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DATE

  • Wednesday, July 23, 2025, at 9:30 a.m. EDT

CALL PARTICIPANTS

  • Chief Executive Officer — Alok Maskara
  • Chief Financial Officer — Michael Quenzer

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RISKS

  • CEO Alok Maskara said dealer confidence has been impacted by concerns around R454B canister availability, potentially leading to a partial reversal of last year's temporary share gain in the Residential segment.
  • Maskara stated that Residential new construction demand "remains subdued," contributing to volume declines in the Home Comfort Solutions segment.
  • Management cited ongoing "industry-wide shortages of R454B canisters," which may have increased system repairs in place of replacements.
  • CEO Maskara noted, "[residential] new home construction is the one area that remains weak," with persistent weakness "taken into account" in current guidance.

TAKEAWAYS

  • Revenue: Grew 3% in the second quarter, driven partly by favorable product mix and pricing in both Home Comfort Solutions and Building Climate Solutions segments.
  • Segment Margin: Achieved a record 23.6% segment margin, up 170 basis points in Q2 2025, reflecting enhanced operating efficiency and productivity improvements.
  • Operating Cash Flow: Reported at $87 million for the quarter.
  • Adjusted Earnings Per Share (EPS): Delivered adjusted earnings per share of $7.82 for the quarter.
  • EPS Guidance Raised: Full-year adjusted EPS is now expected in the range of $23.25 to $24.25 for FY2025, up from prior guidance of $22.25 to $23.50.
  • Revenue Guidance Raised: Full-year 2025 revenue growth outlook raised to 3%, up from the previous 2% estimate.
  • Volume Forecasts: Full-year sales volumes are expected to decline 6%, improved from the previous estimate of a 9% decline; Second-half FY2025 guidance anticipates further volume declines of approximately 8% for Home Comfort Solutions and 4% for Building Climate Solutions.
  • Pricing and Mix Benefit: The combined full-year benefit for FY2025 is now forecast at 9%, slightly below the prior 11% estimate, as material tariff inflation was lower than expected.
  • Cost Inflation: Total cost inflation is now projected to increase by 6% for FY2025, improved from the earlier 9% outlook, due partly to tariff mitigation.
  • R454B Transition: About 90% of refrigerant-based product sales now contain R454B as of Q2 FY2025; transition anticipated to be fully completed by 2026.
  • Share Repurchase and Dividend: $300 million in shares repurchased year-to-date as of Q2 2025; The company authorized an additional $1 billion for future buybacks in Q2 2025 and raised its quarterly dividend by approximately 15% in May 2025.
  • Home Comfort Solutions Performance: Segment revenue increased 3%, with pricing up 12% in Q2 2025; Sales volumes declined in Q2 FY2025, driven by R410A inventory sell-through, new construction softness, and R454B canister shortages.
  • Building Climate Solutions Performance: Segment revenue rose 5% in Q2 2025, with an 8% benefit from product mix and pricing, offsetting a 3% decline in sales volumes; Light commercial HVAC shipments saw double-digit volume declines in Q2 2025, but emergency replacement and service helped offset some of the weakness.
  • Factory Productivity Gains: Achieved sequential and year-over-year improvements in Q2 2025 as the new facility ramp neared completion and the labor force was optimized.
  • Transformation Strategy Progress: Strategic joint ventures with Samsung and Ariston are expected to begin contributing to growth in 2026 and 2027, respectively.
  • Free Cash Flow Guidance: Full-year 2025 free cash flow is expected in the range of $650 million to $800 million, with inventory normalization anticipated in the second half.
  • Tax and Interest Assumptions: Interest expense for full year FY2025 is expected to be approximately $30 million, with the tax rate between 19% and 20%.
  • Margin Expansion: Management guides to operating margin expansion of approximately 50 basis points for the full year; with sequential recovery in both major business segments in the second half.

SUMMARY

Lennox International (LII 6.69%) management signaled successful execution in navigating the R454B refrigerant transition, reporting that about 90% of refrigerant-based product sales used R454B in Q2 FY2025. Channel inventories are moving toward more typical levels, with some normalization still expected in the third quarter. The joint ventures with Samsung and Ariston are positioned as key portfolio growth levers, with clear timelines for meaningful impact—Samsung is expected to contribute to growth in 2026, followed by Ariston in 2027—and strong initial dealer feedback, especially for water heater integration. Distribution investment efforts, including expanding emergency replacement inventory and piloting commercial offerings in residential stores, are broadening market reach and enhancing service responsiveness.

  • CEO Maskara said, "We are now selling mostly our R454B product, with limited R410A remaining in the channel as of Q2 2025," indicating a near-complete refrigerant transition.
  • Management articulated disciplined price management, employing AI-driven tools to optimize pricing by region and citing that tariff-driven surcharge withdrawals were made when input costs decreased.
  • The company highlighted a deliberate inventory increase in Q2 2025 to ensure smooth product transitions and meet seasonal demand, with Chief Financial Officer Quenzer confirming an expectation to "drive it down to more normal levels" by year-end 2025.
  • Emergency replacement initiatives expanded from pilot to five or six markets, with commercial SKUs planned for residential store placement, supporting management's stated commitment to "continue making a dent in this [market]."
  • CEO Maskara observed that although the company expects to "give back quite a bit" of last year's residential share gain, contract renewal rates remain high and availability improvements are attracting more dealers.
  • With respect to margin sustainability, management identified ongoing investments in productivity and distribution, as well as continued pricing discipline, as integral to maintaining competitive profitability despite inflation and input cost challenges.

INDUSTRY GLOSSARY

  • R454B: A next-generation refrigerant with lower global warming potential (GWP), now replacing R410A in most Lennox International Inc. refrigerant-based products.
  • R410A: The legacy refrigerant phased out in favor of R454B due to regulatory and environmental requirements.
  • SEER: Seasonal Energy Efficiency Ratio, an efficiency standard for HVAC equipment; the industry minimum referenced as "70% as the minimum SEER equipment" in the call.
  • HCS: Home Comfort Solutions — Lennox International Inc.’s residential heating and cooling segment.
  • BCS: Building Climate Solutions — the company’s commercial heating and cooling segment.
  • RTU: Rooftop Unit, an HVAC system commonly used for commercial applications referenced in the discussion of life cycle solutions.
  • AHRI: Air-Conditioning, Heating, and Refrigeration Institute, used for market share tracking.
  • Two-step/One-step Channel: Distribution models for reaching installers and end-customers, with distinct revenue and inventory dynamics described in the transcript.

Full Conference Call Transcript

Alok Maskara: Thank you, Chelsey. Good morning, everyone. Let me begin today's call by highlighting the impressive results we achieved in Q2. Results that reflect our team's strategic focus and resilience in the face of a challenging external environment. Both segments delivered revenue growth and margin expansion. This performance was fueled by our continued emphasis on cost discipline, elevating the customer experience, and enhancing our go-to-market differentiation. As we build on this momentum, I want to express my sincere gratitude to our employees for their dedication and to our loyal customers for their continued trust and partnership. Let us turn to slide three for an overview of our second-quarter financials. Revenue this quarter grew 3%.

