Q1 2026 Lennox International Inc Earnings Call

April 29, 2026

Speaker #2: Please stand by. Your meeting is about to begin. Good morning, everyone. Welcome to the Lennox 2026 first quarter earnings conference call. All lines are currently in a listen-only mode, and there will be a question-and-answer session at the end of the presentation.

Operator 3: Good morning, everyone. Welcome to the Lennox 2026 Q1 Earnings Conference Call. All lines are currently in a listen-only mode, and there will be a question and answer session at the end of the presentation. You may enter the queue to ask a question by pressing star and one on your telephone. To exit the queue, press star and two. As a reminder, this call is being recorded. I would now like to turn the call over to Ms. Chelsey Pulcheon from Lennox investor relations. Chelsey, please go ahead.

Operator: Good morning, everyone. Welcome to the Lennox 2026 Q1 Earnings Conference Call. All lines are currently in a listen-only mode, and there will be a question and answer session at the end of the presentation. You may enter the queue to ask a question by pressing star and one on your telephone. To exit the queue, press star and two. As a reminder, this call is being recorded. I would now like to turn the call over to Ms. Chelsey Pulcheon from Lennox investor relations. Chelsey, please go ahead.

Speaker #2: You may enter the queue to ask a question by pressing star and one on your telephone. To exit the queue, press star and two.

Speaker #2: As a reminder, this call is being recorded. I would now like to turn the call over to Ms. Chelsey Pulcheon from Linux Investor Relations.

Speaker #2: Chelsey, please go ahead. Thank you, Bill. Good morning, everyone, and thank you for joining us as we share our 2026 first quarter results. Joining me today is CEO Alok Maskara and CFO Michael Quenzer.

Chelsey Pulcheon: Thank you, Bill. Good morning, everyone, and thank you for joining us as we share our 2026 Q1 results. Joining me today is CEO Alok Maskara and CFO Michael Quenzer. Each will share their prepared remarks before we move to the Q&A session. Turning to slide 2, a reminder that during today's call, we will be making certain forward-looking statements which are subject to numerous risks and uncertainties as outlined on this page. We may also refer to certain non-GAAP financial measures that management considers relevant indicators of underlying business performance. Please refer to our SEC filings available on our investor relations website for additional details, including a reconciliation of GAAP to non-GAAP measures. The earnings release, today's presentation, and the webcast archive link for today's call are available on our investor relations website at investor.lennox.com.

Chelsey Pulcheon: Thank you, [Bill]. Good morning, everyone, and thank you for joining us as we share our 2026 Q1 results. Joining me today is CEO Alok Maskara and CFO Michael Quenzer. Each will share their prepared remarks before we move to the Q&A session. Turning to slide 2, a reminder that during today's call, we will be making certain forward-looking statements which are subject to numerous risks and uncertainties as outlined on this page. We may also refer to certain non-GAAP financial measures that management considers relevant indicators of underlying business performance. Please refer to our SEC filings available on our investor relations website for additional details, including a reconciliation of GAAP to non-GAAP measures. The earnings release, today's presentation, and the webcast archive link for today's call are available on our investor relations website at investor.lennox.com.

Speaker #2: Each will share their prepared remarks before we move to the Q&A session. Turning to slide two, a reminder that during today's call, we will be making certain forward-looking statements which are subject to numerous risks and uncertainties as outlined on this page.

Speaker #2: We may also refer to certain non-GAAP financial measures that management considers relevant indicators of underlying business performance. Please refer to our SEC filings available on our Investor Relations website for additional details, including a reconciliation of GAAP to non-GAAP measures.

Speaker #2: The earnings release today's presentation and the webcast archive link for today's call are available on our Investor Relations website at investor.linux.com. Now, please turn to slide three as I turn the call over to our CEO Alok Maskara.

Chelsey Pulcheon: Now, please turn to slide three as I turn the call over to our CEO, Alok Maskara.

Speaker #3: Thank you, Chelsey. Good morning, everyone. Before turning to our quarterly performance, I want to recognize the exceptional adaptability and dedication of our team, as well as the trust and loyalty of our customers.

Alok Maskara: Thank you, Chelsey. Good morning, everyone. Before turning to our quarterly performance, I want to recognize the exceptional adaptability and dedication of our team, as well as the trust and loyalty of our customers. While the macro environment remains uncertain, our core values empower us to respond with discipline, innovation, and an unwavering commitment to enhancing the customer experience. Turning to slide 3, revenue was $1.1 billion, up 6% year over year, as growth initiatives gained traction and channel conditions stabilized. Our segment margin was 14.4% in the quarter, down 130 basis points, primarily due to the impact of factory under absorption. Operating cash flow was +$16 million and adjusted earnings per share for the quarter was $3.35. In Home Comfort Solutions, industry conditions began to stabilize as expected.

Speaker #3: While the macro environment remains uncertain, our core values empower us to respond with discipline, innovation, and an unwavering commitment to enhancing the customer experience.

Speaker #3: Turning to slide three, revenue was 1.1 billion dollars, up 6% year over year, as growth initiatives gained traction and channel conditions stabilized. Our segment margin was 14.4% in the quarter, down 130 basis points primarily due to the impact of factory under absorption.

Speaker #3: Operating cash flow was positive 16 million, and adjusted earnings per share for the quarter were $3.35. In home comfort solutions, industry conditions began to stabilize as expected.

Speaker #3: One-step results continued to be impacted by weak new home construction while sentiment in the two-step channel improved as distributors began to restock ahead of the summer season.

Alok Maskara: One-step results continued to be impacted by weak new home construction, while sentiment in the two-step channel improved as distributors began to restock ahead of the summer season. In Building Climate Solutions, emergency replacement momentum and disciplined execution contributed to record quarterly performance. We are reaffirming our full-year adjusted earnings per share guidance range of $23.50 to 25.00. With that context, let us turn to slide 4 to discuss the current economic outlook. The industry environment continues to gradually improve. Channel destocking has largely concluded as dealers regain confidence and replacement demand strengthens. Consumer sentiment remains cautious, contributing to continued softness in new home construction and remodel activity. At the same time, Lennox-specific growth initiatives are gaining momentum and beginning to offset these pressures. On the cost side, we are experiencing inflationary and tariff-related increases across commodities, components, and finished goods.

Speaker #3: In building climate solutions, emergency replacement momentum and discipline execution contributed to record quarterly performance. We are reaffirming our full-year adjusted earnings per share guidance range of 23.50 to 25 dollars.

Speaker #3: With that context, let us turn to slide four to discuss the current economic outlook. The industry environment continues to gradually improve. Channel destocking has largely concluded as dealers regain confidence and replacement demands strengthen.

Speaker #3: Consumer sentiment remains cautious contributing to continued softness in new home construction and remodel activity. At the same time, Lennox specific growth initiatives are gaining momentum and beginning to offset these pressures.

Speaker #3: On the cost side, we are experiencing inflationary and across commodities, components, and finished goods. Fuel and transportation costs are also rising. In response, we are sharpening our focus on mitigation activities including productivity, and reductions in material cost.

Alok Maskara: Fuel and transportation costs are also rising. In response, we are sharpening our focus on mitigation activities, including productivity and reductions in material cost. We are also further streamlining our supply chain, optimizing manufacturing operation, and implementing thoughtful pricing actions. In Home Comfort Solutions, sales volume year over year improved sequentially during the quarter, supported by better performance in the two-step channel. Repair versus replacement stabilized, providing greater visibility into underlying demand trends. New product introductions, including a successful water heater launch and growing traction with new heat pump products, contributed positively. In addition, the on-track integration of Supco parts and supplies strengthens our attachment rate growth vector. In Building Climate Solutions, our superior execution continues with emergency replacement and national accounts both driving volume growth. Greater engagement across our full lifecycle offerings, along with the integration of DuroDyne parts and supplies, is expanding our commercial portfolio.

Speaker #3: We are also further streamlining our supply chain optimizing manufacturing operation, and implementing thoughtful pricing actions. In home comfort solutions, sales volume year over year improved sequentially during the quarter, supported by better performance in the two-step channel.

Speaker #3: Repair versus replacement stabilized providing greater visibility into underlying demand trends. New product introductions including a successful water heater launch and growing traction with new heat pump products contributed positively in addition, the on-track integration of SUPCO parts and supplies strengthens our attachment rate growth vector.

Speaker #3: In building climate solutions, our superior execution continues with emergency replacement and national accounts both driving volume growth. Greater engagement across our full lifecycle offerings along with the integration of Durodyne parts and supplies is expanding our commercial portfolio.

Speaker #3: Now, let's turn to slide five to highlight recent product introductions. Innovation continues to be a critical differentiator for Lennox. Our recently launched product further elevates our competitive position to meet the evolving needs of our customers particularly around efficiency, backwards installation.

Alok Maskara: Now, let's turn to slide five to highlight recent product introductions. Innovation continues to be a critical differentiator for Lennox. Our recently launched products further elevate our competitive position to meet the evolving needs of our customers, particularly around efficiency, backwards compatibility, and ease of installation. In commercial, our new Strategos rooftop with heat pump technology expands replacement options for customers. This product offers greater flexibility in where and how systems can be installed, supporting a wide range of electrification as efficiency expectations continue to rise. In residential, we are broadening our heat pump portfolio to serve all climates and insulation requirements. Cold climate capabilities allow us to better address demand in northern regions, while our new compact air handlers make it easier to deploy high-efficiency systems in retrofit and space-constrained applications.

Speaker #3: In commercial, our new Strategos rooftop with heat pump technology expands replacement options for customers. This product offers greater flexibility in where and how systems can be installed supporting a wide range of electrification as efficiency expectations continue to rise.

Speaker #3: In residential, we are broadening our heat pump portfolio to serve all climates and installation requirements. Cold climate capabilities allow us to better address demand in northern regions while our new compact air handlers make it easier to deploy high-efficiency systems in retrofit and space-constrained applications.

Speaker #3: We are also extending our presence within the home through high-efficiency Lennox heat pump water heaters via our Ariston joint venture. This new product integration supports the convergence of HVAC and water heating and strengthens the Lennox home control platform.

Alok Maskara: We are also extending our presence within the home through high-efficiency Lennox heat pump water heaters via our Ariston joint venture. This new product integration supports the convergence of HVAC and water heating and strengthens the Lennox Home control platform. Together, these innovations expand our addressable market, increase share of wallet, and reinforce Lennox's long-term competitive position. With that, I will turn it over to Michael to review our financials.

Speaker #3: Together, these innovations expand our addressable market, increase share of wallet, and reinforce Lennox's long-term competitive position. With that, I will turn it over to Michael to review our financials.

Speaker #2: Thank you, Luke. Good morning, everyone. Please turn to slide six. After two consecutive quarters of year-over-year sales declines, we were pleased in the first quarter to return to year-over-year revenue growth of 6%.

