Lennox at Morgan Stanley Conference: Strategic Growth Amid Market Challenges

On Thursday, 11 September 2025, Lennox International Inc. (NYSE:LII) presented at Morgan Stanley’s 13th Annual Laguna Conference, outlining its strategic initiatives amidst both challenges and opportunities in the HVAC market. The company highlighted its competitive advantages, such as a direct-to-contractor distribution model and technological innovation, while acknowledging pressures from regulatory changes and tariffs.

Key Takeaways

• Lennox is focused on a 99% fulfillment rate, up from 90%, through direct-to-contractor distribution.
• The company is leveraging AI for customer support and e-commerce personalization.
• Strategic acquisitions aim to boost aftermarket parts sales to 40% of total sales.
• Lennox is optimistic about long-term HVAC demand despite current market pressures.
• Joint ventures with Samsung and Ariston are set to enhance product offerings in ductless systems and water heaters.

Financial Results

• Lennox’s direct-to-contractor model allows it to capture both manufacturing and distributor margins.
• The company plans to increase its sales from aftermarket M&A to 40%, currently at 20%.
• Tariff-related cost increases are being mitigated through strategic sourcing and pricing discipline.

Operational Updates

• Investment in AI-powered chatbots enhances technical support capabilities.
• Training programs are available nationwide for technicians.
• Product offerings are being expanded with a "good, better, best" strategy.
• Integration with Samsung appliances will allow unified management through a single app.

Future Outlook

• Lennox plans to expand its mid-tier product line, focusing on cold climate heat pumps.
• The launch of a new Samsung R32 gas product and a water heater is anticipated next year.
• An annual price increase is planned, expecting similar industry responses.

Q&A Highlights

• 75% of Lennox’s residential business is direct-to-contractor, with 25% as sell-in.
• The company has experienced 11 consecutive months of declining HRI shipments.
• A new factory is expected to increase output by 20%, aiding in market share recovery.
• Lennox has engaged 7,000 dealers with its AI-driven app to enhance sales efforts.

Lennox remains confident in its customer-centric approach and innovation focus, aiming to outperform competitors. Readers can refer to the full transcript for more details.

Full transcript - Morgan Stanley’s 13th Annual Laguna Conference:

Unidentified speaker: All right. Thank you, everybody. Super excited to be up here with Lennox International. We have the CFO, Michael Quenzer, and then we have the Chief Technology Officer, Prakash Bedapudi. Thank you guys so much for joining us.

Michael Quenzer, CFO, Lennox International: Thanks for having us.

Unidentified speaker: You know, there’s a lot of, or maybe several players in the U.S. resi and light commercial HVAC market. You know, sometimes for us on the outside looking in, it’s difficult to identify the differentiation at the business level. I guess, you know, why do you guys think Lennox is positioned to win?

Michael Quenzer, CFO, Lennox International: Sure. Yeah, I think that’s a great question to start off the discussion here, especially for those of you that aren’t that familiar with Lennox International. There’s really two main competitive advantages we’d see at Lennox. I’ll talk about the first one and then hand it off to Prakash to talk about the second one. The biggest advantage we have is our direct-to-contractor distribution model that we offer. Essentially, what that allows us to do is be a manufacturer and a distributor. That really gives us a few advantages. First, structurally from a profitability perspective, if we perform well, it gives us the opportunity to have a manufacturing and a distributor margin, which is good. We’ve been a really good manufacturer. We’ve been spending a lot of time being a better distributor, making a lot of investments on that side of our business. That’s helpful for us.

What’s important to the contractor is about connecting closely with them, being a great partner with that contractor. When we win market share, we win market share because we help that contractor win in their local market. It’s really three things that we’re focused on in helping that contractor win. It’s about fulfillment. Several years ago, we were at about a 90% fulfillment. That means 10% of the time we weren’t able to get the product to the contractor when they needed it. It’s critical that we need to get up to 99%. A lot of focus there. It’s also about investing in their technicians around technical support and training. On technical support, we’ve launched new AI-powered technical support chatbots, helping their technicians become more efficient. Also on training, we have local areas throughout the country where we have technicians come in, we invest, we train their technicians.