Our segment margin was a record 23.6%, an increase of 170 basis points. Operating cash flow was $87 million. Adjusted earnings per share in the second quarter was $7.82. Our team is performing well despite ongoing challenges, including softness in new construction demand, industry refrigerant canister shortages, customer uncertainty, and inflationary pressures. In HCS, profitability remains strong as we transition into selling primarily our R454B products. Destocking in Q2 was largely in line with expectations, though we anticipate some spillover into Q3 as industry lead times continue to normalize. While residential new construction remains subdued, the HCS segment continues to perform well given the broader market conditions. In BCS, factory productivity has improved, helping to mitigate inflationary pressures.

Emergency replacement wins have partially offset end markets that have been weaker than we anticipated. In addition, growth from our full life cycle strategy has delivered year-over-year revenue growth and margin expansion. We are raising our full-year outlook to reflect our consistent execution in a challenging environment and continued progress on our growth initiatives. We now expect adjusted earnings per share in the range of $23.25 to $24.25 and revenue growth of approximately 3%. Now let us move to slide four for a brief look at how we're expanding our portfolio and the value we bring to our customers through joint ventures with leading global partners.

As we continue to execute our transformation plan, we are taking a deliberate approach to building long-term value through strategic partnerships that strengthen our heat pump portfolio and enhance customer experience. Our joint ventures with Samsung and Ariston are clear examples of this strategy in action. These partnerships allow us to offer a broader range of products that our customers are already installing, making it easier for them to do more business with us. With 75% of our dealers already selling mini splits and 50% offering water heaters, these additions are a natural fit that will provide one-stop shopping convenience to all our customers. These joint ventures position us well for future growth.

Samsung brings advanced technology, smart things integration, and strong brand recognition that will enhance our portfolio in both HCS and BCS through ductless mini splits and VRF products. Ariston contributes deep expertise in global heat pump water heating, and our North American joint venture strengthens the position of both companies during the ongoing convergence of HVAC and water heating trades. These partnerships align with the growth acceleration phase of our transformation strategy and establish the foundation for the expansion phase. We expect Samsung to begin contributing meaningfully to growth in 2026, followed by Ariston in 2027. Now let me hand over the call to Michael, who will take us through the details of the Q2 financial results.

Michael Quenzer: Thank you, Alok. Good morning, everyone. Please turn to slide five. As Alok outlined, in the second quarter, we operated in a challenging environment shaped by persistent inflationary pressures, industry-wide destocking of R410A equipment, and a continued transition to the low GWP R454B products. Despite these dynamics, our team delivered record results with a 3% increase in revenue and 11% growth in segment profit. A key driver of this performance was the successful introduction of our new low GWP R454B products. These enhanced products will replace approximately 70% of our home comfort solutions product portfolio and 40% of our building climate solutions portfolio.

During the quarter, approximately 90% of our refrigerant-based product sales contained the new R454B refrigerant, driving favorable product mix, contributing meaningfully to both top-line and profit growth. Let's now turn to slide six to review the performance of our home comfort solutions segment. Home comfort solutions delivered strong financial results this quarter, despite softness in sales volumes. Revenue increased 3%, driven by favorable product mix and pricing, which rose by 12% as these initiatives reached full effectiveness. As anticipated, sales volumes declined mainly because contractors and distributors are still selling through their R410A inventory. This slowdown was also influenced by continued softness in residential new construction and industry-wide shortages of R454B canisters, which are required for many new system installations.

These shortages may have led to an increase in system repairs instead. On the cost side, inflationary pressures on materials and components persisted. However, we successfully offset part of these impacts through effective tariff mitigation and improved factory productivity. Distribution costs were higher this period due to ongoing investments in expanding and strengthening our network. These investments are part of our long-term growth strategy aimed at improving customer fulfillment rates, broadening product availability, and making it easier for customers to access the solutions they need when they need it. By enhancing our distribution capabilities, we are working to deliver a more seamless and responsive customer experience. Moving on to slide seven.

After a slow start to the year, the Building Climate Solutions segment delivered a strong rebound in the second quarter as customers regained confidence since Q1. The segment achieved a 5% increase in revenue, driven by an 8% benefit from favorable product mix and pricing, which more than offset volume declines. Light commercial HVAC, which accounts for 50% of BCS revenue, continued to face pressure from soft end market demand, with industry shipment volumes down double digits. However, our segment sales volumes declined just 3%, supported by growth in emergency replacement products and continued strength in our refrigeration and service offerings. On the cost side, material inflation remained elevated.

Encouragingly, for the first time in several quarters, we delivered year-over-year factory productivity gains as the ramp-up of our new facility nears completion. Turning to slide eight. Let's review cash flow and capital deployment. From a free cash flow perspective, we remain on track to achieve our full-year guidance of $650 million to $800 million. While we made temporary inventory investments to smooth the transition to the new R454B products, we expect inventory levels to normalize in the second half of the year. We're also strategically investing in inventory to strengthen our position in the commercial emergency replacement segment and to support the launch of our new Samsung ductless product line.

On capital deployment, we have repurchased $300 million in shares year-to-date. In the second quarter, we also received authorization for an additional $1 billion in future share repurchases. Reflecting our strong earnings and cash flow outlook, we increased our quarterly dividend by approximately 15% in May. Lastly, we continue to take a disciplined approach to M&A, actively evaluating attractive bolt-on opportunities that enhance our distribution capabilities, expand our product portfolio, and integrate smart technologies. If you'll now turn to slide nine, I'll review our full-year 2025 guidance. Let me walk you through the updates to our 2025 financial guidance, which reflect a strong first half and improved visibility into the second half of the year.

Based on our performance so far and the momentum we're seeing, we are raising both our revenue and EPS guidance. This speaks to the strength of our execution and the confidence we have in our outlook. Starting with revenue, we now expect full-year revenue to grow by 3%, up from our previous guidance of 2%. This modest improvement reflects a slightly more optimistic view on sales volumes, which are now projected to decline 6% compared to our prior estimate of down 9%. This includes the impact of pre-buy and temporary share gain. On mix and pricing, we now expect a combined benefit of 9%, slightly below our previous estimate of 11%. This adjustment reflects lower-than-anticipated material tariff inflation.

As noted in Q1, our pricing strategy is designed to flex input cost trends, which have moderated. In line with this, we now expect cost inflation to increase total cost by 6%, down from our prior estimate of 9%. This improvement is primarily driven by successful tariff mitigation efforts. Looking at other key items, we now expect interest expense to be approximately $30 million and our tax rate to fall between 19-20%. And finally, on earnings, we are raising our EPS guidance to a range of $23.25 to $24.25, up from our previous range of $22.25 to $23.50.