Michael Quenzer: Thank you, Alok. Good morning, everyone. Please turn to slide six. After two consecutive quarters of year-over-year sales declines, we were pleased in Q1 to return to year-over-year revenue growth of 6%. Growth from our DuroDyne and Supco acquisitions completed in Q4 2025 contributed 6%, while growth in BCS was offset by continued sales declines in HCS. As expected, residential end markets remain down year over year, but the rate of decline improved sequentially versus Q4 of last year. As inventory levels normalized, the segment profit was negatively impacted by approximately -$50 million of manufacturing costs under absorption. Against that backdrop, results progressed as expected. Let me turn to the details of our Home Comfort Solutions segment on slide seven.

Speaker #2: Growth from our Durodyne and SUPCO acquisitions completed in Q4 2025 contributed 6% while growth in BCS was offset by continued sales declines in HCS.

Speaker #2: As expected, residential end markets remained down year over year, but the rate of decline improved sequentially versus the fourth quarter of last year. If inventory levels normalize, the segment profit was negatively impacted by approximately 15 million dollars of manufacturing costs under absorption.

Speaker #2: Against that backdrop, results progressed as expected. Let me turn to the details of our home comfort solution segment on slide seven. In our fourth quarter earnings call, we noted that the first quarter end markets would remain challenging but should show signs of improvement.

Michael Quenzer: In our Q4 earnings call, we noted that the Q1 end markets would remain challenging but should show signs of improvement. Overall, HCS revenue declined 10%, M&A contributed a positive 2%, while organic revenue declined 12% with 1-step down approximately 10% and 2-step down approximately 15%. Organic sales volumes declined 21%, but this represented a meaningful improvement from a 32% decline in Q4 2025. Within the 1-step channel, lower new construction activity continued to weigh on results. In the 2-step channel, distributor sentiment improved as customers began to restock ahead of the summer season. Mix and price realization contributed positively to results, driven primarily by the full conversion to new R454B products. Product costs were a $23 million headwind, driven by materials inflation and under absorption due to lower production levels.

Speaker #2: Overall, HCS revenue declined 10%, M&A contributed a positive 2% while organic revenue declined 12% with one step down approximately 10% and two steps down approximately 15%.

Speaker #2: Organic sales volumes declined 21%, but this represented a meaningful improvement from a 32% decline in the fourth quarter of 2025. Within the one-step channel, lower new construction activity continued to weigh on results.

Speaker #2: In the two-step channel, distributor sentiment improved as customers began to restock ahead of the summer season. Mix and price realization contributed positively to results driven primarily by the full conversion to new R454B products.

Speaker #2: Product costs were at 23 million dollar headwind driven by materials inflation and under absorption due to lower production levels. Finally, acquisitions contributed approximately 2 million dollars of profit and SG&A cost actions taken last quarter mostly offset SG&A inflation.

Michael Quenzer: Finally, acquisitions contributed approximately $2 million of profit and SG&A cost actions taken last quarter mostly offset SG&A inflation. Please turn to slide 8 for an overview of the Building Climate Solutions segment. BCS delivered another exceptionally strong quarter with organic sales up 26%, M&A growth up 12%, and profit margins expanding 300 basis points. Sales volumes increased 17% as national account demand normalized alongside continued growth in emergency replacement and new customer wins across both equipment and service offerings. Price and mix delivered 9% revenue growth, driven by the full transition of light commercial products to the new R-454B refrigerant. Similar to HCS, BCS experienced absorption pressure as we optimized inventory levels, but manufacturing cost efficiencies offset this impact. M&A contributed $7 million of profit growth, offsetting SG&A inflation and distribution investments.

Speaker #2: Please turn to slide eight for an overview of the building climate solution segment. BCS delivered another exceptionally strong quarter with organic sales up 26%, M&A growth up 12%, and profit margins expanding 300 basis points.

Speaker #2: Sales volumes increased 17% as national account demand normalized alongside continued growth in emergency replacement and new customer wins across both equipment and service offerings.

Speaker #2: Price and mix delivered 9% revenue growth driven by the full transition of light commercial products to the new 454B refrigerant. Similar to HCS, BCS experienced absorption pressure as we optimized inventory levels but manufacturing cost efficiencies offset this impact.

Speaker #2: M&A contributed 7 million dollars of profit growth offsetting SG&A inflation and distribution investments. Please turn to slide nine for cash flow and capital deployment.

Michael Quenzer: Please turn to slide 9 for cash flow and capital deployment. Free cash flow in Q1 2026 was at $39 million use of cash, an improvement versus $61 million use of cash in the prior year quarter. Underlying operating performance improved materially. Adjusting for approximately $30 million of higher capital expenditures year over year, operating cash flow was $16 million, an improvement of $52 million, driven primarily by inventory growth of $60 million this quarter compared to $210 million in the prior year period. Inventory build in the quarter focused on parts and specific SKUs to support customer fulfillment during the upcoming peak season. Given normal seasonality, we expect inventories to moderate from current levels in the H2 of the year.

Speaker #2: Free cash flow in Q1 2026 was at 39 million dollar use of cash and improvement versus a 61 million dollar use of cash in the prior year quarter.

Speaker #2: Underlying operating performance improved materially. Adjustment for approximately 30 million dollars of higher capital expenditures year over year operating cash flow was 16 million dollars and improvement of 52 million dollars driven primarily by inventory growth of 60 million dollars this quarter compared to 210 million dollars in the prior year period.

Speaker #2: Inventory build in the quarter focused on parts and specific SKUs to support customer fulfillment during the upcoming peak season. Given normal seasonality, we expect inventories to moderate from current levels in the second half of the year.

Speaker #2: We continue to maintain a strong balance sheet with healthy leverage while supporting the 550 million dollar acquisition completed in Q4 2025 and continued share repurchases.

Michael Quenzer: We continue to maintain a strong balance sheet with healthy leverage while supporting the $550 million acquisition completed in Q4 2025 and continued share repurchases. We also see a healthy pipeline of both of M&A opportunities and remain disciplined, prioritizing deals that enhance our portfolio and meet our return thresholds. For 2026, we continue to expect approximately $250 million of capital expenditures focused on innovation and training centers, digital capabilities, distribution network optimization, ERP modernization, and targeted AI capabilities. With that, let me move to slide 10 to review our updated 2026 financial guidance. Our updated full year 2026 guidance reflects Q1 results and trends including higher cost inflation and tariffs. The tariff environment continues to evolve with little notice. Earlier this month, new Section 232 tariffs were announced.

Speaker #2: We also see a healthy pipeline of bolt-on M&A opportunities and remain disciplined prioritizing deals that enhance our portfolio and meet our return thresholds. For 2026, we continue to expect approximately 250 million dollars of capital expenditures focused on innovation and training centers, digital capabilities, distribution network optimization, ERP modernization, and targeted AI capabilities.

Speaker #2: That let me move to slide 10 to review our updated 2026 financial guidance. Our updated full year 2026 guidance reflects Q1 results and trends including higher cost inflation and tariffs.

Speaker #2: The tariff environment continues to evolve with little notice. Earlier this month, new Section 232 tariffs were announced. As a Loke noted earlier, we have a proven track record of using multiple levers including price and productivity to offset tariff-related cost pressure.

Michael Quenzer: As Alok Maskara noted earlier, we have a proven track record of using multiple levers, including price and productivity, to offset tariff-related cost pressure. As a result of our move to FIFO accounting, we do not expect any income statement impact from these new tariff rules until Q3. With that context, I will walk through the specific guidance items that have changed since we introduced our initial 2026 outlook in January. All other guidance items remain unchanged. Revenue is now expected to grow approximately 8% compared to prior guidance of 6% to 7%. The increase is driven by modestly higher mix and price, reflecting the Lennox price actions announced earlier this week, the annual price increase implemented earlier this year, and the carryover benefit of the 2025 regulatory mix.

Speaker #2: As a result of our move to FIFO accounting, we do not expect any income statement impact from these new tariff rules until the third quarter.

Speaker #2: With that context, I will walk through the specific guidance items that have changed since we introduced our initial 2026 outlook in January. All other guidance items remain unchanged.

Speaker #2: Revenue is now expected to grow approximately 8% compared to prior guidance of 6% to 7%. The increase is driven by modestly higher mix and price reflecting the Lennox Price Actions announced earlier this week.

Speaker #2: The annual price increase implemented earlier this year and the carryover benefit of the 2025 regulatory mix. Looking at the segment revenue guidance, HCS is now expected to grow 4%, compared to the previous guidance of 2%, and BCS is now expected to grow approximately 16%.

Michael Quenzer: Looking at the segment revenue guidance, HCS is now expected to grow 4% compared to the previous guidance of 2%. BCS is now expected to grow approximately 16%. Organic volumes are still expected to decline low single digits net of approximately 1 percentage point of growth from parts and accessories, commercial emergency replacement, ducted heat pumps, and Samsung ductless products. Cost inflation is now expected to be up approximately 5% from up 2%, driven by recent increases in tariffs and input costs for aluminum, steel, copper, and fuel. Based on these updated assumptions, adjusted EPS is still expected to be in the $23.50 to $25 range. Free cash flow remains expected to be $750 million to $850 million, driven by inventory normalization and higher profitability.

Speaker #2: Organic volumes are still expected to decline low single digits net of approximately one point of growth from parts and accessories commercial emergency replacement ducted heat pumps and Samsung ductless products.

Speaker #2: Cost inflation is now expected to be up approximately 5% from up 2% driven by recent increases in tariffs and input costs for aluminum, steel, copper, and fuel.

Speaker #2: Based on these updated assumptions, adjusted EPS is still expected to be in the 23 dollars and 50 cents to 25 dollar range. Free cash flow remains expected to be 750 million dollars to 850 million dollars driven by inventory normalization and higher profitability.

Speaker #2: Overall, we feel good about the underlying momentum in the business, while recognizing that the external environment remains dynamic and will require continuous focus and execution.

Michael Quenzer: Overall, we feel good about the underlying momentum in the business, while recognizing that the external environment remains dynamic and will require continuous focus and execution. With that, please turn to slide 11, and I'll hand it back to Alok.

Speaker #2: With that, please turn to slide 11, and I'll hand it back to Lowe.

Speaker #3: Thanks, Michael.

Alok Maskara: Thanks, Michael. As we close, I want to take the opportunity to share why, 4 years in, I am still genuinely excited about Lennox. We operate in an attractive growth industry with an enduring place in the market. However, what really sets Lennox apart is how we deliver differentiated growth through our execution on enhancing the customer experience, disciplined capital allocation, and effective acquisition integration, all of which reinforce our resilient margin profile. What excites me most is that innovation is always at the forefront. Our product and advanced technology portfolios continues to expand, enabling us to capture a greater share of wallet. Of course, none of this would be possible without the strong foundation that is our culture. Guided by core values and guiding behaviors, the Lennox team shows up every day committed to creating long-term value for our customers, employees, and shareholders.

Speaker #2: As we close I want to take the opportunity to share why four years in I'm still genuinely excited about Lennox. We operate in an attractive growth industry with an enduring place in the market.