This is all about making their technicians more efficient. If they’re more efficient, they can do more jobs, they can win more market share. The last piece of the offering is about having a full product offering to the contractor. That includes things like water heaters that we’ve done a new water heater joint venture with. It’s also expanding our portfolio in ductless offerings with Samsung. It’s about parts and accessories. That’s kind of the next level of the portfolio. Prakash has done a really good job designing a good, better, best strategy. Maybe you can share kind of some of the things we do there.

Prakash Bedapudi, Chief Technology Officer, Lennox International: Yeah, thank you, Michael. As Michael alluded to, great products are necessary but not sufficient to win. We also need to have great distribution, manufacturing, supply chain, and e-commerce systems. We invest in all of those over the last couple of decades. Just on the product, if you think about heat pumps, there’s been a lot of talk about heat pumps. Samsung certainly joint venture fills as a ductless heat pump need. Traditionally, the ducted heat pumps have been very strong. We won the DOE Cold Climate Heat Pump Challenge a couple of years ago for residential. Two days ago, we announced we were the first one to meet DOE Cold Climate Heat Pump Challenge for 15 tons and above category. You know, that’s important to us. Investing, being a best-of-breed focused HVAC company, all our R&D dollars go into one area, which is HVAC. We out-innovate our competition.

That’s why we put points on the board. If you look at the product portfolio on the high end, whether it’s furnace efficiency, air conditioner efficiency, heat pump efficiency, rooftop unit efficiency, we lead across the board because of the work we’ve done and innovative work. It doesn’t end there, right? As you all know, the market is made up of 70%, 80% is entry level. There, we need to be cost-competitive. That’s where we sort of operate on both ends of the spectrum, having the industry-leading products on the high end. At the same time, we are at scale. We have the very competitive manufacturing footprint and we have the purchase power. We make very cost-effective entry-level products as well. We compete on both ends of the spectrum and mid-tier.

Another thing we’ve strategically decided dozens of years ago is to own our own controls, IP, and all the algorithms that make the products differentiate versus competitors and give a better performance. For example, not only the system-level controls, unit controls, we’ve also gone into designing our own, people call power electronics, which is variable speed controls to drive the compressor at a variable speed, as well as indoor motors and outdoor motors. Having brought that technology in-house, we were able to disaggregate the monopoly of some of the component suppliers and buy more commodity motors and compressors using our power electronics or variable speed drives to bring the cost down. That’s the way you can move the technology down to the middle of the product line cost effectively. Those are the things we’ve done that differentiates us.

Unidentified speaker: Thank you. I appreciate that. You know, from the outside looking in, one of the things that makes resi HVAC a good business for all of the companies is that dealer network. You know, can you maybe talk about that? How difficult is it for dealers to switch OEMs? Is it an exclusive relationship? Do they usually sell multiple?

Michael Quenzer, CFO, Lennox International: Yeah, shares don’t shift a lot in our industry. There’s a lot of investments that I just talked about, both from either the OEM or the distributor into the contractor. There’s normally a longer-term relationship that exists. Most contractors will have primary and secondary brands. A lot of times, if there’s a supply disruption, we’ve had a tornado and some other instances where some competitors have had issues on regulatory changes where you see a supply shift and you see some of those contractors move to another provider. In general, it’s really about that long-term stickiness of working with that contractor and helping them win in that local market. That’s really what drives share within our industry.

Unidentified speaker: Thank you for that. Maybe moving towards the market and specifically resi HVAC, I think it’s been maybe a bit of an eventful week for resi HVAC. July AHRI was under pressure. A couple of your key competitors are talking about more pressure, and I think there was a pressure expected in Q3. It seems to be coming through sharper. I guess, what are you guys seeing in the market?