Overall, these updates reflect strong execution across the business and confidence in our ability to deliver on our commitments for the remainder of the year. With that, please turn to slide 10, and I'll turn it back over to Alok.

Alok Maskara: Let me take a moment to provide a view of how we are positioned for growth and how we see the market evolving across both of our segments. The smooth transition to a low GWP refrigerant maintained our exceptional track record and deepened trust with our customers. We are now selling mostly our R454B product, with limited R410A remaining in the channel. While the transition was well executed by Lennox International Inc., dealer confidence has been impacted by concerns around R454B canister availability. This may have led to a partial reversal of last year's temporary share gain.

We are beginning to see that more homeowners are choosing repair versus replace and trading down as inflation and government incentives continue to influence some consumer behavior. While the broader environment remains challenging, our internal momentum continues to accelerate. Equipment inventories in the channel are moving towards more typical levels, and the availability of R454B canisters is expected to continue improving. This will enhance our ability to support dealers and meet customer demand in a timely manner. In the Building Climate Solutions segment, we are beginning to see early signs of demand stabilization following prolonged industry softness. Additionally, our strategic investments are generating positive results.

Order rates and backlog remain healthy given steady replacement demand as aging systems approach end of life. Our operational execution has been strong, and we now have the necessary capacity to meet demand. Margins have sequentially recovered as factory productivity improved, which helped offset inflationary pressures on materials and components. Demand is also increasing for comprehensive RTU life cycle solutions as national account customers are placing greater value on partners who can support them across the entire value chain, from equipment and installation to service and long-term preventative maintenance. Our ability to deliver across the spectrum sets us apart. We're also seeing growing traction in emergency replacement where our brand quality, availability, and responsiveness have proven to be a success.

Looking ahead, we see opportunities to expand our product and service portfolio through growth initiatives that strengthen our ability to serve customers and deepen our relationships. Now let's turn to slide 11. While Lennox International Inc. continues to be well-positioned for sustained growth and margin expansion, we remain focused on executing the Lennox transformation strategy introduced in 2022 and advancing into our next phase of strategic expansion. Our growth is supported by steady replacement demand and targeted initiatives across digital customer experience, ductless technology, commercial capacity, and parts and services. We continue to expand resilient margins through productivity and pricing excellence while investing in distribution to further enhance customer experience and availability.

We are also scaling digital capabilities across products and customer interactions while leveraging proprietary data and expanding our intelligent product lineups. All of this is powered by a high-performing team and a culture grounded in accountability and results. I am confident in our strategy, encouraged by our progress, and focused on delivering value for our customers, our employees, and our shareholders. As I look forward, our best days are ahead of us.

Michael Quenzer: Thank you.

Alok Maskara: We will be happy to answer your questions now. Margo, let's go to Q&A.

Operator: Thank you. The star one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one to ask. We'll take our first question from Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Jeff Hammond: Good morning, guys.

Alok Maskara: Morning, Jeff.

Jeff Hammond: Hey. So the, you know, the gap between price and cost was pretty stunning, and, obviously, showed through in the margin. I'm just wondering what you're seeing with the A2L manufacturing costs given that there are some added costs related to that equipment? And then tariffs, you know, if they can't really showed up or came into two q or do they step up into the second half? Just trying to understand that price cost gap better as we go forward.

Alok Maskara: Sure. So on the A2L conversion, both our cost and price are very close to our expectations and our previous communication, Jeff. So there's been no change as what we have been able to do is get more factory productivity and we have done significant headcount retrenchment as like, you know, we finally were able to get out of some of the factory inefficiencies. That came into play during the A2L conversion. So I think as expected and mostly driven by productivity, not price in that case. Both price and mix were as expected, and it's holding just fine.

Michael Quenzer: And, Jeff, your question on tariffs, in the second half, we do have tariffs increasing a little bit in the second half, but that's all built in the guide. Both businesses are still reflecting margin expansion in the second half of the year. Demonstrating our good price cost excellence.

Jeff Hammond: Okay. And then can you walk through kind of what your volume assumptions are for the second half Looks like you bumped it up a little bit or it's less bad and in, HCS. And then you know, should we expect price mix to be similar to 2Q in as in the second half as it was in 2Q? Thanks.

Michael Quenzer: Implied in the guidance for the HCS segment is the balance of the year volumes including the destock and just overall volumes are down about 8% that compares to about down 6% year to date. So a little bit more decline in the second half than the first half. And then on price mix, it implies about up 10% in the second half in line with where we saw the first half. And at BCS, down volumes in the second half of about 4% compared to down 6% year to date. In the balance of the year, price mix similar to what we saw in the first half and up 6% six or 7%.

Jeff Hammond: Okay. That's helpful. Thanks so much.

Operator: Yep. Thank you. We'll take our next question from Julian Mitchell with Barclays. Please go ahead.

Julian Mitchell: Just wanted to circle back to the margin outlook there for a second. Just wanted to confirm the sort of full year EPS guide. Is that embedding kind of 50 bps, 60 bps of operating margin expansion that type of rate. And when we're thinking about kind of third versus fourth quarter, anything to call out there in terms of moving parts, maybe as kind of the tariff effect comes in for that 6% cost inflation number any more color around that, please?

Michael Quenzer: Yes, Julian, that's correct. For the full year, we're projecting about a 50 basis point expansion in margins. We had about a 50 in the first half, another 50 points in the second half. For full year, H will be up a little bit more than the 50 basis points. And the BCS will be closer to flat with the volume reduction that we just took but both businesses will show margin expansion in the second half, a little bit more margin expansion in BCS as that factory productivity kicks in.

Alok Maskara: And, Julian, I think there's lots of moving pieces here. But overall, the is consistent with our journey as we are looking to make margins both as a manufacturer and distributor. And if you just go back three years, we can see that our margins in Q2 have expanded 600 base 680 basis point over the past three years. So we don't think of this current margin expansion of anything, but just part of our overall trajectory to earn margins both as a manufacturer and a distributor. That's helpful. And, just to follow up on that. So I understand the sort of margin increase first half, second half year on year is pretty similar delta. But I suppose the sort of first versus second quarter was quite a big difference. And just trying to understand, would you argue that the second quarter represents a more natural performance given where we are in the A2L cycle and plant productivity. Whereas Q1, you're obviously dragged down by the early phase of A2L plus the Mexican plant issues.

Alok Maskara: Yeah. I think you're right, Julian. Q1 was tainted by significant inefficiencies in our manufacturing, both as we transition our BCS factories into A2L products we obviously had an air pocket that we talked about both from sales and production perspective. And, yes, overall, like, in Q2, we saw mix shift more towards $4.54 versus $4.10 a. So just Q1 inefficiencies and then more normal mix for the year both makes us confident that Q2 is a better gauge of our margin versus what abnormal Q1 margins look like.