Speaker #2: However, what really sets Lennox apart is how we deliver differentiated growth. Through our execution on enhancing the customer experience disciplined capital allocation and effective acquisition integration all of which reinforce our resilient margin profile.

Speaker #2: What excites me most is that innovation is always at the forefront. Our product and advanced technology portfolios continue to expand, enabling us to capture a greater share of wallet.

Speaker #2: Of course, none of this would be possible without the strong foundation that is our culture. Guided by core values and guiding behaviors the Lennox team shows up every day committed to creating long-term value for our customers employees and shareholders.

Speaker #2: For all of these reasons and many more I truly believe there are best days are still ahead. Thank you. We'll be happy to answer your questions now.

Alok Maskara: For all of these reasons and many more, I truly believe that our best days are still ahead. Thank you. We'll be happy to answer your questions now. Let's go to Q&A.

Speaker #2: So let's go to Q&A.

Speaker #4: Certainly, Mr. Maskara. Look, thank you. Ladies and gentlemen, at this time if you do have any questions please press star one. And as a reminder, you can always remove yourself from the queue by pressing star two.

Operator 3: Certainly, Mr. Maskara. Look, thank you. Ladies and gentlemen, at this time, if you do have any questions, please press star one. As a reminder, you can always remove yourself from the queue by pressing star two. Additionally, we do ask that you please limit yourself to one question and one follow-up. We'll go first this morning to Noah Kaye with Oppenheimer.

Operator: Certainly, Mr. Maskara. Look, thank you. Ladies and gentlemen, at this time, if you do have any questions, please press star one. As a reminder, you can always remove yourself from the queue by pressing star two. Additionally, we do ask that you please limit yourself to one question and one follow-up. We'll go first this morning to Noah Kaye with Oppenheimer.

Speaker #4: Additionally, we do ask that you please limit yourself to one question and one follow-up. We'll go first this morning to Noah Kaye with Oppenheimer.

Speaker #5: Good morning. Thanks for taking the questions. Michael, the FIFO conversion continues to give us talking points and I want to ask following up on your comments.

Noah Kaye: Good morning. Thanks for taking the questions. Michael, the FIFO conversion continues to give us talking points. I want to ask, following up on your comments, just how to think now about the timing difference in cost increases versus price realization. You mentioned the incremental costs. Many of them won't really layer in until Q3. How do we think about pricing? Should we still think about kind of the previous guidance for H1, H2 EPS splits as still applying, or is anything shifting given these moving pieces in the outlook?

Speaker #5: Just how to think now about the timing difference in cost increases versus price realization. You mentioned the incremental costs. Many of them won't really layer in until three Q.

Speaker #5: How do we think about pricing and should we still think about kind of the previous guidance for first half second half EPS splits as still applying or is anything shifting given these moving pieces in the outlook?

Speaker #6: Yeah. First, we'll break down the guidance. Most of the cost impact and the price impact will fall within the second half. We've announced a price increase earlier this week.

Michael Quenzer: Yeah. First, we'll break down the guidance. Most of the cost impact and the price impact will fall within H2. We've announced a price increase earlier this week. It'll take some time before we start to see that full impact, maybe start to see a little bit later in Q2. Predominantly, both of these should come into the end of H2 of the year. When you look at the revenue splits, they'll put a little bit more revenue, obviously now in H2 than H1, overall profitability should still be about the same as we reflected last year by the quarters.

Speaker #6: It'll take some time before we start to see the full impact—maybe start to see a little bit later in the second quarter. But predominantly, both of these should come into the end of the second half of the year.

Speaker #6: When you look at the revenue splits, they'll put a little bit more revenue obviously now in the second half than the first half. But overall profitability should still be about the same as we reflected last year by the quarters.

Speaker #5: Okay. And as a follow-up you called out the 15 million under absorption. Impacting this quarter any lingering under absorption headwinds to think about here for two Q or are we kind of mostly caught up now that restocking's underway and you haven't increased your inventories too much?

Noah Kaye: Okay. As a follow-up, you know, you called out the $15 million under absorption impacting this Q1. You know, any lingering under absorption headwinds to think about here for Q2? Are we kind of mostly caught up now that restocking is underway and you haven't increased your inventories too much?

Speaker #6: I think if you saw within our results in the first quarter we continue to not grow inventory as much as we did previous years.

Michael Quenzer: I think as you saw within our results in Q1, we continue to not grow inventory as much as we did previous years, so we have some absorption headwinds. We reduced our productions about 30% in Q1, so there'll be a little bit of absorption that will go into Q2, but by the end of Q2, the inventory normalization will have occurred.

Speaker #6: So we have some absorption headwinds we reduce our productions about 30% in the first quarter. So there'll be a little bit of absorption that will go into the second quarter.

Speaker #6: But by the end of the second quarter the inventory normalization will have occurred.

Speaker #5: Perfect. I'll turn it over.

Noah Kaye: Perfect. I'll turn it over.

Speaker #4: Thank you. We'll go next now to Ryan Merkle with William Blair.

Operator 3: Thank you. We'll go next now to Ryan Merkel with William Blair.

Operator: Thank you. We'll go next now to Ryan Merkel with William Blair.

Speaker #7: Hey everyone. Good morning. Thanks for the question. Wanted to ask first on HCS the revenue outlook for two Q. I think previously you saw it down low single digits year over year.

Ryan Merkel: Hey, everyone. Good morning. Thanks for the question. Wanted to ask first on HCS, the revenue outlook for Q2. I think previously you saw it down low single digits year over year, but it sounds like you're seeing a bit of stabilization, and I am just curious if April has been a little bit better.

Speaker #7: But it sounds like you're seeing a bit of stabilization and I'm just curious if April has been a little bit better?

Speaker #8: Hey Ryan. Good morning. You know it's pretty hard to call quarter especially given some of the impact of weather that is still very unknown.

Alok Maskara: Hey, Ryan. Good morning. You know, it's very hard to call quarter, especially given some of the impact of weather that is still very unknown. I don't think at this point we would give you any further clarification compared to what we said in the past. I would go with the same assumptions. The change we made in the guidance simply reflects a stronger Q1 overall, and more importantly, the impact of additional price increases that we announced earlier this week that are gonna mostly fall in the H2.

Speaker #8: So I don't think at this point we would give you any further clarifications compared to what we said in the past. I would go with the same assumptions.

Speaker #8: The change we made in the guidance simply reflects a stronger Q1 overall, and more importantly, the impact of additional price increases that we announced earlier this week that are going to mostly fall in the second half.

Speaker #7: Okay. Got it. Thanks. And then as my follow-up BCS was really strong. You mentioned good execution anything else you'd call out there and why not raise the guidance a little bit more there?

Ryan Merkel: Okay, got it. Thanks. As my follow-up, BCS was really strong. You mentioned good execution. Anything else you'd call out there? Why not raise the guidance a little bit more there?

Speaker #8: You should have asked conservative a CFO as I have Ryan. So listen on the guidance piece it's such a seasonal business. Weather makes an impact and I think we have based on everything we know Q1 is not a quarter to raise guidance anyway.

Alok Maskara: You should have as conservative a CFO as I have, Brian, listen, on the guidance piece, it's such a seasonal business, weather makes an impact, and I think we are based on everything we know, Q1 is not a quarter to raise guidance anyway. I mean, there's just so much more to go given the because it's just a shorter season. I won't read too much into Q1. On BCS, first of all, just congratulations to the team. I mean, the execution out there is just super. Like, you know, the new factory is paying strong dividends. We are getting the right amount of productivity that we expected, maybe a little more than we expected. The emergency replacement initiative, now that we have inventory positioned all over US, is paying off meaningfully.

Speaker #8: I mean there's just so much more to go given the there's just a shoulder season. So I wouldn't read too much into Q1. On BCS first of all just congratulation to the team.

Speaker #8: I mean the execution out there is just super. You know the new factory is being strong dividends. We are getting the right amount of productivity that we expected.

Speaker #8: Maybe a little more than we expected. The emergency replacement initiative, now that we have inventory positioned all over the U.S., is paying off meaningfully. And more importantly, the fact that now Stuttgart is more stabilized is also helping us win back national accounts and gain additional volume from that.

Alok Maskara: More importantly, the fact that now Stuttgart is more stabilized, is also helping us win back National Account and gain additional volume from that. Don't forget our other two businesses. The service business is benefiting from the full lifecycle value proposition, and the refrigeration business also continues to set records both in growth and profitability. Just a good success story and something that we think we are gonna start seeing in HCS as well as our markets stabilize and the end markets are not such a big drag on us. Congratulations to the BCS team. Nothing unusual, just strong execution on a very, very defined strategy.

Speaker #8: And don't forget our other two businesses the service business is benefiting from the full life cycle value proposition and the refrigeration business also continues to set records both in growth and profitability.

Speaker #8: So just a good success story, and something that we think we are going to start seeing in HCS as well, as our market stabilizes and the end markets are not such a big drag on us.

Speaker #8: So congratulations to the BCS team. Nothing unusual. Just strong execution on a very well-defined strategy.

Speaker #7: All right. That's great. I'll pass it on. Thanks.

Ryan Merkel: All right, that's great. I'll pass it on. Thanks.

Speaker #4: Thank you. We'll go next now to Julian Mitchell with Barclays.

Operator 3: Thank you. We go next now to Julian Mitchell with Barclays.

Operator: Thank you. We go next now to Julian Mitchell with Barclays.

Speaker #9: Hi. Good morning. Maybe just wanted to start on the overall operating margin guide for the company. Is it fair to say that you've sort of got a flattish operating margin dialed in total company for the year and then within that you've got HCS down, BCS up and just trying to understand sort of HCS margins understandably had a tough time in Q1 for many reasons.

Julian Mitchell: Hi, good morning. Maybe just wanted to start on the overall operating margin guide for the company. Is it fair to say that you've sort of got a flattish operating margin dialed in total company for the year, and then within that you've got HCS down, BCS up, and just trying to understand sort of HCS margins understandably had a tough time in Q1 for many reasons? You know, how quickly do those margins kind of climb up out of that hole?

Speaker #9: You know, how quickly do those margins kind of climb up out of that hole?

Michael Quenzer: Sure. I'll speak to the overall margin guide. When we talked in January, we expected a slight increase in the enterprise margin expansion. Now with the increase to revenue and costs, we expect a slight decline in the margin. You're correct, within BCS, organically, we expect margins to be up there. Within HCS, organically, we expect them to be down. M&A will have a slight drag overall in the enterprise. We should expect to see, as volumes recover in the H2 of the year, the incrementals within HCS improve. We just need to go through the H1 of this year for HCS to see that challenge behind us.

Speaker #6: Yeah. So I'll speak to the overall margin guide. When we talk in January we expected a slight increase in the enterprise margin expansion. Now with the increase to revenue and cost we expect a slight decline in the margin.

Speaker #6: But you're correct. Within BCS organically we expect margins to be up there. Within HCS organically we expect them to be down. M&A will have a slight drag overall in the enterprise.

