Climate control solutions innovator Lennox International (NYSE: LII) beat Wall Street’s revenue expectations in Q2 CY2025, with sales up 3.4% year on year to $1.50 billion. Its non-GAAP profit of $7.82 per share was 13.9% above analysts’ consensus estimates.

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StockStory’s Take

Lennox’s second quarter results were welcomed by the market, reflecting management’s ability to navigate ongoing industry headwinds. Revenue and segment margins improved despite continued softness in residential new construction and persistent inflation in material costs. CEO Alok Maskara attributed the performance to effective cost discipline, mix and pricing strategies, and the successful transition to new, lower global warming potential (GWP) refrigerant products. Maskara noted that “approximately 90% of our refrigerant-based product sales contained the new R-454B refrigerant, driving favorable product mix and contributing meaningfully to both top line and profit growth.”

Looking ahead, Lennox’s updated annual guidance is supported by continued productivity gains, the anticipated normalization of inventory levels, and expansion of its product portfolio through joint ventures. Management sees opportunities for growth from the integration of Samsung and Ariston partnerships, which are expected to enhance the company’s ductless and water heater offerings over the next two years. CFO Michael Quenzer pointed out that “we are raising both our revenue and EPS guidance,” citing improved visibility into the second half and stable consumer demand. However, management remains cautious about ongoing tariff uncertainty and the pace of recovery in commercial and residential construction markets.

Key Insights from Management’s Remarks

Management emphasized that margin expansion and product mix improvements, along with disciplined cost controls, were central to Lennox’s Q2 performance and revised outlook.

• Transition to R-454B refrigerant: The shift to low GWP R-454B refrigerant products replaced a significant share of both Home Comfort Solutions and Building Climate Solutions portfolios. This transition contributed to a favorable product mix and supported higher margins, despite industry-wide shortages that temporarily impacted dealer confidence and system replacements.

• Segment performance amid mixed demand: The Home Comfort Solutions segment delivered revenue growth and margin expansion, driven by pricing and mix, even as new construction volumes remained subdued. In Building Climate Solutions, improved factory productivity offset ongoing material inflation, and a rebound in emergency replacement demand helped mitigate volume declines.

• Strategic inventory investment: Lennox made temporary inventory investments to ensure a smooth transition to new products and support future launches, including the Samsung ductless product line. Management expects inventory levels to normalize in the second half of the year, with no significant risk of stranded inventory.

• Expansion via partnerships: Joint ventures with Samsung (ductless mini splits and VRF products) and Ariston (heat pump water heaters) are central to Lennox’s long-term strategy. Early dealer feedback on the water heater initiative has been positive, and meaningful revenue contributions are expected beginning in 2026 and 2027, respectively.

• Operational productivity and tariff mitigation: Enhanced factory productivity and targeted cost controls partially offset inflation and tariff pressures. The company withdrew most recent tariff surcharges after successful mitigation efforts and is closely monitoring future tariff developments.

Drivers of Future Performance

Lennox’s outlook is shaped by its ability to manage cost inflation, expand its product offerings, and execute on strategic growth initiatives, with continued focus on margin resilience and operational flexibility.

• Normalized inventory and destocking trends: Management expects channel inventories to return to typical levels in the second half, following elevated stock to support the refrigerant transition. CEO Alok Maskara affirmed that most destocking is behind the company, reducing headwinds for volumes going forward.

• Growth from joint ventures: Contributions from Samsung and Ariston partnerships are anticipated to gradually grow through 2026 and 2027, expanding Lennox’s offerings in ductless and water heating categories. Management highlighted dealer enthusiasm, especially for the convenience and integration benefits of these new products.

• Tariff and cost inflation uncertainty: While Lennox has mitigated much of the tariff-related cost pressure, management remains cautious about potential future changes to trade policy and input costs. CFO Michael Quenzer noted that cost inflation is now expected at 6%, and the company will continue to adjust pricing and productivity initiatives as needed.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be watching (1) the pace at which Lennox’s new R-454B refrigerant products gain traction and whether dealer confidence fully recovers, (2) progress on inventory normalization and the impact on free cash flow, and (3) early signs of revenue from the Samsung and Ariston joint ventures. The effectiveness of productivity initiatives and resilience against tariff pressures will also be key to sustained margin performance.

Lennox currently trades at $664.54, up from $619.49 just before the earnings. At this price, is it a buy or sell? The answer lies in our full research report (it’s free).

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