Julian Mitchell: Thank you. Did Michael, I don't know if you mentioned sort of anything on Q3 versus Q4. Maybe I'd missed it.

Michael Quenzer: No. We don't give the quarterly guidance. But what I will say is the second half, you will have more of that comp issue. In fourth quarter as we had $125 million in the second half of last year for pre-buy and temporary share gains. So that will weigh a little bit more in the fourth quarter.

Julian Mitchell: Makes sense. Thank you.

Michael Quenzer: Yep.

Operator: Next, we'll go to Damian Karas with UBS. Please go ahead.

Damian Karas: Hey. Good morning, everyone.

Alok Maskara: Morning. Morning, Damian.

Damian Karas: I actually wanted to ask you about the Ariston partnership. Obviously, interesting move to get involved in water heaters. Alok, could you maybe share some of the early feedback you've gotten from your dealers on the water heater business? And what's a reasonable expectation for the pace that you could start to see some of those sales showing up in your results?

Alok Maskara: Sure. Great questions. The early feedback from our dealer and overall from our channel has been very positive. You know, as we mentioned in our script, 50% of our current dealers or contractors are already selling water heaters. So for them to be able to buy from us would significant change the kind of logistics hurdles that they have to go through. We can consolidate shipments. And more of our tech advanced dealers are excited about the fact that we can integrate the controls and they can provide a common service option. So if they're going twice a year to change filters, they can also flush the water heaters while they are going there.

The dealer reaction has been very positive. You know, we're gonna launch the product in kind of Q1 next year, which means from practical perspective, we will see meaningful growth starting in 2027. I think '26 is gonna be more of a launch year, and we'll work through all the like, even launch pieces. At this stage, it's kind of early to give you numbers, but I think over the long term, we see this convergence between the two continue to play out. And positions us really well as a lot of the water heaters have to make the transition to heat pump at that point, the overlap and the growth will go up even higher.

And that, as you know, happens in 2029. When all electric water heaters over 35 gallons need to be heat pump based. So we think a lot of acceleration will happen at that point.

Damian Karas: That's really helpful. Thank you. Then I wanted to ask you about market share Sorry if I missed this. I know you talked a little bit about starting to gain momentum in emergency replacement. But on the residential side of the market, are you still expecting to more or less give back all of the, share gains from last year, or has your view changed at all there based on what you're seeing?

Alok Maskara: You know, it's too early to say. I think we did expect to give back some of that shared We think we might have given back some in Q2 already. Because of the R454B canister shortages. And that's kind of guided our view of the rest of the year. But overall, we are pleased with where we stand. We are pleased with how we've been able to renew most of our contracts. And continue to improve our availability and attract more dealers.

So, yeah, I think we are not banking on keeping all that share. We'll give back quite a bit. Or, like, partially that share back.

Damian Karas: Got it. Got it. Thanks a lot. Good luck out there, Lo.

Alok Maskara: Thanks.

Operator: We'll go next to Ryan Merkel with William Blair. Please go ahead.

Ryan Merkel: Hey, everyone. Thanks for the question. I had a two parter on BCS. To start. You lowered the volume to mid single digits for the year. Could you just talk about why that was Is it I think you mentioned industry softness, but if you could expand on that. And then and then what do you mean by commercial is nearing a bottom?

Alok Maskara: Just unpack that. Sure. So I think they're related. I mean, we were expecting BCS industry volume to start hitting bottom by the end of Q1, and it turned out it kept declining as the industry volume all throughout Q2. But now we are seeing signs of stabilization and we do expect things to kind of bounce along the bottom for a bit before the uptick back to more normal levels starting maybe like, you know, late in the second half. So that's the reason we brought our overall PCS volume guide down based on what we saw in Q2. But at the same time, we do see signs of stabilization and hence, we called out that like, you know, we have kind of bouncing along the bottom at this stage. You never know how long this would last. Things are no longer getting worse. Okay. Got it. That's helpful. And then just a question on whether you know, people are worried about the mild weather. You didn't mention weather as a headwind in the script. So just curious if you thought it was a headwind and maybe just comment on the shape of the quarter.

Ryan Merkel: Did you see you know, better trends as you got into late June, July, just given the heat wave?

Alok Maskara: Yeah. That's part of my rule, Ryan. I think you and I have talked about it. I don't think we should ever blame weather for our numbers, so we shouldn't talk about that. But, obviously, you know, we have seen over the past many years that there's been late start to the summer. And that seems to be continuing this year. May was very soft, and towards the June, we saw much stronger sales. So, yes, there's clearly a pattern that's related to weather. But that June strength continues as we look at, like, in the first few weeks of July as well. So from our perspective, there's some anecdotal data about May being the coldest May in the past, whatever, twenty years plus or so.

But for us, like, you know, as we look at the replacement demand and we look at where consumer confidence and R454B canister shortages, those all probably played an equal amount of role. Into the softer Q2 for HCS. But, yeah, there's definitely was a weather impact that got better throughout the quarter.

Ryan Merkel: Got it. All right. Thanks. Congrats on the quarter. I'll pass it on. Thanks, Ryan.

Operator: Thank you. And next, we'll go to Stephen Volkmann with Jefferies. Please go ahead.

Stephen Volkmann: Hi. Great. Good morning, everybody. I wanted to dig in a little bit into the price mix question. Maybe, Michael, I'm curious it sounded like from Alok's comment that maybe the mix was negative. So was price like, a little stronger than in mix perhaps a little bit negative? Did I read that right?

Michael Quenzer: Yeah. It's the opposite. So we've had very strong mix and also continued price. And we blended the two together just because at this point, we started the year with a 10% increase for mix on the R454B product and then followed on with two price increases. So it's a bit challenging to spike out the difference between mix and price, but overall, the mix is still achieving what we believe is that 10% increase that we began the year with.

Stephen Volkmann: Got it. Okay. And I guess what I'm really trying to think about here is whether, like, on the repair side, Alok, I think you mentioned that it was sort of canister related. But are there any signs of just kind of price pushback in the sense that affordability is just getting tough for some people? And therefore, they're perhaps looking to trade down or repair versus replace. Is that a dynamic? Or is it all in your mind, more just canister-related?

Alok Maskara: You know, it is hard to be extremely precise with this, Steve. But I think the way we have looked at it the R454B canister shortage had impacted the dealer confidence. And they are the ones who typically do a great job convincing the consumer on the benefits of replace versus repair and benefit of upgrading. So I think that was a primary On secondary factory, yeah, we have seen consumers trade down. But, you know, the entire industry has moved to 70% as the minimum SEER equipment. And that continues to like, you know, be the case for many years. So I do see that trade-down trend continues. We have not seen any impact of Carnafino.