Michael Quenzer, CFO, Lennox International: Yeah, so overall, we have, on the residential side, 75% of what we do goes direct to the contractor. We consider that sell-through, 25% sell-in. There’s a little difference between sell-in and sell-through. There’s obviously a lot more volatility historically on the sell-in versus sell-through. We’ve seen some of that compression on the sell-in. We’ve known coming into this year that it was going to be a bit of a noisy year going through this regulatory challenge. We knew there was going to be destocking. As we went into the year, all of a sudden tariffs came in. We had to navigate tariffs. The weather was cold. We had a 454B canister shortage. New construction houses started. Existing home sales were soft. You have all of these variables kind of hitting at the same time.

In general, we feel that there’s a bit of a temporary inflection here in the industry. Nothing structurally different. There are a lot of distributors that have 410A inventory that they need to sell through by the end of the year because the regulatory change would make that obsolescence and of no value. Near term, we see some of those challenges. We think longer term, though, structurally, the industry is still very disciplined in how we all go to market. We’re looking forward to getting into the next year.

Unidentified speaker: Yeah, no, I appreciate that. I think everyone can appreciate some of the challenges on sell-in. Obviously, some of the numbers from a year ago were incredibly strong. Can you talk about what you’re seeing on the sell-through side of the house?

Michael Quenzer, CFO, Lennox International: Yeah, it’s really all those variables I just talked about. It’s like definitely new construction is down. That’s about 25% of what we’re doing. Now, if you look at the industry, maybe 10% of the industry is planned replacement on the residential side for existing home sales. That is down. You have 25% to 30% of the industry on a sell-through that’s down. You take some macroeconomic conditions in there on just the homeowner electing to maybe do some more repairs in the short term that’ll eventually turn into a system replace. Near term, we think, yeah, a little bit of challenge on the sell-through. Long term, structurally, our industry is still well disciplined and ready to grow.

Unidentified speaker: When you kind of think about that homeowner, there’s obviously a lot of uncertainty facing the consumer today. That could lift and improve, and rates could support that as well. How do you think about that, more of a transitory headwind versus potential risk that the level of price being pushed, obviously because of cost inflation, tariffs, metal, is just disrupting demand that could maybe have longer duration behind it.

Michael Quenzer, CFO, Lennox International: Yeah, I think the good thing is that demand destruction is either in our industry, you don’t have to repair to replace it. When you repair it, eventually you’re going to have to replace it. It’s not like there’s a great substitute for HVAC unless people don’t want to have heating and air conditioning. I think that’s a good catalyst. Overall, we also see some variables we think, megatrends, where the average life of the system continues to get stressed and shorter. As you do these repairs, they’re not going to last as long. The cost of the legacy gas, the 410A gas, is going to put more pressure on the cost of repairs, as well as electricity usage and cost. If electricity costs continue to go up, there’s going to be a better return on investment for homeowners to do a new system where they’ll get a 10-year warranty.

They’ll get some energy savings, and we see that cycle just reverting back to normal.

Unidentified speaker: Yeah, no, maybe switching over to light commercial. It seemed like you guys on Q2, and I think a couple others as well, took a bit more of a positive tone on light commercial versus maybe the prior year. I think the industry data Dodge is starting to get better, maybe there’s a little momentum. I guess, what are you seeing there? What gives you guys confidence that maybe the first half of the year was the bottom?

Michael Quenzer, CFO, Lennox International: Yeah, no, I don’t know if we had bottom. We’ve had 11 months consecutive in the HRI shipments being down. What we’ve seen on our side is some good share recovery, especially on the emergency replacement initiative. Very positive trajectory there, as well as us getting back on the offensive on the national account side. For several years, we’ve been supply constrained. We now have a new second factory up and running. That’s allowed us to get back and attack these two different verticals, large national accounts with custom equipment and emergency replacement with the new product coming out of Mexico. We’re really pleased with some of the progress we’re making on attacking some of those channels. As we talk with large national accounts, they have a lot of initiatives for the next several years to refresh all of their units.

