Lennox International (LII) investor relations material

Strategic Growth Initiatives and Business Performance

• Four key growth drivers—heat pumps, emergency replacement, parts/service acquisitions, and JVs with Samsung and Ariston—are each expected to add 50 basis points to growth.

• Heat pump sales are underpenetrated at less than 20% versus the industry’s one-third, with new product launches and investments targeting this gap.

• Recent bolt-on acquisitions in parts and service aim to raise attachment rates from the teens to 30–35%, with Duro Dyne Subco acquisition expected to drive parts revenue above 30% over several years.

• JVs with Samsung (launched) and Ariston (launching next year) are set to expand the addressable market, with meaningful impact expected in 2025 and 2027.

• ROIC remains industry-leading, with profit margin growth from 15% to 20% over three to four years and a 110 basis point improvement to 20%.

Market Outlook, Inventory, and Margin Dynamics

• 2024 is a transition year with mid-20% volume declines in Q4, but underlying demand is stable and expected to grow in 2025.

• Inventory destocking in the one-step channel ends by year-end, while two-step channel normalizes by Q2 2025.

• $10 million per quarter under-absorption impact in Q4 and Q1, with normalization by Q2; price mix carryover to benefit Q1.

• Margin expansion is expected in both business segments, supported by distribution network redesign and productivity improvements.

• Price increases are planned for next year to offset inflation, tariffs, and higher metal and healthcare costs.

Industry Trends, Challenges, and Competitive Landscape

• Canister shortages and refrigerant transition (R-454B vs. R-32) caused temporary market disruptions and increased repair over replacement.

• Contractor and consumer confidence affected repair/replace trends, but replacement is expected to resume its long-term dominance.

• System price increases are driven more by contractor-consumer dynamics than OEM margins; dealer margins expected to normalize as competition returns.

• Channel loyalty remains strong, with little long-term share shift despite temporary disruptions; technology and controls are key differentiators.

• Fears of a price war and permanent shift to repair over replacement are considered overblown.