Consumer price elasticity or anything like that. It remains a necessary purchase, but we do see consumers getting two to three coats if earlier they were getting one to two coats. So I think there's a lot more consumers who are like, you know, able to get multiple codes. Versus during COVID, they were delighted if they just got one quote. Somebody willing Right. An availability to do that. So we do see some more consumer looking to get deals. And I think that puts like, you know, multiple dealers into play at any given time. So we are watching all those trends, but nothing unusual this quarter to what we had seen earlier. Except the R454B canister was unusual.

That's why we called that out.

Stephen Volkmann: Got it. Okay. Thank you so much. I'll pass it on.

Operator: Thank you. We'll take our next question from Jeff Sprague with Vertical Research Partners. Please go ahead.

Jeff Sprague: Hey, thank you. Good morning, everyone. Just a point of clarification before I get to my question. Just on the inflation number you're giving us, the 6% that's on total COGS and total SG&A. And then investments and productivity numbers you gave us are separate and apart from that.

Michael Quenzer: Yeah. That's correct. So it'd be on the total cost both, the cost of goods sold and SG and A. And then from there, then you add on top of it any investments and subtract productivity. I wonder if you could thank you for that.

Jeff Sprague: Can we just maybe address kind of managing price mix? I think we've kinda you know, tiptoed around a little bit in some of the earlier questions. But you know, it does sound like you're seeing some you know, some you know, you know, price elasticity come into play. It also looks to me like, you know, you're, quote, unquote, getting you know, more price than you need, and congratulations if you can do that.

But you know, as you try to toggle you know, price you need versus price you can get and the impact that it has you know, on the consumer buying decision, is there some clear trade off there in your view in terms of, you know, making sure price is not at a level that it you know, negatively impacts mix and then has other ramifications on you know, the whole repair versus replace dynamic.

Alok Maskara: Sure. You know, as you know, you never get pricing exactly right. You know? You're always gonna be a tad too high or a tad too low. And I think pricing excellence remains over all, a very core initiative for us, we often find that may be underpriced in certain markets. And maybe overpriced in certain other markets, and I'm talking geographically within US. Because each region and each local ZIP code has its own pricing. So we continuously, on a daily basis, manage that and have now started using some really good tools, AI based tools, and a lot of data to make those decisions.

And that's probably behind when we talk about why our pricing has yielded good results. But overall, we remain very sensitive to the trade off between pricing and share or pricing versus consumer like, you know, price elasticity. But keep in mind, the consumer price elasticity depends on dealers selling to consumers, not us selling to dealers. And there's a significant markup because of labor, installation, permits, supplies that happens between when we sell to a dealer versus a dealer sells to consumer. So net, you know, I don't know if I would say that a pricing turned out to be much better than expected. I think it was as expected. Tariff costs continue to come through.

Remember, we did two price increase, one price and one surcharge. We landed up withdrawing a large portion of that surcharge. We talked about in Q1. As some of the tariffs came out lower. So we remain focused on making sure we price fairly and we price competitively in the marketplace.

Jeff Sprague: Great. Thank you for that. And then I'm sorry I was missed the first five minutes of the call, but has the line length, increased on OEM units going out the door hasn't fully addressed kind of the issue of the canister shortage or do you think we're gonna be done talking about canister shortages here, you know, as we move through the third quarter.

Alok Maskara: Yeah. I hope we are done talking about the canister shortages So the line length issue and we all have done that. Right? Gone to 30 feet line length, and that has addressed the concerns from our dealer. Unfortunately, a lot of that inventory hit sales or our warehouses only in June. So we started to see some of that impact where dealers' concerns were less towards the June versus May. And but I think all of us now have inventory with 30 feet line length precharge And that plus there are more canisters available than they were two months ago. So overall, I sincerely hope that we won't be talking about this when we talk about Q3 or next. And we're talking about it in a more positive way.

Jeff Sprague: Great. Thank you for that color.

Operator: Thank you. And next, we'll go to Noah Kaye with Oppenheimer. Please go ahead.

Noah Kaye: Wanted to ask about the inventory build. You provided some color, but I was hoping to maybe unpack a little further what drove the sequential build between you know, just more build of R454B versus the channel being able to take that. Had Samsung and a couple other things that you called out. And to put a bow on it, how we should think about kind of the cadence of inventory reduction and where you expect to be at year end?

Michael Quenzer: Sure. Yeah. Just to add some clarity. So we always wanted to make sure we did a successful transition to the new R454B product. And within that, we thought there might be this error pocket coming in the second quarter, but we wanted to have sufficient inventory for the season in case that error pocket didn't come in. It came in a bit as So what we're gonna do in the second half of the year is to decelerate some of that inventory and drive it down to more normal levels.

There'll still be a growth year over year at the end of the year mostly for these investments for Samsung and the emergency replacement, but it will normalize in the second half of the year, and that's all built into our free cash guide.

Noah Kaye: Okay. And just a quick follow-up on that. That inventory that you built and that you expect to come down does most of that kind of remix towards the longer line length and that we were just talking about in the prior question?

Alok Maskara: Yeah. For residential, that would be true. So and I think that puts us all in a really good position. But we also have some of the older line length as well, so I think it's a good mix. But most of the one we built recently were the longer line length.

Noah Kaye: Yeah. I think people just wanna understand, like, any risk around straining inventory. It sounds like that's not an issue. Last question. Know, '25, you mentioned there's a little yeah. Yeah. You mentioned a little bit that '25 c expiration Of course, that's that's eligible through the end of the year to claim. Any anticipation in the guide of a demand pull forward around that? Are you driving any initiatives with dealers to try to get the credit monetized before it expires?

Alok Maskara: I don't expect a significant demand pull. As you know, was only in single digits that units are compared to units sold that took advantage of the 25 c credits. I think it's a small amount. In '26, maybe the mix would be slightly. I mean, again, so only six, 7% of the units were impacted. But, no, at this stage, I don't expect any demand pull forward because of that.

Noah Kaye: Perfect. Thank you. And we'll go next to Brett Lindsey with Mizuho. Please go ahead.

Brett Linzey: Hey. Good morning. I appreciate all the detail.

Alok Maskara: Morning, Brad.

Brett Linzey: Yeah. What wanted to start with commercial. So you noted the manufacturing product productivity continues to ramp in the Mexico facility. I guess as that capacity gets stood up and you're you're back in the emergency replacement market, do you have any updated thinking on factory output and how that might ramp over the coming quarters as you're as you're filling it out and driving more revenue there?

Alok Maskara: Sure. First of all, I'm delighted that we're talking about productivity versus factory inefficiency. In seems like for the past four, five quarters, all we were talking about was factory inefficiencies. But, yes, delighted that we now have two factories Both are doing well. One in Saltillo, very focused on standard product, emergency replacement, nonconfigured and the one in US in Stuttgart, where you focus on configured products, mostly for key accounts and other application. So I think that balance is going very well for us. We have scaled back our labor force, and the factories as our inventory has come to a good level. Mostly through attrition and otherwise.