We see a multi-year refresh happening on that side of the business, as well as a multi-year share gain on emergency replacement.

Unidentified speaker: Yeah, I guess following on that emergency replacement, any way to frame how much of an impact on that opportunity is coming through this year? You know, on that multi-year, what is the three-year, five-year opportunity as you look out?

Michael Quenzer, CFO, Lennox International: Yeah, we’re seeing some really good traction this year. We didn’t quite hit the full season. It’s a bit of a seasonal product. We’ll see some more of it next year. We have all the structural pieces in place. We have the quote within two hours. We can ship the next day. We’ve hired 30 salespeople. Really, it’s about now retraining the salesforce to basically go out and be hunters and attack on this. In the past, they’ve been a bit defensive trying to explain to customers why we don’t have product. Now it’s just about transitioning the organization to be on the defensive and winning back that confidence that we can deliver. We’re seeing good traction on it.

Unidentified speaker: Has it been more, you know, you guys obviously brought capacity online to be able to serve that market. Has it been more difficult driving utilization of that capacity, just given that the trends there are so soft?

Michael Quenzer, CFO, Lennox International: No, I think our goal there was really about redundancy. We had a single factory that couldn’t supply enough, and we needed to get redundancy. At the same time, it’s going to add a bit of cost productivity as we get into next year. Redundancy and cost productivity were big initiatives. It also gave us about 20% more output initially to start to win back market share. We have enough size there to more than double our output, and we’re going to do that linearly as we continue to win share. Right now, we feel really good. That was a really complex operation to stand up in a new factory, and it’s gone very well.

Prakash Bedapudi, Chief Technology Officer, Lennox International: Thank you. Maybe just to add on, we designed a product to go after the install base for the emergency replacement. We call it Radar, that sits on one of our competitors’ footprint. We gained very good traction. Then COVID happened. We had labor issues in our factory. We walked away from the business completely. Now, with the second factory capacity, we added people, as Michael said. We also put some technology to make it easy to buy those units, right? We bought a business called AES a couple of years ago. They make roof curbs. Now we can quote roof curbs, units, emergency replacement units, everything that they need to finish the job quickly. Through one app, they can quote, they can get it delivered. They know where it’s available, what the pricing is. It’s speed wins in the market, emergency replacement.

Unidentified speaker: Maybe, you know, following up on some tech-related questions for you, Prakash. Now that we’re nearing the completion of that A2L transition, can you talk about new product introductions that Lennox is planning?

Prakash Bedapudi, Chief Technology Officer, Lennox International: We thought this after the big wave of A2L conversions, our engineers were going to be taking, catching a breath. No, no such thought. We have a very full pipeline of product innovation ideas. Let’s talk about residential. We commercialize there on the very high-end cold climate heat pumps. Now, taking the technology, optimizing it, cost optimizing to proliferate down to the middle of the product line, mid-tier, maybe eventually entry tier to get to the cold climate heat pump. Better integrating Samsung’s JB mini splits, right? On the electronics integration on the back end, we’re doing cloud-to-cloud integration so that a homeowner who has appliances, Samsung appliances, Lennox split systems, they add on a mini split. All of them can be managed, interfaced with one app, unified app. That’s what we’re doing.

We plan to do the same thing with the Ariston JB for the water heater. That way, the homeowner and the dealer, talk about dealer. Dealer installs mini split. They install split systems. They install a water heater. They don’t want to go to three different accounts to order that, three different invoices, three different warranty experiences. They don’t want to deal with training the homeowner and training their technicians to deal with three different apps. We have one unified app, one unified service dashboard through our e-commerce platform so that they can look at all the assets they install. We can troubleshoot. They can troubleshoot, diagnose, find the repair parts, all of those. It’s about making it easy to do business with us. Those are the innovations we’re working on on the HCS side. Commercial side, again, we just won the cold climate heat pump challenge.