Speaker #6: But we should expect to see as volumes recover in the second half of the year the incrementals within HCS improve. We just need to go through the first half of this year for HCS to see that challenge behind us.

Speaker #8: Yeah. And I think one thing as we've dug into the results in Q1 it became abundantly clear to us that the decline in margin which we don't love at all is 100% driven by the factory under absorption.

Alok Maskara: Yeah, I think one thing as we dug into the results in Q1, it became abundantly clear to us that the decline in margin, which we don't love at all, is 100% driven by the factory under absorption. You know, we were able to offset inflation and volume with pricing and efficiency. It's the under absorption. As that under absorption continues to become less of an issue as we go into Q2 and H2, we are very confident in the margin going back to normal.

Speaker #8: You know we were able to offset inflation with and volume with pricing and efficiency. But as the under absorption so as that under absorption kind of continues to become less of an issue as we go into Q2 and second half we are very confident in the margin going back to normal.

Speaker #9: Thanks very much. And then my follow-up I suppose was around you know so the cost inflation numbers moved two and a half percent to five percent.

Julian Mitchell: Thanks very much. My follow-up, I suppose, was around, you know, the cost inflation numbers moved 2.5% to 5%. Is that right that that's roughly kind of $100 million or so extra gross cost headwind? I suppose, do you see any competitive implications from that cost base movement, you know, sort of tied to that, how is the price elasticity of volume playing out in HCS at present, please?

Speaker #9: So is that right that that's roughly kind of a hundred million or so extra gross cost headwind? And then I suppose do you see any competitive implications from that cost base movement and you know sort of tied to that how is the price elasticity of volume playing out in HCS at present please?

Alok Maskara: Yeah. I guess on the first piece, your numbers are roughly right, as usual, Julian, so no surprises. I don't see any competitive dynamic or drawback to us. Like, you know, I mean, inflation in oil, commodities, components, I mean, that's hitting all of us. The Section 232 derivative tariff impact, that hits people differently, but it does hit every manufacturer. You know, some will bring metal components from overseas, some getting finished products from overseas. That one, there may be some slight variation depending on which company, but we don't think it puts us at a competitive disadvantage overall. We remain very sensitive to those competitive dynamics, and we'll continue adjusting those as we go along. Sorry, Michael.

Speaker #8: Yeah, so I guess on the first piece, your numbers are roughly right as usual, Julian—so no surprises. I don't see any competitive dynamic or drawback to us.

Speaker #8: You know, I mean the inflation in oil commodities components—I mean, that's hitting all of us. The Section 232 derivative tariff impact, that's hit people differently, but it does hit every manufacturer.

Speaker #8: You know, some will bring metal components from overseas; some bring finished products from overseas. So, on that one, there may be some slight variation depending on which company.

Speaker #8: But we don't think it puts us at a competitive disadvantage overall. However, we remain very sensitive to those competitive dynamics, and we'll continue adjusting those as we go along.

Speaker #8: Sorry Michael.

Speaker #6: Yeah. I'll just add. I mean if you looked at the spot market since our last guidance aluminum was up 25% steel's up 20 to 25% diesel's up 50% copper's up 10 to 15%.

Michael Quenzer: I'll just add, I mean, if you looked in the spot market since our last guidance, aluminum's up 25%, steel's up 20% to 25%, diesel's up 50%, copper's up 10% to 15%. We have hedging programs that delay some of that. We have fixed contracts. Overall, these input costs are up significantly since our last guidance.

Speaker #6: We have hedging programs that delay some of that. We have fixed contracts. But overall, these input costs are up significantly since our last guidance.

Speaker #9: That's helpful. Thank you.

Julian Mitchell: That's helpful. Thank you.

Speaker #4: We'll go next now to Chris Snyder of Morgan Stanley.

Operator 3: We'll go next now to Christopher Snyder of Morgan Stanley.

Operator: We'll go next now to Christopher Snyder of Morgan Stanley.

Speaker #10: Thank you. I also wanted to follow up on the price cost drivers into the back half. You know I guess there might be some rounding involved but but you guys are still calling for mid-single digit price.

Christopher Snyder: Thank you. I also wanted to follow up on the price cost drivers into the back half. You know, I guess there might be some rounding involved, but you guys are still calling for mid-single digit price, but it does sound like more is coming. Just maybe if you could kind of provide a little bit more, you know, nuance around that. Why is the incremental on the price action getting better? I think now it's expected to be 90% versus prior 75%. Thank you.

Chris Snyder: Thank you. I also wanted to follow up on the price cost drivers into the back half. You know, I guess there might be some rounding involved, but you guys are still calling for mid-single digit price, but it does sound like more is coming. Just maybe if you could kind of provide a little bit more, you know, nuance around that. Why is the incremental on the price action getting better? I think now it's expected to be 90% versus prior 75%. Thank you.

Speaker #10: But it does sound like more is coming. So just maybe, if you could kind of provide a little bit more, you know, nuance around that.

Speaker #10: And then also why is the incremental on the price action getting better? I think now it's expected to be 90% versus prior 75%. Thank you.

Speaker #8: I think the first part of the question. So yes there is a bit of rounding. You know I mean mid-single digit is still a broad range.

Alok Maskara: I'll take the first part of the question. Yes, there is a bit of rounding. You know, I mean, mid-single digit is still a broad range. Overall, as you know, we are very transparent with what we do, but it's within the mid-single digit range. Michael can address the realization point. Essentially, given all the inflation that we just talked about and the additional pricing actions we have taken this week, you know, that just gives us better drop-through because it's just gonna stick better going back to each of the inflation pieces that Michael just talked about. Michael?

Speaker #8: And overall, as you know, we are very transparent with what we do. But it's within the mid-single-digit range. Michael can address the realization point.

Speaker #8: But essentially given all the inflation that we just talked about and the additional pricing actions we have taken this week you know that just gives us better drop through because it's just going to stick better.

Speaker #8: Going back to each of the inflation pieces that Michael just talked about. Michael?

Speaker #6: Yeah. Specific to the 90% within that there's really two guide points. First we have price that has a incremental of 100% because we have costs on the other side of our guidance.

Michael Quenzer: Yeah. Specific to the 90%, within that, there's really two guide points. First, we have price that has an incremental of 100% because we have costs on the other side of our guidance. Then mix, normally what happens there is there's an incremental somewhere in the 50-ish percent range that we have within that. When you blend the two together, you start to get a higher drop-through because there's now more price than mix, 'cause the mix is generally behind us now from the carryover, the regulatory change last year.

Speaker #6: And then mixed normally what happens there is there's an incremental somewhere in the 50-ish ish percent range. That we have within that. So when you blend the two together you start to get a higher drop through because there's now more price than mixed because the mix is generally behind us now from the carryover the regulatory change last year.

Speaker #10: Thank you. I I appreciate that. And then if I could just follow up on the HCS revenue trajectory from here. It seems like on my math you know to kind of get to that full year guide the build into Q2 and Q3 off the Q1 level seems steeper than typical on my math.

Christopher Snyder: Thank you. I appreciate that. Then if I could just follow up on the HCS revenue trajectory from here. It seems like on my math, you know, to kinda get to that full year guide, the build into Q2 and Q3 off the Q1 level seems steeper than typical on my math. Correct me if you guys disagree with that. I guess, is that a function of, you know, the channels restocking, demand's getting better, you guys are taking share, more price? Any color there would be helpful. Thank you.

Chris Snyder: Thank you. I appreciate that. Then if I could just follow up on the HCS revenue trajectory from here. It seems like on my math, you know, to kinda get to that full year guide, the build into Q2 and Q3 off the Q1 level seems steeper than typical on my math. Correct me if you guys disagree with that. I guess, is that a function of, you know, the channels restocking, demand's getting better, you guys are taking share, more price? Any color there would be helpful. Thank you.

Speaker #10: Correct me if you guys disagree with that. And I guess is that a function of you know the channels restocking demands getting better you guys are taking share more price you know any any color there would be helpful.

Speaker #10: Thank you.

Speaker #8: So, let me start with the second half. I mean, the comps get much easier in the second half. I mean, that's where we saw massive declines last year.

Alok Maskara: Let me start with H2. I mean, the comps get much easier in H2. I mean, that's where we saw massive declines last year. Michael did talk earlier about pricing will have more of an impact in H2. I think in Q2, remember, mix will still benefit us because we hadn't completed the R-454B conversion all the way by the time we hit Q2. I think you put it all together. Q1 last year, the mix was very tough because a lot of people were stocking up in preparation for, like, you know, the transition and buying a lot of R-410A inventory. Large part of the answer is just comps, what happened last year, and then the pricing impact. Michael, what would you add to that?

Speaker #8: Michael did talk earlier about pricing will have more of an impact in the second half. I think in Q2 remember mixed will still benefit us because we hadn't completed the 454B conversion.

Speaker #8: All the way by the time we hit Q2. So I think you put it all together, Q1 last year, the mix was very tough because a lot of people were stocking up in preparation for, you know, the transition and buying a lot of 410A inventory.

Speaker #8: So a large part of the answer is just comps—what happened last year—and then the pricing impact. Michael, what would you add to that?

Speaker #6: Yeah. So remember Q2 had the canister issue last year that was significantly within that quarter was the the canister shortage issue.

Michael Quenzer: Remember, Q2 had the canister issue last year that's significantly within that quarter with the canister shortage issue.

Speaker #10: Thank you. I appreciate that.

Christopher Snyder: Thank you. I appreciate that.

Chris Snyder: Thank you. I appreciate that.

Speaker #4: Thank you. We'll go next now to Jeff Sprague with Vertical Research.

Operator 3: Thank you. We'll go next now to Jeff Sprague with Vertical Research.

Operator: Thank you. We'll go next now to Jeff Sprague with Vertical Research.

Speaker #11: Hey thanks. Good morning. Just back to the inflation. Yeah Michael you that litany you went through aluminum steel copper etc. We've been watching that ourselves obviously.

Jeffrey Sprague: Hey, thanks. Good morning. Just back to the inflation, yeah, Michael, you with that litany you went through aluminum, steel, copper, et cetera, we've been watching that ourselves obviously. How would you parse, you know, kind of the inflation headwind between the tariff changes and, you know, just kind of the general inflation going on? Obviously, you know, there's an annualized impact on what, you know, what you laid out here, given sort of the half year dynamics. The price that you're putting in place would fully cover you for sort of those carryover headwind impacts into 2027.

Jeff Sprague: Hey, thanks. Good morning. Just back to the inflation, yeah, Michael, you with that litany you went through aluminum, steel, copper, et cetera, we've been watching that ourselves obviously. How would you parse, you know, kind of the inflation headwind between the tariff changes and, you know, just kind of the general inflation going on? Obviously, you know, there's an annualized impact on what, you know, what you laid out here, given sort of the half year dynamics. The price that you're putting in place would fully cover you for sort of those carryover headwind impacts into 2027.

