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LENNOX INTERNATIONAL INC (LII)·Q1 2025 Earnings Summary

Executive Summary

  • Q1 2025 revenue grew 2% to $1.07B, GAAP diluted EPS was $3.37; segment/operating margin compressed 140 bps to 14.5% on tariff and factory ramp inefficiencies .
  • Wall Street consensus: LII posted a clean beat vs S&P Global estimates — EPS $3.37 vs $3.25*, revenue $1.073B vs $1.022B*; EBITDA was essentially in line ($180.3M vs $180.4M*) .
  • Guidance: revenue growth maintained at ~2%; adjusted EPS range narrowed to $22.25–$23.50 (raised lower end from $22.00 in Jan), with price actions and surcharges offsetting higher inflation/tariffs .
  • Strategic/capital catalysts: $1.0B increase to buyback authorization and dividend raised 13% to $1.30/quarter (post-quarter), plus JV with Ariston to launch Lennox-branded water heaters — supportive of medium-term multiple and cash returns .

What Went Well and What Went Wrong

What Went Well

  • Home Comfort Solutions (HCS) delivered 7% revenue growth to $721M; segment profit +4% to $117M on strong price/mix with ~50% of equipment sales R-454B and ~10% price yield on the new product family .
  • Management executed tariff mitigation via two mid-single-digit price increases (one permanent, one largely surcharge) with good stick rates; updated pricing expected to offset inflation/tariffs and volume softness .
  • Balanced-sheet and capital deployment solid: net debt/adj EBITDA 0.8x; $85M buybacks in Q1; FCF guide unchanged at $650–$800M for FY25 .

What Went Wrong

  • Building Climate Solutions (BCS) revenue -6% to $351M; segment profit -32% to $53.5M with margin down 580 bps (15.2%) on expected ramp inefficiencies, tariff timing, and emergency replacement investments .
  • Gross profit declined YoY ($328.5M vs $340.0M) with operating cash outflow ($35.8M) on inventory positioning for customer fulfillment; FCF negative ($60.8M) in-seasonal Q1 .
  • Segment/operating margin fell 140 bps YoY to 14.5% as LIFO timing recognized tariff costs ahead of price realization; BCS inefficiencies to linger into Q2 before easing .

Financial Results

Headline results vs prior quarters

MetricQ3 2024Q4 2024Q1 2025
Revenue ($USD Millions)$1,498.1 $1,345.0 $1,072.6
Gross Profit ($USD Millions)$488.4 $455.3 $328.5
Operating Income ($USD Millions)$303.3 $244.6 $155.6
Operating Margin %20.2% 18.2% 14.5%
Net Income ($USD Millions)$239.0 $197.7 $120.3
Diluted EPS ($USD)$6.68 $5.52 $3.37
Cash from Operations ($USD Millions)$452.1 $332.4 $(35.8)
Free Cash Flow ($USD Millions)$411.7 $272.8 $(60.8)

Q1 2025 vs S&P Global consensus

MetricConsensusActual
Primary EPS ($USD)3.253*3.37
Revenue ($USD Millions)1,022.7*1,072.6
EBITDA ($USD Millions)180.4*180.3

Values marked with * retrieved from S&P Global.

Segment breakdown

SegmentQ3 2024Q4 2024Q1 2025
Home Comfort Solutions Revenue ($USD Millions)$1,032.8 $887.4 $721.4
HCS Segment Profit ($USD Millions)$226.5 $192.6 $116.8
HCS Segment Margin %21.9% 21.7% 16.2%
Building Climate Solutions Revenue ($USD Millions)$465.3 $457.6 $351.2
BCS Segment Profit ($USD Millions)$105.9 $98.8 $53.5
BCS Segment Margin %22.8% 21.6% 15.2%

Q1 2025 operational drivers (company-quantified)

DriverImpact ($USD Millions)
Price/mix benefits+$40
Product costs (tariffs, factory inefficiencies)$(29)
Sales volume$(12)
Other (distribution, freight, selling)$(10)

KPIs

KPIQ3 2024Q4 2024Q1 2025
Share Repurchases ($USD Millions)$12.9 $41.0 $85.2
Capital Expenditures ($USD Millions)$41.2 $60.2 $25.5
Net Debt / Adjusted EBITDA (x)0.8x 0.6x 0.8x

Guidance Changes

MetricPeriodPrevious Guidance (Jan 29, 2025)Current Guidance (Apr 23, 2025)Change
Adjusted EPSFY 2025$22.00–$23.50 $22.25–$23.50 Raised lower end; narrowed range
Revenue GrowthFY 2025~2% ~2% (maintained) Maintained
Capital ExpendituresFY 2025~$150M ~$150M Maintained
Free Cash FlowFY 2025$650–$800M $650–$800M Maintained
Cost Inflation AssumptionFY 2025~3% (company bridge) ~9% (incl. direct/indirect tariffs) Raised
Price Gains AssumptionFY 2025~1% (company bridge) ~7% (two increases, surcharge) Raised
Volume Assumption (ex-prebuy effect)FY 2025+2% −4% Lowered