There’s a whole host of ideas, whether hot gas reheat or dehumidification solutions, sort of dedicated outdoor air solutions. Some of those products we don’t have in our portfolio. We’re working on all of those.

Unidentified speaker: Anything on AI that the company is doing to, you know, just help win?

Prakash Bedapudi, Chief Technology Officer, Lennox International: Two areas primarily we’re leveraging the technology. Number one is to improve the customer experience on our e-commerce platform. For example, hyper-personalization. When the dealer logs in, AI can anticipate seasonally what they need based on their purchase patterns for the last 10 years. We can pre-populate their carts. They know exactly. Make it easy for them. Matchups, HRI matchups, taking away all the laborious work they have to do. We can pretty much deliver at their fingertips without a lot of work for them, right? Technician app, for example, Michael mentioned, right? We launched that. There are 7,000 dealers engaged with us using that agentic AI app. They can get troubleshooting information, parts lookup, step-by-step repair procedures, 24/7, wherever they are, right? They don’t need to call and wait for a tech support technician to help them. Similarly, consumer on AI to improve the customer experience.

They can come to lennox.com, look up warranty, find troubleshooting information, error code information if the thermostat displays something, any number of things that they would be dependent on calling an agent on the call center. Now they can self-serve, right? That’s on the customer experience. Within the enterprise, lots of productivity, internal productivity. Every business process, there’s SIOP, sales inventory ops planning, there’s distribution planning, network optimization, lots of areas where we see sales, price optimization, right? We’re looking at so many use cases. It’s exciting.

Unidentified speaker: You know, outside of technology, another place the company has been investing in is M&A and specifically the aftermarket. You guys recently announced that you purchased the HVAC division of NSI Industries, you know, a parts supplier. I guess, why is that a good business? Why is it important for Lennox and how do you create value with it?

Michael Quenzer, CFO, Lennox International: Yeah, so we’re really excited with this acquisition. A couple of things. First, it’s met our strategic goal of being a better distributor back to servicing the contractor. We want to give a whole offering of products, which includes parts and accessories. When you look at other large distributors, 40% of their sales, HVAC distributors, 40% of their sales are parts and accessories. It’s only about 20% of what we do. It’s an underserved market. It’s something we’ve looked at wanting to do for a while. We’ve been doing organic investments internally to drive this. Now we’re going to be able to accelerate some of this with the inorganic opportunity with NSI Industries. Like the opportunity from synergies, we think there’s some cost synergies with 50% of the product being manufactured.

We’re going to be able to help kind of drive that, as well as combining their distribution network into ours. They have a single point that can deploy A items into our stores, B items. Within the next day, we can ship to the next C items within two days. A lot of work on the distribution side of joining our existing parts and accessories with this business. This acquisition gets us nearly to $1 billion in parts sales with it and has a really good potential for ROIC at the multiple that we’ve audited at.

Unidentified speaker: Is there anything to provide on any end markets where NSI has outside exposure? I guess kind of anything you could share on how the business has grown in the last few years?

Michael Quenzer, CFO, Lennox International: No, I think overall they continue to have both a commercial and a residential presence. A little bit more on the new construction side, which we think is good. It gives us, again, that opportunity to move in a bit of that vertical for the parts and new construction. Really, no specific vertical that is outside. What we just like so much about it is that we have a lot of parts that complement similar parts in our stores that we’ll be able to replace with sub-colored Duradyn parts. We get some synergies from that side of it. We also hope to leverage the brand through our channels and have other products that we can extend that brand through and sell more parts with that brand.

Unidentified speaker: Appreciate that. Should we expect more M&A on the aftermarket? Is that still a focus or do you feel like $1 billion is a good scale?

Michael Quenzer, CFO, Lennox International: No, we definitely want to grow more. We want to get to that 40% of our sales, either organically or inorganically. I think right now we’ll digest this. We’ll combine both that organic initiative that I talked about we’ve been growing with this inorganic, have a very focused internal parts and distribution business. What’s great about this too is that we inherited through this acquisition a culture that knows how to sell parts and accessories. Traditionally we’ve been a very good HVAC manufacturer and even an HVAC distributor on the system. The parts and accessories is a much different culture, training people and getting people excited to sell $10 parts versus $2,000 systems. That’s a big piece of what we’re doing here.

