lead to inventory replenishment in the two-step channel.
Q:What is the breakdown of BCS growth for 2026?
A:BCS is expected to grow 15%, with high single-digit growth from acquisitions, mid-single-digit growth from volume recovery and share gains, and low single-digit growth from price mix.
Q:What is the outlook for repair versus replace dynamics?
A:Repair activity is expected to stabilize at 2025 levels, with no significant improvement or worsening. Dealer confidence has improved, and repair costs are expected to rise, making replacement more favorable over the next 1-2 years.
Q:What is the CapEx plan for 2026?
A:CapEx is planned at $250 million, with $150 million for normal recurring expenses and $100 million for strategic growth investments. These investments are not permanent and are expected to revert to typical maintenance levels after completion.
Q:What are the absorption headwinds for Q1 2026?
A:Q1 will face the largest absorption headwinds due to ramping down production to align inventory for Q2. This will have a significant impact on decrementals, but the situation is expected to normalize by Q2.
Q:What is the cost inflation outlook for 2026?
A:Cost inflation is expected to be 2.5%, driven by commodity prices, tariffs, and other factors. Productivity initiatives are expected to offset some of these costs.
Q:What is the operating margin outlook for 2026?
A:Operating margins are expected to expand by 20 basis points, with BCS margins up and HCS margins flat to slightly down. The second half is expected to show more margin expansion due to improved seasonality and cost productivity.
Q:What is the market outlook for HCS in 2026?
A:The sell-in market is expected to improve due to the end of destocking. Repair versus replace activity is expected to stabilize, and dealer confidence has returned, providing a positive outlook despite potential headwinds like consumer confidence and interest rates.
Q:What is the pricing competitiveness in the market?
A:The market remains disciplined, with competitors aiming for similar price increases. Some price competitiveness is observed in the low-end Residential New Construction (RNC) business, but the industry largely competes on technology, availability, and service.
Q:What are the price mix trends in HCS?
A:Price mix trends in HCS have been stable, with a slight step down in Q4 due to a higher proportion of furnace and parts sales compared to condensers. Price mix continues to stick within each product channel.
Q:What is the update on the NSI acquisition and parts strategy?
A:The NSI acquisition is performing as expected, with a focus on integration and improving attachment rates. The parts and accessories business is expected to grow, with margins improving by 2027.
Q:What is the outlook for two-step versus one-step channels in Q4 and FY 2026?
A:In Q4, the two-step channel saw a significant decline, while the one-step channel performed better. For FY 2026, the one-step channel is expected to grow slightly, while the two-step channel will face headwinds due to destocking.
Q:What are the productivity initiatives for 2026?
A:Productivity initiatives include cost reductions in manufacturing, distribution, SG&A, and tariff mitigation. These efforts are expected to offset cost inflation and improve margins.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the exact impact of the accounting change on the shape of 2026, stating it would normalize over time. Additionally, they did not provide precise regional or efficiency-level observations for repair versus replace trade-downs, citing no significant differences.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI tool
EBIT
ERP
FIFO
HVAC industry
Lennox
Light Commercial
SGA
Samsung ductless
absorption headwind
accounting
acquisition venture
action
appendix
canister shortage
channel destocking
destocking end
digit contribution
disruption
end market
expense
flow inventory
housing
industry shipment
level emergency
market channel
method
mix digit
pressure
price cost
priority
rationale change
replacement Samsung
replacement account
requirement
return
support
training center
venture investment
volume decline
LII Transcript
Lennox International Inc. (LII) Q4 2025 Earnings Call Transcript
Unknown1-28
The overall sentiment is negative due to revised downward guidance for revenue, EPS, and free cash flow, reflecting lower sales volumes and elevated inventory levels. Despite cost inflation mitigation and strategic investments for 2026, the current guidance revision indicates immediate challenges. The Q&A reveals concerns about residential volumes, channel performance, and absorption headwinds, further supporting a negative sentiment. The market outlook for 2026 provides some optimism, but the immediate impact of reduced guidance and financial performance is likely to result in a negative stock price reaction.
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Lennox International Inc. (LII) Q3 2025 Earnings Call Transcript
Unknown10-22
The earnings call presents a mixed outlook. While revenue growth and EPS guidance have been raised, and cost inflation expectations have decreased, the Q&A reveals ongoing challenges, such as high inventory levels and destocking impacts. Positive aspects like the Samsung JV and improved supply chains are offset by vague responses on destocking and trade-down trends. Without a clear market cap, the overall sentiment remains neutral, as the positive and negative factors balance each other out.
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LII Slides
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