And we will continue to kind of balance demand across both. To make sure that we serve the customers in the most appropriate way and get the right financial outcome. I think we're just pleased with that balance and that flexibility we have, which we have never had before. So I do expect our productivity run that started in Q2 to continue for the next multiple quarters as we continue balancing those two.

Brett Linzey: That's great. And then just wanted to follow-up on the repair verse replace discussion. You noted the trade down I guess, is there any data you can share on the rate of growth in the parts categories versus equipment or something you know, fundamental in the in the second quarter, you know, driving that sentiment. And then, I guess, how do we think about that dynamic in the context of you know, the raise in the guide for the for the segment against some pretty tough comps here in the back half?

Alok Maskara: Sure. So I'll take it one at a time. Right? On the repair versus replace, you know, we are underweight in part. As you know. So, I mean, I'm actually interested to see when all those declare their results to see if they have noticed an uptick. If there was a big uptick in repair parts, we won't necessarily see that. But no, our part sales were pretty normal in Q2. So no evidence. But this is more based on just talking with dealers, talking with our key accounts, and looking at, like, you know, other industries trends.

This was our comment based on that, but no numerical evidence to support that. On the second piece, as we look at it, when we gave the guide for 2025 at the end of Q1, Our view was shaped by a potential impending recession. Our view was shaped by potentially tariffs leading to a lot of inflation, and that inflation leading to a lot of demand pullback and consumer uncertainty. Things have just become more stable for The US economy, as you know, since then. So that's primarily the reason for change in our guide. Is just more stable consumer demand, more stable consumer confidence. The new home construction is the one area that remains weak.

Just like existing home sales, and we did take that into account. As we came back with the guy. But that's the piece that continues to be weak.

Brett Linzey: Okay. Great. Appreciate the detail.

Operator: Thank you. Next, we'll go to Tommy Moll with Stephens. Please go ahead.

Tommy Moll: Good morning, and thank you for taking my questions.

Alok Maskara: Good morning, Tommy.

Tommy Moll: Hello, Kevin. I wanted to start on tariffs and associated surcharges or price increases, whatever we wanna call them. I heard you earlier say that you ended up removing all or a substantial portion of the surcharge that was, I guess, announced in April. Just as the tariff picture improved. So if you could walk us through any of the details there, I think it would help to clarify for folks and then as we look forward, what are some of the potential changes in the tariff landscape where you would have to think about potentially needing to come back for another surcharge or you know, it could go the other way as well. There's there's a lot in flux.

So maybe just frame for us what are you watching over the next couple quarters.

Alok Maskara: Sure. Let me start by giving you where we are on the overall tariff plan. Landscape. Right? I mean, when we give our Q1 guidance, we talked about $250 million in tariff impact to us. If you were to ask her the same question again now, we will the impact is gonna be less than half of that. And that's because our teams have done a really good job of mitigating tariffs by switching suppliers and others. And as you know, some of the tariffs have been changed or lowered. So putting that, like, an overall impact is much lower.

To offset the impact, we had always talked about we're gonna focus heavily on productivity, focus on cost and we did pretty effectively. And then we relied on pricing. We had done one price increase and one surcharge. Related to tariffs. And, eventually, we did withdraw. I wouldn't say all, but majority of the surcharge. Given that the China tariffs came down substantially. From 145 some to a lower number. But the first piece, continues, and that continues to offset the tariff impact, which we are still facing.

Alok Maskara: And that impact is as a less than before, Going forward, know, there's a lot of uncertainty. You and I both wish we knew what's gonna happen on tariffs tomorrow, but we don't. But we remain concerned about tariffs coming from South Korea. We remain concerned about some of the August 1 tariff deadlines? We remain concerned about, like, the future of The US Mexico USMCA, production and exemption. So we continue to watch out for those but our goal has always been to provide our dealers and contractors a certain level of certainty and a certain level of confidence. Which I think we have managed to do successfully. By being very disciplined with our tariff versus cost and cost versus price approach.

Tommy Moll: Thank you, Alok. As a follow-up, I wanted to address the EPS guidance, which you raised today and maybe stepping back from some of the numbers and just talking philosophically here if we can do that on earnings day. I don't know if that's possible. But I think where a lot of the questions are coming from today are you raised largely on pushing through this beat in the second quarter? And given some of the recent price cost trends where, you know, your incremental margins were pretty impressive, this quarter. It might suggest a bigger raise would be appropriate for the year Maybe there's some conservatism embedded in the second half. Maybe there are some other factors that haven't come out in the questions today.

But anything you could do to help us understand your philosophy here would be helpful. Thank you.

Alok Maskara: Sure. I read a McKinsey article once which said that successful companies 80% of them have an aggressive CEO, but they are balanced by having CFO. So, apparently, those two make a good pair. So maybe I'll let Michael answer the question. But listen. At the end of the day, there's a lot of uncertainty still remains in the market. There's lots of uncertainty around tariffs. There's all the pieces we mentioned about our R454B. Residential new construction remains weak. And so we think our range we kept the range of EPS guide to be $1. Normally, we would have narrowed that range at this stage. But given the uncertainty, we kept that range to be $1.

And we feel like we appropriately neither conservative nor aggressive. With the new range that we have given out. But, Michael, anything you wanna add to that? Sure. I'll just add mean, our goal is to have confidence to make sure that we meet our commitments. I think we've done this with the guidance that we've laid out. But there is a bit of some conservative in some of these assumptions maybe around some of that cost inflation around 6%, I mean a half point difference there can make a difference in the EPS. But with the inflation and uncertainty, you know, around that, I think it still makes sense to hold it at six but we'll keep watching that.

Tommy Moll: Thank you both. I'll turn it back.

Operator: Next, we'll go to Chris Snyder with Morgan Stanley. Please go ahead.

Chris Snyder: Thank you. I wanted to ask about the back half volume outlook for the resi business. In Q2, volumes were down 9% and the output plus one. In the back half, you know, it's calling for volume. It's mostly maybe a little bit worse than that 9%, but the comp goes from 1% in Q2 to a plus 616% in the back half. So, you know, I guess, you know, in that context, like, you know, why are you guys confident that volumes will be mostly stable here, you know, given those comps? Is it that the destock came through in Q2 and it's now over? Is it canister issue getting sorted itself out? Any color there would be appreciated.

Michael Quenzer: Alright. So may maybe what I'll do is first clarify the numbers. In the balance of the year, we have volumes down in HCS about 8%. So it's a little bit more than the year to date 6% that we saw. And just recall that we will have the comp issue in the second half of sec basically, the fourth quarter. So that's kinda built in there. But then we have 10% increase in price mix also on that. So we are building in a little bit more decline in volumes in the second half than what we saw in the first half.