Once we get that internal structure and foundation set, I think it’s a great platform that we can use M&A to further bolt onto it where we see good deals.

Unidentified speaker: Yeah, maybe kind of just turning back to the market. There’s obviously been just a lot of choppiness, both in the macro, but then I think with you guys with all the channel dynamics as well in resi HVAC. Has there been any rate of change on share, whether it’s the big players we know about or also potentially from smaller foreign low-cost players? The U.S. does import HVAC from China. I imagine that business is pressured.

Michael Quenzer, CFO, Lennox International: No, we haven’t seen a big share shift. It’s hard to tell exactly, but it seems like when I read all the industry articles, everyone’s kind of navigating through this temporary near-term shortage the same way. There isn’t one big winner in the situation. From the Asian imports, there are, you know, ductless products that are growing, but we think that’s more of a complementary addition to the overall installed base where you might have a lot of rooms that need a new ductless system more than a displacement of a ductless to a ducted system. We think the ducted system still is the most cost-efficient system the way the U.S. has designed homes, and we think that will continue to prevail. At the same time, ductless systems are 10% of the industry. It’s only about 2% of our sales.

We are really excited that now we’ve aligned away from a previous China manufacturer to Samsung. That is a really good brand recognition. Our dealers are really excited to sell this product next year. We kind of missed the market a little bit this year because we transitioned in with the new R32 gas. Most of the market was selling the 410A, but we’re ready next year to really get some good sales through that Samsung. Anything you’d like to add on?

Prakash Bedapudi, Chief Technology Officer, Lennox International: No, I think the product portfolio is really competitive. Our dealers really like both the brand as well as the product differentiation the Samsung product brings. We’re also integrating, like I said earlier, easy to integrate for the dealers and homeowners, having a unified app that they can see. If they have a Samsung SmartThings app or a Lennox Home app, iComfort app, they can see all the systems in their house seamlessly without having to switch between. The dealer dashboard, the dealer can install Samsung mini split and our ducted split in the home, and all of them can be ordered through one invoice, get delivered, warranty experience the same between both. With the service dashboard, they can remotely diagnose both the equipment. All of that makes it easy for them.

Unidentified speaker: Appreciate that. With maybe like share trends somewhat stable in the market, you guys, it seems like, are more comfortable with a better growth outlook, at least for resi relative to some of the other peers. Is that just the sell-in, sell-through delta versus some of the other competitors that you talked about earlier, or is there anything else like Lennox specific that is just causing a potentially better trajectory here?

Michael Quenzer, CFO, Lennox International: No, I think some of that, but I think it’s also just about our increased focus on the customer and the contractor. Back to how it started is that if we help that contractor win in the local markets, we win. We have been very focused on listening to that contractor and doing everything we can on fulfillment, inventory availability, mobile app, all of these services, technical training. These are the things that help us grow better. It’s real hard in the near term to really judge what’s happening. Long term, though, we feel that that structurally puts us at an advantage to grow faster.

Unidentified speaker: Yeah, you know, we published, I think I asked you this on the last conference call. My caution was that I think your guys, the resi business in Q2, I think it was down 9% on a plus 1% comp. In the back half of the year, the comps turned quite, quite more difficult, and it’s a roughly similar volume expansion. What am I missing in that?

Michael Quenzer, CFO, Lennox International: Yeah, I think it’s challenging within our industry to sell through. It’s not like we have a backlog. We make some assumptions out there. Normally, what we do is we go through a quarter. We still have September. It’s a big month. We’ll go through September and see how it all plays out. Lots of puts and takes within our guide, both from tariff costs and tariff mitigations, price cost dynamics, the growth rates on the commercial side. We’ll go through and take a look at everything after we close the quarter. We’ll come out and see if we need to make any changes to the guide. There’s always puts and takes on all variables.