Speaker #11: How how would you parse you know kind of the inflation headwind between the tariff changes and you know just kind of the general inflation going on?

Speaker #11: And then obviously you know there's an annualized impact on what you know what you laid out here given sort of the half year dynamics.

Speaker #11: The price that you're putting in in place would fully cover you for sort of those carryover headwind impacts into 2027?

Speaker #8: Sure. So I'll speak to the the input costs. We do have hedging programs and fixed contracts for a lot of that as I mentioned.

Michael Quenzer: Sure. I'll speak to the input costs. We do have hedging programs and fixed contracts for a lot of it, as I mentioned. We're about on average 78% hedged on that. There is a piece of our overall inflation guide for that remaining 30%, the balance is mostly tariffs. On the annualized impact, we're going to continue to look to find ways to mitigate. As we talked about, this is still not fully mitigated. We still have a lot of levers that take time on the supply chain and the manufacturing processes to be able to continue to mitigate that cost. That's our goal is keep focusing on cost mitigation. Just some of these efforts take a little longer.

Speaker #8: So we're about on average 70-ish percent hedged on that. But there is a a piece of our overall inflation guide for that remaining 30% and then the balance is mostly tariffs.

Speaker #8: And then on the annualized impact and we're going to continue to look to find ways to mitigate as we talked about this is still not fully mitigated.

Speaker #8: We still have a lot of levers that take time on the supply chain and the manufacturing processes to be able to continue to mitigate that cost.

Speaker #8: So that’s our goal, is to keep focusing on cost mitigation. Just some of these efforts take a little longer.

Speaker #6: Yeah. And I'm pretty optimistic on our abilities just like we have done before. Is to reduce the mitigated impact of tariff. But as Michael says supply chain moves manufacturing moves product SKU moves buying US steel in Mexico moves they just take a lot of time.

Alok Maskara: Yeah. I'm pretty optimistic on our ability, just like we have done before, is to reduce the mitigated impact of tariffs. As Michael says, supply chain moves, manufacturing moves, product SKU moves, buying US steel in Mexico moves. They just take a lot of time. We are working through all of that to continue mitigating the impact.

Speaker #6: So we are working through all of that to continue mitigating the impact.

Speaker #4: Thanks for that. And then just on the channel behavior right it's kind of you know always interesting how we can quickly move from destock to restock.

Jeffrey Sprague: Thanks for that. Just on the channel behavior, right? It's kind of, you know, always interesting how we can quickly move from destock to restock. Do you know, sense in the channel that there was, you know, sort of pre-buy in front of, you know, inflation or, you know, there's been some early heat in some places, maybe a realization that things got a little bit too lean? Just kind of the, you know, that behavior, animal spirits, you know, in the channel right now, a little more color on what you're seeing.

Jeff Sprague: Thanks for that. Just on the channel behavior, right? It's kind of, you know, always interesting how we can quickly move from destock to restock. Do you know, sense in the channel that there was, you know, sort of pre-buy in front of, you know, inflation or, you know, there's been some early heat in some places, maybe a realization that things got a little bit too lean? Just kind of the, you know, that behavior, animal spirits, you know, in the channel right now, a little more color on what you're seeing.

Speaker #4: Do you sense in the channel that there was, you know, sort of pre-buy in front of, you know, inflation? Or, you know, there's been some early heat in some places.

Speaker #4: Maybe a realization that things got a little bit too lean. Just kind of the you know that behavior animal spirits you know in the channel right now a little more color on what you're seeing.

Speaker #8: No. We have no indication of any pre-buy ahead of price increase or inflation. I mean the April tariff announcements took most of us by surprise.

Alok Maskara: No, we have no indication of any pre-buy ahead of price increase or inflation. I mean, the April tariff announcements took most of us by surprise. there's just absolutely no opportunity or knowledge within the channel to do any pre-buy around it. We think the restock is pretty normal. I mean, we do like the word re versus de when it comes to stock, so restock is good. folks are just looking at the upcoming summer season, and nobody wants to be short. We think inventory levels are pretty normal. I'm not concerned. Remember, we haven't had a normal year in years, and this will be the first time that we don't have a deal with a refrigerant transition, canister shortage, SEER transition, and all of those things. We think the inventory levels are reaching normal for the channel and for us.

Speaker #8: So there's just absolutely no opportunity or knowledge within the channel to do any pre-buy around it. We think the restock is pretty normal. I mean, we do like the word 're' versus 'de' when it comes to stocks.

Speaker #8: So, restock is good. And folks are just looking at the upcoming summer season, and nobody wants to be shot. So, we think inventory levels are pretty normal.

Speaker #8: I'm not concerned but remember we haven't had a normal year in years. And this will be the first time that we don't have to deal with a refrigerant transition canister sorted sear transition and all of those things.

Speaker #8: So we think the inventory levels are reaching normal for the channel and for us.

Speaker #6: And I'll just add we continue to look to our at our warranty registration data that suggests that inventory in the channel continues to be normal especially on the the one step side.

Michael Quenzer: I'll just add, we continue to look at our warranty registration data that suggests that inventory in the channel continues to be normal, especially on the one step side.

Speaker #4: Great. Thank you. We'll go next now to Ahmed Mehrotra at UBS.

Jeffrey Sprague: Great. Thank you.

Jeff Sprague: Great. Thank you.

Operator 3: We'll go next now to Amit Mehrotra at UBS.

Operator: We'll go next now to Amit Mehrotra at UBS.

Speaker #12: Thanks a lot good morning everybody. I guess I just wanted to come back on the section 232 changes. From from my seat it's a little bit like the blind leading the blind in terms of what the actual impact is and I'd love to get you've got you've done a good job giving us kind of a very high level view but there's a lot of moving parts in terms of how much you have in Mexico how much that's crossing borders that's actually in the scope of the new section 232 what the net effect is in terms of the steel content versus the total value.

Amit Mehrotra: Thanks a lot. Good morning, everybody. I guess I just wanted to come back on the Section 232 changes. From my feed, it's a little bit like the blind leading the blind in terms of what the actual impact is. You've done a good job giving us kind of a very high-level view, but there's a lot of moving parts in terms of how much you have in Mexico, how much that's crossing borders that's actually in the scope of the new Section 232, what the net effect is in terms of the steel content versus the total value. You buy compressors, you move them down to the south and bring it back up north. There's just a lot of moving parts.

Speaker #12: You buy compressors you move them down to the south and bring it back up north. There's just a lot of moving parts. Maybe you can just kind of pull back the curtain a little bit and just explain to us kind of you know how you know what what the scope is and and just so we get a little bit of a flavor of what's going on.

Amit Mehrotra: Maybe you can just kind of pull back the curtain a little bit and just explain to us kind of, you know, how, you know, what the scope is and, just so we get a little bit of a flavor of what's going on.

Speaker #8: Sure. The scope is pretty wide. I'm not a tariff expert but I can tell you we have a lot of tariff experts in our company.

Alok Maskara: Sure. The scope is pretty wide. I am not a tariff expert, but I can tell you we have a lot of tariff experts in our company. I think there is a 7:00 AM crisis, war crisis type call every day. I wish I could invite you to that because then you will get answers to all of your questions there, Amit.

Speaker #8: I think there's a 7:00 AM crisis war crisis type call every day. I wish I could invite you to that because then you will get answers to all of your questions there Ahmed.

Speaker #12: I'm happy to join.

Amit Mehrotra: I'm happy to join.

Speaker #8: The scope is pretty wide.

Alok Maskara: The scope is pretty wide.

Amit Mehrotra: I'm happy to join.

Speaker #12: I'm happy to join.

Speaker #8: The scope is pretty wide; the secondary impacts are coming out to be also quite challenging or new. Because the primary impact is often well understood once you understand all the different products and the classification codes.

Alok Maskara: The scope is pretty wide, and also as time progresses, the secondary impacts are coming out to be also quite challenging or new. The primary impact is often well understood once you understand all the different products and the classification codes. From our perspective, this is not new. Listen, the tariff thing took us by a little surprise last year when we had tariffs by the country. This year, we are getting some refunds, we are paying some more. What we have done is get ourself and our team used to working through these uncertainties, remaining very adaptable, very flexible, moving products, raw material out as needed, and working with our vendors to share the pain. I think we are working through all of that. Net-net, what it comes down to is, I think every manufacturer who deals with metal is impacted.

Speaker #8: But from our perspective this is not new. This is the tariff thing took us by a little surprise last year when we had tariffs by the country.

Speaker #8: This year we're getting some refunds. We are paying some more. What we have done is get ourself and our team used to working through these uncertainties remaining very adaptable very flexible moving products raw material all as needed and working with a vendors to share the pain.

Speaker #8: So I think we are working through all of that. Net net where it comes down to is I think every manufacturer who deals with metals is impacted.

Speaker #8: So clearly you know we are not the only one. And I think overall we seem to be dealing it with appropriate resiliency and appropriate determination.

Alok Maskara: Clearly, you know, we are not the only one. I think overall, we seem to be dealing it with appropriate resiliency and appropriate determination. We also have to continue wait and see, right? Things change dramatically, too. There could be another tweet sometime in the next week or two that could just flip this on its head. Can go into tons of details on that, Amit. Happy to have offline conversation. The teams are very qualified, very capable, and we're working through it.

Speaker #8: We also have to continue wait and see right. Things change dramatically too. There could be another tweet sometime in the next week or two that could just flip this on its head.

Speaker #8: So can't go into the kind of details on that Ahmed. Happy to have offline conversation. But the teams are very qualified very capable and we're working through it.

Speaker #12: Okay, I appreciate that, Alok. And then maybe just a follow-up on your comment about replace versus repair sort of stabilizing. I'm just curious if you're seeing actual evidence of consumers moving back into replacement, or is it just kind of repair activity that simply is not getting worse? You know, the context of the question is really, it's natural for inventory to restock at this particular point in the year.

Amit Mehrotra: Okay. I appreciate that, Alok. Maybe just to follow up on your comment about replace versus repair sort of stabilizing. I'm just curious if you're seeing actual evidence of consumers moving back into replacement, or is it just kind of repair activity that simply is not getting worse? You know, the context of the question is really, it's natural for inventory to restock at this particular point in the year. I'm just wondering if maybe it's a leading indicator or potential destock, unless you're actually seeing real consumer activity moving back towards the replacement paradigm.

Speaker #12: I'm just wondering if maybe it's a leading indicator or a potential destock, unless you're actually seeing real consumer activity moving back towards the replacement paradigm.

Speaker #8: Yes. I remember first of all in our one step channel we are very close to thousands of dealers right. I mean we have 10,000 direct customers and we have multiple conversations with them every hour every day.

Alok Maskara: Yeah. Remember, first of all, in our one-step channel, we are very close to thousands of leaders, right? Maybe a 10,000 direct customers, and we have multiple conversations with them every hour, every day. The sentiment we get back from them is that it is not getting worse, and if anything, a lot of the deferred replacement that happened last year or so is now coming back up for replacement. I don't think this is an exact science, but last year, we were hearing a lot more hesitancy, even within our contractors, to recommend replacement versus repair. They were short on canister. They were not fully trained on R-454B.