Earnings Call Themes & Trends

TopicPrior Mentions (Q3 2024)Prior Mentions (Q4 2024)Current Period (Q1 2025)Trend
Low GWP (R-454B) transitionPricing/mix tailwind 10%+; 65% transition in 2025; ramp costs expected Q1’25 Phaseout of R-410A by Q2’25; mix +4% growth; 2025 comps impacted by Q4 prebuy ~50% of HCS equipment sales R-454B; margin headwinds near-term; training/tools/customer adoption improving Positive mix tailwind; transitory inefficiencies easing by 2H
Tariffs & inflationNot material in Q3; LIFO/commodity costs discussed broadly FY25 bridge assumed ~3% inflation; price/mix and productivity to offset Total cost inflation now ~9%; two mid-single-digit price actions; surcharges tied to China tariffs Inflation risk up; mitigation via pricing/surcharges
Supply chain & manufacturingNew Saltillo commercial factory ramp; below-demand output Saltillo online; inefficiencies at Stuttgart; recovery expected in 2025 BCS ramp inefficiencies persisted; sequential margin improvement expected from Q2 Improving through 2H25
Emergency replacement (commercial)Pilots encouraging; capacity constrained Program highlighted for 2025; benefit back-half weighted Inventory now positioned; sales force investment lapped; growth expected in Q2–Q3 Building tailwind
Channel dynamics (destock/restock)Two-step restocking post industry destock; early R-410A prebuy $125M prebuy in Q4 (HCS-heavy); Q1/Q2 destock headwind Expect Q2 destock as distributors sell remaining R-410A; HCS two-step +11% in Q1 Near-term headwind (Q2)

Management Commentary

  • “Our results this quarter highlight the strength of our replacement-driven business model and the value of our North American-focused strategy… We are narrowing our full-year guidance, with pricing expected to offset any volume impacts.” — CEO Alok Maskara .
  • “We now expect our total cost inflation to be 9%… To mitigate tariffs, we have implemented 2 new price increases… boosting price gains to 7%… we now anticipate sales volumes… to decrease by 4%.” — CFO Michael Quenzer .
  • “The risk of homeowner price elasticity on replacement remains very low… a 5–10% increase in equipment does not translate 1:1 for homeowners.” — CEO Alok Maskara .
  • “We maintained a strong balance sheet, with net debt to adjusted EBITDA at 0.8x… and will return excess capital through share repurchases.” — CFO Michael Quenzer .

Q&A Highlights

  • Tariff cost timing/LIFO: Q1 recognized higher tariff costs (Mexico metals) ahead of price benefits; mitigation actions expected to lower impact over time .
  • Pricing actions: Two mid-single-digit increases (one permanent, one surcharge tied to China tariffs) with solid stick rate; surcharges could be withdrawn if tariffs roll off .
  • Destock: Q2 expected air-pocket as distributors clear R-410A; sequential BCS margins should improve despite lingering inefficiencies in Q2 .
  • Refrigerant logistics: Bulk R-454B supply adequate; retail service canister shortages temporary, expected to normalize by end of Q2 .
  • Capital returns: $85M repurchases in Q1 with intent to be more active in 2025; opportunistic approach alongside bolt-on M&A .

Estimates Context

  • Q1 2025 EPS $3.37 beat by $0.12 vs consensus $3.25*; revenue $1,072.6M beat by ~$49.9M vs $1,022.7M*; EBITDA ~$180.3M in line with ~$180.4M*. Values retrieved from S&P Global.
  • Implication: Street models likely raise FY EPS lower bound to align with $22.25–$23.50 and incorporate higher price/mix offset to tariffs; near-term reductions to HCS volume assumptions (Q2 destock) and BCS margin cadence (ramp easing in 2H).

Key Takeaways for Investors

  • Price/mix is offsetting elevated tariff/inflation, preserving FY margin framework despite Q1 compression — expect sequential improvement from Q2 and clearer recovery in 2H as BCS ramp inefficiencies fade .
  • Near-term trading: Anticipate Q2 destock headlines; focus on confirmation of BCS margin improvement trajectory and stick rate of surcharges/price actions as catalysts .
  • Capital returns/valuation support: Dividend up 13% and $1.0B buyback authorization underpin downside protection and EPS accretion if shares remain pressured .
  • Structural growth levers: Emergency replacement ramp (inventory, trained teams) and Samsung ductless plus Ariston JV expand portfolio and channels — supportive of mix/attachment and medium-term margin .
  • Watch tariff path and China sourcing exposure (~5% of spend; down meaningfully over 3 years); surcharge flexibility provides hedging against policy shifts .
  • FY25 guide credible: revenue ~2% maintained; EPS range tightened upward; FCF $650–$800M intact — monitor execution vs raised cost inflation assumption (9%) .
  • Medium-term thesis: Low GWP transition creates durable pricing/mix tailwinds; distribution and digital investments enhance margins; expect margin expansion resuming in 2026 per management’s longer-term targets .