Unidentified speaker: Thank you. I appreciate that perspective. Anything on the latest 232 tariff increases? Does that have any impact on the gross exposure?

Michael Quenzer, CFO, Lennox International: Yeah, I think that kind of leads into that comment I just made on the guide. We are seeing a little bit of cost increase on the 232s, but we’re also doing a really good job mitigating costs, both on the tariff side as well as taking some SG&A cost actions. Lots of cost efforts to mitigate costs where we can. Prakash, you want to add some stuff you’re doing?

Prakash Bedapudi, Chief Technology Officer, Lennox International: No, I mean, on the same lines, we’re sourcing commodities differently. We’re negotiating incumbents, moving the volume, rebalancing the factories, moving some product lines back and forth, all of the above to mitigate tariff impact as much as possible. Overall, with all the puts and takes, more or less, our tariff exposure remained the same even with the 30%, that’s 232 expansion.

Unidentified speaker: Yeah, I appreciate that. Maybe just kind of on the tariff policy, you know, the USMCA is coming up for review in 2026. You know, you guys and just the whole industry is obviously very tied to Mexico. You know, is that something that you guys are thinking about or planning for, that, you know, perhaps there are changes to that a year from now?

Michael Quenzer, CFO, Lennox International: It’s hard to scenario plan for that. Right now what we have is a diverse manufacturing base. We have already existing five factories in the U.S., more than 50% of what we do is in the U.S. You’re already getting tariffed a lot of that cost through Mexico that’s superseding the USMCA. I think what we’ve learned, and others have too, is that the complication of the intricacies between Mexico, Canada, and the U.S. are very well knit. It’s been trillions of investment across that network. I think a big disruption there would cause a lot of problems. It’s hard to see how it would play out. We’ll tackle that issue, I think, if it comes.

Unidentified speaker: Yeah, no, I appreciate that. You know, the industry and Lennox obviously included has a really just a fantastic track record of price. Do you, how do you see price shaping up here? Just kind of, you talked about earlier, we are in maybe this transitional period of pressure. Are you confident that the industry will continue to act rational through that?

Michael Quenzer, CFO, Lennox International: Yeah, I think so far we’ve seen very rational pricing from all the OEMs. A lot of these OEMs have the same input costs as we do. They’re seeing the same tariff pressures. They’re seeing the same investments they had to make to switch to the new refrigerant products. Very disciplined on the industry right now pushing price. I expect price and cost to continue to go up. I don’t think inflation is going to stop here. I think the next level will be early next year when we all come out and announce our next full round of price increases. For the balance of the year, I think we’re pretty well set from a price perspective. Next year, we’ll do our annual price increase, and just like we always do, we expect similar results by others.

Unidentified speaker: Yeah, no, I appreciate that. Q2 was really good margins. You guys put up very strong incrementals despite obvious cost inflation in the market. Can you kind of maybe talk about some of the drivers there? Was price cost favorable? Was it some of the productivity actions that Prakash and the team have been driving coming through?

Michael Quenzer, CFO, Lennox International: I think it’s a combination of all of it. We saw both price-cost and the mixed benefit for the new products really drop through. We had really good factory productivity. We’ve been able to hold off tariffs either through negotiations with vendors. We continue to do that. We think tariff costs will elevate a little bit in the second half. It’s kind of built within the guide. The team’s really focused on cost mitigation and maintaining that price-cost dynamic. Maybe not to the exact degree we did in the second quarter, but overall price-cost positive is our goal.

Unidentified speaker: I appreciate that. You guys talked earlier about some of the JVs that are going on, Samsung on mini splits, also the water heater JV. I think you guys talked about Samsung having an impact in 2026, water heaters 2027. Any way to frame how big those opportunities could be? Why does the water heater come through a year later?