Speaker #8: The sentiment what we get back from them is that it is not getting worse and if anything a lot of the deferred replacement that happened last year or so is now coming back up for replacement.

Speaker #8: So I don't think this is an exact science but last year we were hearing a lot more hesitancy even within our contractors to recommend replacement versus repair.

Speaker #8: They were short on canister. They were not fully trained on 450 4B. And now the contractors are more confident and consumers are going back to making the economic decision which is that let's not repair a 10, 12 system versus look for replacement which gives you better efficiency better warranty better financing.

Alok Maskara: Now the contractors are more confident and consumers are going back to making the economic decision, which is that let's not repair a 10, 12-year-old system versus look for replacement, which gives you better efficiency, better warranty, better financing. Definitely not getting worse, definitely stable, and some green shoots in terms of confidence among dealers and consumers returning back to more economic decisions.

Speaker #8: So definitely not getting worse. Definitely stable and some green shoots in terms of confidence among dealers. And consumers returning back to more economic decisions.

Speaker #12: Right. That makes good sense. Thank you very much Ahlook. Appreciate it.

Amit Mehrotra: Right. That makes good sense. Thank you very much, Alok. Appreciate it.

Speaker #4: We'll go next now to Tommy Moore with Stevens.

Operator 3: We'll go next now to Tommy Moll with Stephens.

Operator: We'll go next now to Tommy Moll with Stephens.

Speaker #13: Good morning and thank you for taking my questions.

Tommy Moll: Good morning. Thank you for taking my questions.

Speaker #8: Good morning Tommy.

Alok Maskara: Good morning, Tommy.

Speaker #13: Ahlook to continue with that same theme there where you said for the one step channel there are at least some green shoots. Can you give us any sense of how the volumes have progressed year to date?

Tommy Moll: Alok, to continue with that same theme there where you said for the one-step channel, there are at least some green shoots. Can you give us any sense of how the volumes have progressed year to date? Just observing other data points across the industry, it seems like.

Speaker #13: Just observing other data points across the industry it seems like yep. It seems like the year started really slow but then March and April things have started to pick up.

Alok Maskara: Yeah.

Tommy Moll: Yep. It seems like the year started really slow, but then March and April, things have started to pick up. Some of that may just be a comparison issue. I don't know. Any context you can share would be helpful. Thanks.

Speaker #13: Some of that may just be a comparison issue. I don't know. But any context you can share would be helpful. Thanks.

Speaker #8: Yeah. I think so things have improved sequentially month over month since the beginning of the year. So yes both the statements that you made are accurate.

Alok Maskara: Yeah, I think so things have improved sequentially month over month since the beginning of the year. Yeah, both the statements that you made are accurate. Some of it is driven by comparison, as last year, people were holding fort NA at this point, and this is now turning out to be more normal. Some of it's also just confidence back in the channel where folks are, you know, taking more advantage of our stockup promotions. We are seeing two-step getting a lot more eager to make sure they're not left behind in case we have a really hot start to the summer. Yes, sequentially, things have improved.

Speaker #8: Some of it is driven by comparison as last year people were holding 410A at this point and this is now turning out to be more normal.

Speaker #8: But some of it's also just confidence back in the channel where folks are you know taking more advantage of our stock up promotions we are seeing two step getting a lot more eager to make sure they're not left behind in case we have a really hot start to the summer.

Speaker #8: So yes sequentially things have improved.

Speaker #13: And then on the on the BCS side Ahlook specifically emergency replacement I think you used the word momentum earlier. What additional details can you share there and what inning are we in?

Tommy Moll: On the BCS side, Alok, specifically emergency replacement, I think you used the word momentum earlier. What additional details can you share there and what inning are we in? I know you're starting from a pretty low base of revenue, so you have to be strategic about how you attack that market going forward.

Speaker #13: I know you're starting from a pretty low base of revenue, so you have to be strategic about how you attack that market going forward.

Alok Maskara: I'm still in the second inning or something out of a nine-inning game. Last year, we're not even fully covered in US. We are still not fully covered in US, we have now covered most of the metro areas. Each region gets launched one at a time. What we are positively surprised by and pleased with is the ability of our own Lennox dealers to get back in the game, support us and themselves, and start using and getting back into the rooftop business with us. That's been positive. Honestly, I tell you what the other good news lurking in there is the fact that we took most of the emergency replacement volume away from Stuttgart made Stuttgart more of a configure-to-order factory dedicated to National Account.

Speaker #8: I'm still in the second inning or something out of a nine inning game. We last year were not even fully covered in US. We're still not fully covered in US but we're now covered most of the metro areas.

Speaker #8: Each region gets launched one at a time. What we are positively surprised by and pleased with is the ability of our own Lennox dealers to get back in the game support us and themselves and start using and getting back into the rooftop business with us.

Speaker #8: So that's been positive. Honestly I'll tell you what the other good news lurking in there is the fact that we took most of the emergency replacement volume away from Stuttgart makes Stuttgart more of a configured to order factory dedicated to national account.

Speaker #8: That's paying probably better dividends than we had expected in terms of restoring confidence in national accounts. With shorter lead times more custom products basically going back to basics in there what we used to be very good at and lost our way.

Alok Maskara: That's paying probably better dividends than we had expected in terms of restoring confidence in national accounts with shorter lead times, more custom products. Basically going back to basics in there, what we used to be very good at, and we lost our way. Early innings in emergency replacement, but also pleased with the momentum in national account. The two words we were trying to use, so I'm very pleased you said that, is momentum in BCS and stabilization in HCS. Those are our buzzwords for the quarter as we were practicing.

Speaker #8: So early innings in emergency replacement but also pleased with the momentum in national account. The two words we were trying to use that really pleased you said that is momentum in BCS and stabilization in HCS.

Speaker #8: Those are our buzzwords for the quarter as we were practicing. And I'll just add to that, the bundling of the service offering with the national accounts continues to perform very well.

Michael Quenzer: I'll just add to that. The bundling of the service offering with the national accounts continues to perform very well.

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

Speaker #13: Thank you both. I'll turn it back.

Speaker #4: Thank you. We'll go next now to Jeff Hammond with KeyBank Capital Markets.

Operator 3: Thank you. We'll go next now to Jeff Hammond with KeyBanc Capital Markets.

Operator: Thank you. We'll go next now to Jeff Hammond with KeyBanc Capital Markets.

Speaker #14: Hey good morning guys.

Jeff Hammond: Hey, good morning, guys.

Speaker #8: Good morning Jeff.

Alok Maskara: Morning, Jeff.

Jeff Hammond: I mean, it seems like the lean is more your inflation impact is Section 232, and, you know, you mentioned a couple times, like, you think everyone has the same issues. I'm just wondering, it seems like there's one OEM that does not make product in Mexico and just, you know, what do you think happens if, you know, most people move on price, but not everybody moves on price?

Speaker #14: Hey, just going—I mean, it seems like the lean is more, your inflation impact is $232, and, you know, you mentioned a couple times, like, you think everyone has the same issues. But I'm just wondering, you know, it seems like there's one OEM that does not make product in Mexico, and just, you know, what do you think happens if, you know, most people move on price, but not everybody moves on price?

Speaker #8: Yeah. I mean listen there are a bunch of game theory scenarios Jeff which is hard to get into this right. But remember 232 derivative tariffs are not about products made in Mexico.

Alok Maskara: Yeah. I mean, listen, there are a bunch of game theory scenarios, Jeffrey Sprague, which is hard to get into this, right? Remember, Section 232 derivative tariffs are not about products made in Mexico. They're about products made anywhere coming from outside, as long as the steel content or the metal content is over X%, depending on weight. That does impact a broader group of folks beyond just those who are making in Mexico. At the same time, remember, the secondary impact of this is a lot of the cost of steel and aluminum, like Michael Quenzer mentioned, has gone up, so nobody's immune to it. I think, like, you know, we'll see where everybody lands up on this. We are very confident, and we have done price increases quite thoughtfully to make sure that we are not disadvantaged on share.

Speaker #8: They're about products made anywhere coming from outside. As long as the steel content or the metal content is over X percent depending on weight that does impact a broader group of folks beyond just those who are making in Mexico.

Speaker #8: At the same time, remember the secondary impact of this is that a lot of the cost of steel and aluminum, like Michael mentioned, has gone up.

Speaker #8: So nobody's immune to it. I think like you know we'll see where everybody lands up on this we are very confident and we have done price increases quite thoughtfully to make sure that we are not disadvantageous on share.

Speaker #8: So we'll work through the dynamics but at this stage based on what I'm looking at I look at us doing the appropriate action and sharing the pain with our vendors and our customers.

Alok Maskara: We work through the dynamics, but at this stage, based on what I'm looking at, I look at us doing the appropriate action and sharing the pain with our vendors and our customers.

Speaker #14: Okay great. And then just another one on BCS. I mean it sounds like I mean the the one Q numbers were pretty eye popping I understand easy comp and just all the comments you made in the previous question were were pretty positive.

Jeff Hammond: Okay, great. Just another one on BCS. I mean, it sounds like the Q1 numbers were pretty eye-popping. I understand easy comp. Just all the comments you made in the previous question were pretty positive. It seems like the raise is pretty small, so maybe, you know, are there any aberrations in Q1, or is there any reason, you know, to temper maybe the enthusiasm on, you know, emergency replacement, national account momentum?

Speaker #14: So but it seems like the the raise is is pretty small. So maybe you know are there were there any aberrations in one Q or is there any reason you know to temper maybe the enthusiasm on you know emergency replacement national account momentum?

Speaker #8: No besides what you already said like last year we got beat down because they were bad so we had easier comps in Q1. The comps get tougher as we go along.

Alok Maskara: No, besides what you already said. Like, last year, we got beat down because they were bad, so we had easier comps in Q, and the comps get tougher as we go on. There's nothing beyond that is going to temper the performance going forward. Just the comps get tougher as you move along the year.

Speaker #8: But there's nothing beyond that that is going to temper the performance going forward. Just the comps get tougher as you move along the year.

Speaker #15: Okay. Thanks Ahlook.

Jeff Hammond: Okay. Thanks a lot.

Speaker #4: We'll go next now to Nicole DeBlaise with Deutsche Bank.

Operator 3: We go next now to Nicole DeBlase with Deutsche Bank.

Operator: We go next now to Nicole DeBlase with Deutsche Bank.

Speaker #16: Yeah thanks. Good morning guys.

Nicole DeBlase: Yeah, thanks. Good morning, guys.

Speaker #8: Good morning Nicole.

Alok Maskara: Morning, Nicole.

Speaker #16: Maybe just on the BCS business you guys obviously have a lot going on with respect to various drivers of market share gain. It's hard to see what's happening with the underlying commercial unitary market.