Chris Snyder: I appreciate that. I was kind of asking more about the second half versus Q2. I think Q2 volumes were down nine, and the comp was plus one, and that was you know, minus eight plus 16.

Alok Maskara: Yeah. And I think a lot of that obviously is we talked about destocking. Well, you can never get the exact numbers We think, like, you know, destocking is largely behind us after Q2. And we talked a little bit about the canister shortage and how that impacted us, especially before the 30 feet line set units hit the marketplace. And then finally, we are also guided by the weather pattern that we talked about. Right? We've always had a late start to summer, and we ended the quarter with much better sales rate than we did during the middle of the quarter. It's never a perfect science, Chris, as you know.

But we feel like we have come and given a fair set of numbers to the best of our visibility at this stage.

Chris Snyder: Thank you. I appreciate that. And then maybe just on pricing obviously, the industry has a really great track record of pushing price and holding that. You know, I guess it feels like here, you know, price you know, across I imagine it's across the industry. It seems to be running a bit ahead cost following the de escalation. Do you are you confident, you know, that the industry, you know, will be able to retain all of this price as you look out over the next six, twelve months, just kind of given some of the earlier comments that there is a little bit more repair versus replace, maybe some trading down in the market? Thank you.

Alok Maskara: Yeah. Listen. I mean, our industry still makes less money than some of the other industries like water heaters. And if you think about all the investments that are needed over the past few years, mean, if we spend hundreds of millions of dollars in capital to get to the R454B transition, we are spending hundreds of million dollars to get better distribution so we can deliver products the same day and give quotes back within two hours. I mean, all of those investments are not made by just Lennox International Inc. Every other player is making that investment as well. And to recoup those investments, I mean, we do need the price impact.

And our cost for R454B units are higher. And we are facing other inflation such as refrigerants and other news that we have looked at it. So I can't speak for others. If history is of any guide, us and other players will continue to be price disciplined, so we can invest in delivering a safe products to our customer support them appropriately, and make sure we live up to our quality and warranty standards.

Chris Snyder: Thank you. I really appreciate that. Makes sense.

Operator: And next, we'll go to Deane Dray with RBC Capital Markets.

Deane Dray: Thank you. Good morning, everyone.

Michael Quenzer: Morning. Morning.

Deane Dray: Hey. I was hoping you'd give us a progress report on the emergency replacement initiative. I saw that you had added some inventory, so it you know, you're you gotta start there to have it ready on that twenty-four-hour notice kinda thing. But just, give us an update there, please.

Alok Maskara: Sure. Dean, when we talked in Q1, we were talking about one or two pilot markets on where we learned and kind of got our approach finalized. Since then, we have expanded, and we are now up to about five or six of those markets, and that's what you start seeing in Q2. But clearly, there's more room for us to continue expanding through that Very soon in the future, you will also see our commercial products even in our residential stores. Things that we have never done before as we look at you know, using our distribution footprints more effectively and placing that inventory in the most convenient location for our contractors.

So overall, early innings but we are pleased with the progress that we have seen up pilots have gone well. Our initial rollout has gone well. But there's still a lot of room for us to continue taking this forward. So we're be disciplined about it. We are gonna be aggressive in our approach, and we're gonna continue to make a dent in this. As you know, the overall bogey here is much larger than we are seeing in any quarter. So we think this is a good tailwind for next couple of years plus more.

Deane Dray: Really good to hear. And then second question, Alok, on page 10 of the deck, you gave some hints about the to expand product and services, in the portfolio. I know you're not gonna give a lot of detail here, and we can rule out international. But just the idea of where and how are these growth levers? Is it more JVs? More on the distribution side? Know, anything about the timing of where we would see further initiatives Yep. Kinda like along the lines we saw with water heaters.

Alok Maskara: Sure. I think on water heaters and mini splits, the reason we did JV is because we needed the global technology platform that comes with that. Because in both of those, the our capabilities could not extend that far. But in other areas, and Michael talks about that in capital deployment, that could be parts and supplies. That could be in technology areas. That could be in geographical reach on distribution. Like, you know, we would be obviously very open to acquisitions. I mean, from our perspective, we have a highly underutilized distribution network The 250 stores could add a lot more products compared to what we are selling today. Without adding that much fixed cost.

So we will continue looking at that from m and a perspective. And on the JVs, we only did that because we had like, companies which had well established products, well established reputation. That could allow us a faster entry into those markets. So stay tuned. Definitely more to come.

Deane Dray: Great. Thank you.

Operator: And we'll go next to Joe O'Dea with Wells Fargo. Please go ahead.

Joe O'Dea: Hi. Good morning. One wanted to just touch on destock and market share a little bit more. And so, Alok, I think the way you framed it is that know, your view is the destock headwind you talked about is largely played out. So that 125,000,000 think you saw it in BCS in Q1. And it sounds like you think you saw most of the HCS impact in Q2, obviously, back half of the year comps, but in terms of what that downdraft would have been in the first half of the year and so largely done there. Then just also to add market share to the question, how many points a share do you think you gained last year? And within the guide, how much are you giving back? This year? In HCS?

Alok Maskara: Yeah. So the first one, I would say, yes. All of those statements are largely true. Right? And you realize that 100,000,000, 125, these are large approximate numbers. Right? We don't, we don't have precise accurate math behind it. But in general, it's fair to say that at this stage, the 125,000,000 in destocking that we talked about is essentially done.

There might be some bleed through in Q3, but you know, I think it's gonna be small. The comps obviously remain difficult. Right? I think that's the boss we watch out for, and then we embedded in a guide going forward. To make sure, like, you know, that's been very clear to that. Regarding market share, you know, I mean, it's a moving piece. Remember, we look at both Hardie and AHRI. Because 70% of our sales go directly to dealer. And with stock up and stocking and destocking, those numbers often have large error bars. When we go into the season.

But I've would say that we ended I'm not gonna give a number, but I will say that in 2024, we ended up having the largest market share we have ever had in the history of Lennox International Inc. When it came to residential. And even if we give some back this year, as we expected and as we had broadcast, we'll probably still land up at 2025 at a very healthy and a large market share That's better than what we had in the past.

Joe O'Dea: Got it. For a second, I thought you might give the number, but appreciate the color there. And then, on Michael, just thinking about the 25.3% margin in Q2 in 25.3, or it's just, like, normal seasonality from there?

Michael Quenzer: Yeah. I think what we've built in is a little bit more cost escalation in the second half as the tariffs come back in. But still, overall, we feel confident that margins are going increase in the second half of this year, at least 50 basis points. In HCS, and that's with volumes down 8%, up maybe 70 basis points for the full year. We'll see where inflation comes. Hopefully, it comes in a little bit lower, and we could maybe do a little better than that. But or we feel good on price cost management at the moment.

Joe O'Dea: Great.

Operator: Yep. We'll take our next question from Steve Tusa with JPMorgan. Please go ahead.