Michael Quenzer, CFO, Lennox International: Sure. Yeah, the opportunity on the ductless side is it’s 10% of the industry. It’s only 2% of what we sell. We really see some good traction, especially on the brand. Our dealers are really excited on that brand. We think there’s a lot of opportunity to get to that 10% of our sales through the ductless. On the water heaters, really what we’re going to do is just launch that early next year. The reason we haven’t talked about it being a big impact is because it’s coming from a dollar zero. We don’t sell a single water heater now. We think over time it’s going to be a good growth vector for our organization, especially as these technologies continue to converge. At some point, we’re going to see both the HVAC and a water heater system converging that I’m sure Prakash can explain better than me.

Prakash Bedapudi, Chief Technology Officer, Lennox International: Yeah, with the electrification mega trend, when we move away from gas heat furnaces to heat pump technology to heat the homes, the same concept applies to the water heaters. Today, predominantly, they’re either resistance heaters, which is a terrible way to heat the water, or the gas heat going to a refrigerant vapor compression cycle, heat pump cycle. That’s the right way to heat the water in the future. It may start out as a standalone heat pump cycle to heat the domestic hot water. Eventually, you can see the convergence where you have a refrigerant circuit for heating the home, the air, and you can combine that with the hot water heating with one condensing unit, essentially doing both.

Unidentified speaker: I guess on the resi side, how does the company kind of educate the market on this? It feels like there’s obviously a lot of efficiency that you guys are investing in and bringing to the market. I imagine the average homeowner has no idea and might care about the upfront cost, not the ROI over time. How do you make them understand, or the dealers, just that this is how important this can be?

Prakash Bedapudi, Chief Technology Officer, Lennox International: That’s part of the uniqueness we have with the one-step distribution where we know the dealers. We’ve had generational relations with them. We invest as much, if not more, on the training, how to sell new technology, how to lead with new technology, not just as much as with the product, right? When we did the SunSource product or the new furnace, new heat pump technology, we invest quite a lot. Our territory managers are spending as much time training them on how to do that sales, do the sales pitch at the kitchen counter. With the energy costs going up, electrification happening, I think the efficiency of a heat pump is significantly better than a gas-burning furnace or a water heater. That’s part of what we excel at, training the dealers so that they can have that conversation.

Michael Quenzer, CFO, Lennox International: We do a really good job with the utilization of identifying rebates and tax credits and having that part of the selling to buy down that cost of that system. We identify all that for them so they can sell it to the homeowner.

Unidentified speaker: Appreciate that. Almost every company at this conference is talking to macro uncertainty and just difficulty, not a ton of visibility, hard to call things in the market. You guys have to deal with that, but then there’s also the channel, and then there’s also the refrigerant changeover that’s going on. I guess, what do you guys do to try to gain market insight? When you go out and talk to the dealers, how do they sound? What’s their sentiment through this transitional period, as you called it?

Michael Quenzer, CFO, Lennox International: Yeah, I think overall the dealers are also, you know, calm and disciplined. They understand there’s a lot of noise in the channel. Right now, we have these Lennox Live dealerships where we invest several times in the year. We bring in all the dealers. We have forums. We have roundtables like this where they can talk with other contractors, and we hear the stories. In general, I think they see the homeowners where they’d like to see a lot more less stress because of interest rates coming down. I also know that they know this is a bit of a near-term challenge that the industry is fighting through to get rid of all the 410 inventory. You know, long term, it’s still a product that’s going to be necessary. This repair versus replace dynamic, if there is one, is short term.

All feel generally confident as we go into next year.

Unidentified speaker: We’re up on time. Appreciate the conversation. Thank you, guys.

Michael Quenzer, CFO, Lennox International: Yep, appreciate it.

Prakash Bedapudi, Chief Technology Officer, Lennox International: Thank you.

Unidentified speaker: Thank you. Thank you so much.

Michael Quenzer, CFO, Lennox International: No problem.

Prakash Bedapudi, Chief Technology Officer, Lennox International: Thank you.

Unidentified speaker: Really appreciate it.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.