Nicole DeBlase: Maybe just on the BCS business, you guys obviously have a lot going on with respect to various drivers of market share gain. It's hard to see what's happening with the underlying commercial unitary market. Alok, I'd be curious how you'd frame the performance of the overall market. You know, is it still down overall and Lennox is just outperforming that much, or have you seen any improvement at the same time?

Speaker #16: So Ahlook I'd be curious how you'd frame the performance of the overall market and you know is it still down overall and Lennox is just outperforming that that much or have you seen any improvement at the same time?

Alok Maskara: The overall market remains challenged. The last data that we saw in AHRI, the declines have become less, so, I mean, the second order derivative is kind of turning favorable. The overall market remains challenging and did decline. Yeah, we are clearly outperforming the market in there, but it's not just on unitary equipment. I mean, our services offering, our ability to do a full life cycle. I think that's all put together doing that. Yet our market remains challenging, but our market share remains very small, Nicole. I mean, from our perspective, we continue to have significant opportunity to regain national account and enter emergency replacement in a meaningful way. Yeah, at this stage, based on all the data we look at, is we are pleased with the fact that we're outperforming the market.

Speaker #8: the overall market remains. Challenged. The last data that we saw in HRI the declines have become less. So I mean the second order derivative is kind of turning favorable.

Speaker #8: But the overall market remains challenging and did decline. So yeah we are clearly outperforming the market in there. But it's not just on unitary equipment.

Speaker #8: I mean our services offering our ability to do a full life cycle. So I think that's all put together. Doing well. Yet our market remains challenging but our market share remains very small Nicole.

Speaker #8: I mean from our perspective we continue to have significant opportunity to regain national account and enter emergency replacement in a meaningful way. But yeah at this stage based on all the data we look at is we are pleased with the fact that we outperforming the market.

Speaker #16: Okay got it. Thanks Ahlook. And then just a quick follow up maybe from Michael. I think you mentioned Michael that you expect under absorption to continue but maybe at a lesser rate.

Nicole DeBlase: Okay, got it. Thanks, Alok. Just a quick follow-up maybe for Michael. I think you mentioned, Michael, that you expect under absorption to continue but maybe at a lesser rate in the second quarter. Can we just put a finer point on that relative to the $50 million I think you spoke to in Q1? What are you expecting for Q2?

Speaker #16: And the second quarter can we just put a finer point on that relative to the 50 million? I think you spoke to in one Q.

Speaker #16: What are you expecting for two Q?

Speaker #8: Yeah, it's $50 million in Q1. It's not going to be zero—somewhere between that. But there'll be a little bit of headwind in the second quarter, but by the end of the second quarter that should all be behind us, and we should start to see actually some year-over-year absorption benefit as we get to the second half.

Michael Quenzer: Yeah, it's $15 million in Q1. It's not gonna be 0, somewhere between that. There'll be a little bit of headwind in Q2. By the end of Q2, that should all be behind us, and we should start to see actually some year-over-year absorption benefit as we get to H2.

Speaker #8: Yeah Nicole and also 15 million makes a big difference. When you make only 160 right I mean Q1 is one of our softest quarters.

Alok Maskara: Yeah, Nicole, and also $15 million makes a big difference when you make only $160, right? I mean, Q1 is one of our softest quarter. In Q2, which is one of our more profitable quarters, it doesn't move the needle at all.

Speaker #8: In Q2 which is our one of our more profitable quarters it doesn't move the needle at all. So yeah.

Speaker #16: Got it. Thank you so much. I'll pass it on.

Nicole DeBlase: Got it. Thank you so much. I'll pass it on.

Speaker #4: Thank you. We'll go next now to Stephen Volkman with Jefferies.

Operator 3: Thank you. We'll go next now to Stephen Volkmann with Jefferies.

Operator: Thank you. We'll go next now to Stephen Volkmann with Jefferies.

Speaker #17: Great. thank you and good morning. just a couple sort of bigger picture follow ups. I think Michael you mentioned some spending on ERP and AI targeted just any details those sound like interesting potential projects.

Stephen Volkmann: Great, thank you, and good morning. Just a couple sort of bigger picture follow-ups. I think, Michael, you mentioned some spending on ERP and AI targeted. Just any details? Those sound like interesting potential projects.

Speaker #8: Yeah. So on ERP first let me take away any fear. We are not doing any massive big ERP changes. We love Fachir. As we go into integrating new acquisitions that we have done we're just moving them to our own platform and that work is underway.

Alok Maskara: Yeah. On ERP, first, let me take away any fear. We're not doing any massive big ERP changes. We love Factea. As we go into integrating new acquisitions that we have done, we're just moving them to our own platform, and that work is underway. We are very good at this. We do it diligently. We do it one at a time. I just want to make sure we take up any risk concerns about that because none, and it's limited to the acquisitions we have done recently. On AI pieces, yes, we continue to make investments. We are getting really good results when it comes to two or three specific areas within AI.

Speaker #8: So we are very good at this. We do it diligently. We do it one at a time. So I just want to make sure we take away any risk concerns about there because none and it's limited to the acquisitions we have done recently.

Speaker #8: On AI pieces yes we continue to make investments. We are getting really good results when it comes to two or three specific areas within AI.

Speaker #8: As we look at where we are making a difference is clearly pricing we are seeing some good benefits on using AI. Which increases our win ratio.

Alok Maskara: As we look at where we are making our differences, clearly pricing, we are seeing some good benefits on using AI, which increases our win ratio and also increases overall profitability, which is typically hard to do, but AI enables us to do that. Second piece which we are seeing good traction is truly around looking at demand planning, sales inventory, ops planning. I know right now the headline news on inventory is not great, but we are getting better. As that initiatives move forward, we are very optimistic on what AI can do there. Third big bucket is just general productivity with agentic AI and how we have looked at everything from staffing our call centers to our own HR help desk to really looking at robotic process automation. I mean, all of those things are helping productivity on the SG&A side.

Speaker #8: And also increases our overall profitability. Which is typically hard to do but AI enables us to do that. Second piece which we are seeing good traction is truly around looking at demand planning sales inventory ops planning.

Speaker #8: I know right now the headline news on inventory is not great but we are getting better. As that initiatives move forward we are very optimistic on what AI can do there.

Speaker #8: Third big bucket is just general productivity. With agentic AI and how we have looked at everything from staffing our call centers to our own HR help desk to really looking at robotic process automation.

Speaker #8: I mean all of those things are helping productivity on the SG&A side. And you saw we did really good on the cost control on SG&A.

Alok Maskara: You saw we did really good on the cost control on SG&A. All of that requires investment, and we are making investments in data lakes. We are making investments in partnerships with LLMs. We are also very focused on reducing some of that cost by cutting down on useless subscriptions that are no longer needed, sunsetting old IT systems. As we upgrade our tech stack and we sunset legacy one, there's just a little bit of bump along the curve, right? Because at one point, we are paying for both. In the long term, I think it's gonna be productivity and pricing will outweigh the cost of all the investments we are making. Very pleased with the progress there.

Speaker #8: All of that requires investment, and we are making investments in data lakes. We are making investments in partnerships with LLMs. But we are also very focused on reducing some of that cost by cutting down on useless subscriptions—subscriptions that are no longer needed.

Speaker #8: Sunsetting old IT systems. But as we upgrade our tech stack and we sunset legacy one they're just a little bit of bump along the curve right?

Speaker #8: Because at one point we are paying for both. But in the long term I think it's going to be productivity and pricing will outweigh the benefits and will outweigh the cost of all the investments we are making.

Speaker #8: So very pleased with the progress there.

Stephen Volkmann: Great. Okay. Thank you for that. Then, Alok, I'm interested, you know, both Samsung and Ariston, you know, kind of your growth programs, I suppose, around distribution. I'm guessing those started before all this tariff noise kinda came to bear, and I'm just curious if you've changed the way you're thinking about those opportunities, you know, given the realities of sort of the world today.

Speaker #17: Great. Okay. Thank you for that. And then Ahlook I'm interested you know both Samsung and Ariston you know kind of your growth. programs I suppose around distribution I'm guessing those started before all this tariff noise kind of came to bear and I I'm just curious if you've changed the way you're thinking about those opportunities you know given the realities of sort of the world today.

Alok Maskara: Strategically, we remain very committed to both of those. Ductless and water heater remains core part of our portfolio, and we are gaining momentum in both. I mean, we had really solid momentum in Q1, and water heater we just launched in March. In Q1 and March in both those products. The fact that these are joint ventures versus buy and supply agreements, that makes us very comfortable sitting where we are because we can have very intelligent discussions about supply chain moves, tariff cost sharing, and other futuristic changes that we can make to mitigate any long-term impact of tariff. We appreciate the partnership spirit with both those companies. No, no change in current dynamics. Almost all ductless today are imported from outside, especially when it comes to interior indoor components and some of the core outdoor components.

Speaker #8: so strategically we remain very committed to both of those our portfolio. And we are gaining momentum in both. I mean we had really solid momentum in Q1 and water heater we just launched in March.

Speaker #8: So but in Q1 and March in both those products. The fact that these are joint ventures versus buy and supply agreements that makes us very comfortable sitting where we are because we can have very intelligent discussions about supply chain moves.

Speaker #8: Tariff cost sharing. And other futuristic changes that we can make. To mitigate any long-term impact of tariffs. So we appreciate the partnership spirit with both those companies.

Speaker #8: But no no change in current dynamics has almost all ductless today are imported from outside. especially when it comes to interior indoor components and some of the core outdoor components.

Alok Maskara: No, we are moving with the industry and have no concerns around the structure.

Speaker #8: So no we are moving with the industry and have no concerns around the structure.

Stephen Volkmann: Great. Thank you, guys. I'll pass it on.

Speaker #17: Great. Tha thank you guys. I'll pass it on.

Operator 3: We'll go next now to Nigel Coe with Wolfe Research.

Operator: We'll go next now to Nigel Coe with Wolfe Research.

Speaker #4: We'll go next now to Nigel Coe with Wolf Research.

Nigel Coe: Oh, thanks. Good morning. Oh, by the way, Alok, I'm down for the 7:00 AM crisis call, I'll ask Chelsey to send me the details of that. Could be an interesting call.

Speaker #18: Oh thanks. Good morning. oh by the way Ahlook I'm I'm down for the 7:00 AM crisis call. So I'll ask Chelsey to send me the details of that.

Speaker #18: could be an interesting call.

Alok Maskara: Maybe we'll start charging you guys, and that could be part of our tariff mitigation effort, you know?

Speaker #8: Okay. Maybe even start just maybe even start charging you guys and that could be part of our tariff mitigation effort you know.

Alok Maskara: Maybe we'll start charging you guys, and that could be part of our tariff mitigation effort, you know?

Nigel Coe: It could be. Yeah. I'm sure people would pay for that. By the way, I'm a little disappointed with the baseball analogy. I thought you're more of a cricket guy, Alok, but I'll let you get away with that.

Speaker #18: I+it could be. Yeah. I'm I'm sure we I'm sure people would pay for that. By the way I'm a little dis+disappointed with the baseball analogy.