Steve Tusa: Hey, good morning.

Alok Maskara: Morning, Steve.

Steve Tusa: Congrats on the execution in a pretty you know, choppy environment there.

Alok Maskara: Thanks. That means a lot, especially coming from you, Steve.

Steve Tusa: I wouldn't I wouldn't over, overpunch the worth of my opinion, but, thank you for that. So I just wanted to kind of clarify some numbers. So you got the 6% on the 4,000,000,000, that's like $2,240,000,000. Now you're talking about as far as inflation is concerned. I know there's, some moving parts between that and, the bridge items, I think, because the product cost numbers in the first half are, like, running at, $45,000,000 something like that. Are those two numbers the right comparables? Or I think I'm missing maybe something productivity wise in between those. But I guess out of the two forty, I guess simple question is how much have you kind of booked year to date? Yeah.

Alok Maskara: Steve, I think what you wanna do is look at the product cost and the other combined. It's the inflation's on our total cost perspective. Those two combined are about up 80,000,000 in the first half and applies about $180,000,000 kind of in the second half. Okay. So a 180,000,000 in the second half of that of that cost? Flowing through.

Steve Tusa: Correct. Yeah. To get to get to that. Okay. No. Sorry. Sir, $1.01 80 on the full year. Sorry. On the full year. Okay. Right. So that is so that full year. Yes. That includes that, like, that productivity and, you know, the other numbers above the line on product cost. Okay. That makes some sense. And then I guess, just from a pricing perspective, what have you have you guys, like, booked Is this kind of a normal now run rate here? Or you guys have did that price get booked kind of mid midway through the quarter? Or is that something that's now kind of fully embedded in a run rate in the second quarter?

Alok Maskara: I would say it got booked midway through the quarter. The A2L pricing, as you know, depends on the mix as well. And then mix shifted much more towards $4.54 b to the end of the quarter. And the tariff pricing, the way the announcement worked, we probably had two thirds of the quarter where the tariff pricing was in effect on that. So

Steve Tusa: Okay. Alright. That makes a lot of sense. Thank you. Yep. Marco?

Operator: Joseph, your line is open. Please go ahead.

Joe O'Dea: Hey, guys. This is this is Joe. I didn't I didn't hear the operator. So, well, the credit card couple of quick questions, and I'm sorry if I missed this earlier. But we you take a look at the residential volumes down at 9% this quarter. How what did your independent distribution channel do what you sell through the account network?

Michael Quenzer: Yeah. What we saw is on the two step total revenue was up about 10%. The one step total revenue was about flat. So that's with volume and price mix.

Joe O'Dea: That's with volume and price mix? Okay. Okay. Got it. And then just basically, it's got it. Okay. And then and then just kind of, like, the volume assumptions then in the second half of the year. I know that the 125,000,000 isn't a totally precise number.

But it implies, like, basically, like, a six to 7% volume headwind in the second half. So, like, really, what you're expecting out of your residential volumes, excluding that, that onetime impact, from the prebuy last year is really kind of, like, down, you know, call it, like, one to percent. Am I thinking about it the right way?

Alok Maskara: Yeah. I think roughly that's about right. You know? I think I haven't done exact math, but, yeah, that's the right way to think about it.

Joe O'Dea: Okay. Alright. So things so that's good. So things getting a little bit better on the on the kind of, like, volume assumptions as we exit the year. And then I know somebody earlier asked about pricing and call it, like, the inelasticity of pricing into next year. I'm actually curious on the surcharge. Because you didn't fully, you know, implement four fifty four b this year. And so it seems to me that you should and I'm sorry. Didn't mean to search for it, but I meant on the mix side. You should you should improve on mix in the second in 2026 as well because you'll have you'll be telling off for 54. Yeah. That's the right way to think about it. So even though mix is very positive in 2025, should be some improvement on mix in 2026 as well.

Alok Maskara: Yeah. I think that's right, Joe. We talked earlier about in 2025, 60% of our product was gonna be R454, and 40 was gonna be R410A. In 2026, it'll be hundred. R454 and zero R410A. So, yes, we do expect mix to improve. Like, Q3, Q4, I think it'll start normalizing more. And you'll see year over year, it'll be better in, like, Q1 and Q2. But I think that's a fair way to think about it for 2026.

Joe O'Dea: Okay. That's great. Alright, guys. Thanks so much. Appreciate it.

Operator: And our and our last question comes from Nigel Coe with Wolfe Research. Please go ahead.

Nigel Coe: Thanks. Good morning, and I really appreciate you going along here to fit us all in. Just wanted to follow-up on the direct versus indirect. I think you said two step up 10% all in revenues, and then direct flat. If we saw the destock happening in 2Q, I'd I'd expect that to be expressed more in a two step channel. So just a little bit little bit confused there. Maybe I'm thinking about the wrong way, but any thoughts on that?

Alok Maskara: You know, first of all, I think our exposure to two step is much smaller than others, so I wouldn't read too much into that from a overall industry perspective. I think one thing to keep in mind is in the two step channel, because of tariffs and because of the R454B's uncertainty and all of that, people continue to like, you know, maintain high levels of inventory.

And that's one thing we referred to saying some of this might bleed into Q3. As we look at distributors and how much inventory they have. On the one step, as we looked at it, come back, we did we did talk about even one step is not immune to holding any inventory during transition. There was some inventory OneStep was holding as well. But net, as you put together, I put that within the overall fluctuations and the uncertainty that we experience. But, Michael Yeah. The thing I'll add too is the two step doesn't have the RNC exposure. It's the one step does as well.

Nigel Coe: Yeah. Because that's right, Michael. That's a good reminder.

Nigel Coe: Yeah. That's that's that's great color. And then a quick follow on. You know, just kind of on the on the notion of inventories. Your inventories stepped up Pretty meaningfully from one q to two q. And, we see inventory bleed down in the second quarter. So I know we got higher unit costs with four five four b, and I know that we've got some build with ER, but any more color in terms of, you know, how you see inventories Well, first of all, why inventory is so high? And then and then how do you see that progressing for the year?

Alok Maskara: Yeah. We wanted to play it safe. During the R454B transition and given the industry uncertainty. As you know, the number one complaint from our dealers over the past five, six years has always been around availability of our product. So we wanted to address that fully. So I think we did that. And, yes, some of it was also the seasonality of having a slow start to the summer. Net, you know, we would generate most of our cash in the second half, and we have good confidence on our overall cash outlook. And we will bring the inventory depleted down over the next several months. So it's we look at it internally and say, yeah, is it a little bit more than we thought? Yeah.

But we are confident that it's the right thing to do, and we'll bleed it down before the end of the year.

Nigel Coe: Okay. That's great. Thanks a lot.

Operator: Thank you for joining us today. Since there are no further questions, this will conclude Lennox International Inc.'s 2025 second quarter conference call. You may disconnect your lines at this time.