Speaker #18: I thought you were more the C+Cricket guy, Alok. But I'll let you get away with that.

Alok Maskara: You know, if you had asked me the question, I don't know how you break down two innings. I would have had to say, like, we are 0.2 in the first inning or something, you know?

Speaker #8: I think it became if you had asked me the question but I don't know how you break down two innings. I would have had to say like we have 0.2 in the first inning or something you know.

Nigel Coe: Yeah, like.

Alok Maskara: Nine gives me a lot.

Nigel Coe: The first innings or the first day, something like that. Yeah. That's right. Sorry, I do want to go back to the tariffs. You know, roughly where are we today in terms of US production of residential, like, commercial units? Are you planning to re-domesticate production, I'm not saying next week or next month, but over time? Does it still make sense to keep your production in situ, and pay the tariff from a unit cost perspective? I'm just wondering, you know, what sort of non-price mitigations you're contemplating right now?

Speaker #18: Yeah. Like the first innings of the first day something like that. Yeah. That's right. so I sorry. I I do want to go back to the tariffs.

Speaker #18: you know w+roughly where are we today in terms of US production of residential light commercial units? and are you planning to redomesticate production I'm not saying next week or next month but over time.

Speaker #18: Or does it still make sense to keep your production in situ and pay the tariff from a unit cost perspective? and I'm just I'm just wondering you know what sort of non-price mitigations you're completing right now.

Alok Maskara: If you are playing a T20 cricket game, you know, we are in the third over of the first-.

Speaker #8: So so if you are paying a T20 cricket game you know we are in the third over of the first. Party that's playing. So we are early in that thought process.

Nigel Coe: Okay

Alok Maskara: party that's with you.

Nigel Coe: That's right.

Alok Maskara: We are early in that thought process. First of all, we need things to stabilize before we make any big decisions or changes. Things seem to be moving around quite a bit. Obviously, the USMCA agreement is coming up for renewal, and we'll see where that moves. Currently, we are continuing to fine-tune, change things, change the source of metal, change a bunch of like, you know, smaller decisions. Before we make any large decisions, we do wanna see some stabilization in policy and more of a consistent approach, versus seem like the approach is still evolving. No major changes in the pipeline in terms of massive reshoring. Remember, we do have 3 residential factories today in the US, and we do pretty well going through that.

Speaker #8: You know so first of all we need things to stabilize before we make any big decisions or changes. I mean things seem to be moving around quite a bit.

Speaker #8: Obviously, the US MCA agreement is coming up for renewal, and we'll see where that moves. But currently, we are continuing to fine-tune and change things.

Speaker #8: Change the source of metal. Change a bunch of like you know smaller decisions. But before we make any large decisions we do want to see some stabilization in policy.

Speaker #8: And more of a consistent approach versus seem like the approach is still evolving. So no no major changes in the pipeline in terms of massive reshoring.

Speaker #8: Now, remember, we do have three residential factories today in the US, and we do pretty well going through that. That's in Grenada, Orangeburg, and Marshalltown.

Alok Maskara: That's in Grenada, Orangeburg, and Marshalltown. We have one large one for residential in Mexico. We have plenty of flexibility in our network, and we will continue making changes. For some big, massive transformation, we just need stability in our policies from the government before we look at it. Today, it still makes sense to continue doing what we are doing and just mitigate the impact one product at a time, one screw at a time, and one sheet metal part at a time.

Speaker #8: And we have one large one for our residential in Mexico, so we have plenty of flexibility in our network. And we will continue making changes.

Speaker #8: But for some big massive transformation we just need stability in our policies from the government before we look at it. Today it still makes sense to continue doing what we are doing and just mitigate the impact one product at a time.

Speaker #8: One screw at a time and one sheet metal part at a time.

Nigel Coe: Okay. It doesn't sound like you wanna give me the number on percentages of production domestic, but in case you do, I just thought I'd remind you there. Going back to the sell-through, the minus 10% on the single channel sales, you did mention that you were rationalizing your residential new construction exposure last quarter. I'm just wondering if that was an impact during the quarter, and whether that process is now complete.

Speaker #18: Okay. It doesn't sound like you want to give me the number on the percentages of production domestic. But i+in case in case you f in case you do just just thought to remind you there.

Speaker #18: And going back to the the the sell-through the the minus ten percent on on the single channel. sales. you did mention that you were rationalizing your residential new construction exposure last quarter.

Speaker #18: I'm just wondering if that was an impact during the quarter. And and whether that process is now complete.

Michael Quenzer: What we said in the past, it's about 25% of the HCS segment, the residential new construction. We definitely saw the volumes down there more than others is down about 30% in volumes in the channel. Not necessarily all just customers moving to other competitors. It's a combination of just weak new construction and that, we definitely saw that channel weigh on the overall One Step volume growth.

Speaker #8: Yeah. What we've said in the past it's about twenty-five percent of the HCS segment of residential new construction. We definitely saw the volumes down there more than others.

Speaker #8: It was down above thirty percent in volumes in the channel. Not necessarily all just customers moving to other competitors. It's a combination of just weak new construction and that.

Speaker #8: But we definitely saw that channel weigh on the overall one-step volume growth. Yeah. And that shared loss which is what it'll sh+show in print is gonna negatively impact us all through the year.

Alok Maskara: Yeah. That share loss, which is what it is show in print, is gonna negatively impact us all through the year. That's built into Michael's overall guidance, as we said. Two Step's gonna do better than One Step. You know, from a profitability perspective, that's gonna work in our favor because the margins were like negative to zero in those businesses that we have lost.

Speaker #8: And that's built into Michael's overall guidance as we said two steps gonna do better than one step. You know from a profitability perspective that's gonna work in our favor.

Speaker #8: Because the margins will like negative to zero and on those businesses that we have lost.

Nigel Coe: Okay. Thanks, guys.

Speaker #18: Okay. Thanks guys.

Operator 3: We'll go next now to Joe O'Dea with Wells Fargo.

Operator: We'll go next now to Joe O'Dea with Wells Fargo.

Speaker #4: We'll go next now to Joe Oday with Wells Fargo.

Joe O'Dea: Hi, good morning. In terms of the pricing announcements over the course of the past week, can you just give any color on that? We see the HCS guide go from 2 to 4, but presumably, you know, where your pricing is on a narrower scope of products, just looking for any quantification of the recent price increases. In addition to that, like perspective on the dollar effect. When we think about this, you know, if consumers today are paying $10K for a unit, presumably the dollar effect of what you're flowing through is a pretty small number, as long as the channel doesn't try to price on top of that.

Speaker #19: Hi, good morning. In terms of the pricing announcements over the course of the past week, can you just give any color on that?

Speaker #19: We see the HCS guide go from two to four. but presumably you know where you're pricing is on a narrower scope of products. And so just looking for any quantification of the recent price increases.

Speaker #19: And in addition to that like perspective on on the dollar effect. And so when when we think about this you know if if consumers today are paying ten K for a unit you know presumably the dollar effect of what you're flowing through is is a pretty small number as long as the channel doesn't try to price on top of that.

Alok Maskara: Yeah. The first one, the price increases for us just went into our customers' announcements on Monday. I think we need to work through that over the next multiple weeks. You probably know some competitors have announced that the week before. From our perspective, we need to work through that. I think I would take Michael's guide as the changes in our overall revenue is what we're expecting in price. There's going to be announcement numbers, there's going to be a stick rate number as there is normal. What we are confident is we'll offset the increased cost inflation through those actions, is the way I would look at it.

Speaker #8: Yeah. So the first one the price increases for us just went into our customers' announcements on Monday. So I think we need to work through that over the next multiple weeks.

Speaker #8: and you probably know some competitors have announced that the week before. from our perspective we need to work through that. I think I would take Michael's guide as the changes in our overall revenue is what we expecting in price.

Speaker #8: So there's gonna be announcement number. There's gonna be a stick rate number as there is normal. But what we are confident is we'll offset the increased cost inflation.

Speaker #8: Through those actions is the way I would look at it.

Michael Quenzer: On the impact to the homeowner, we still think the equipment is maybe 40% of the total installation cost. We'll have to see how that cost evolves, but we don't see this as a big driver of that input cost. It's most is the contractor labor and margin.

Speaker #4: Then on the impact to the homeowner we still think the equipment is maybe forty percent of the total installation costs. But w+we'll have to see how the that cost evolves.

Speaker #4: But we don't see this as a a big driver of that input cost. It's most is the contractor labor and margin still.

Alok Maskara: Yeah. I think 40% includes equipment, parts, supplies, and in some cases, it's less than 30% as well, depending on the install and time. I don't think it changes the consumer price elasticity in any meaningful way. I mean, we are sensitive to the market demand-supply agreement, but remain like, you know, convinced that equipment pricing is the least of the variable in that equation.

Speaker #8: Yeah. And I think forty percent includes equipment parts supplies. And in some cases it's less than thirty percent as well depending on the install at time.

Speaker #8: So I don't think it changes the consumer price elasticity in any meaningful way. I mean we are sensitive to the market demand supply agreement.

Speaker #8: But remain com like you know convinced that equipment pricing is the least of the variable in that equation.

Joe O'Dea: Right. Nope, that's what I was getting at. Thank you. Just in terms of seasonality in HCS and margins, I think, you know, the past couple of years we've seen, you know, margins step up from 16%, 17% in Q1 up to kind of 23% to 25% in Q2. Obviously, absorption headwinds that make it a little bit lower starting point in Q1 of this year. You know, just looking for whether, you know, you think the past couple of years are a reasonable benchmark for, you know, what you think you can achieve as you get that seasonal step up in Q2 this year.

Speaker #4: Right. No, that's—that's what I was getting at. Thank you. And then, just in terms of seasonality in HCS and margins, I think, you know, the past couple of years we've seen, you know, margins step up from sixteen, seventeen percent in Q1 up to kind of twenty-three to twenty-five in Q2.

Speaker #4: obviously absorption headwinds that make it a little bit lower starting point in Q1 of this year. But you know just looking for whether you know you think the past couple of years are a a reasonable benchmark for you know what you think you can achieve.

Speaker #4: as you get that seasonal step up in in Q2 of this year.

Michael Quenzer: Yeah. I think the main driver is gonna be the volume recovery within HCS. Obviously, we had some weird comps last year, but what we're building within the guides that we expect sequential year-over-year improvement, Q2 versus Q1, Q3 versus Q2, and Q4 versus Q3. As you look at the year-over-year declines sequentially, that should continue to improve. That will obviously help our margins, and then when you get on the H2 of the year, you'll start to have even better absorption within those margins. That's what we're expecting right now, but we'll watch the summer play out.

Speaker #8: Yeah. I think the main driver is gonna be the volume recovery within HCS. Obviously we have some weird comps last year. But what we're building within the guides that we expect sequential year over year improvement.

Speaker #8: Q2 versus Q1. Q3 versus Q2. And Q4 versus Q3. So as you look at the year over year declines sequentially that should continue to improve.

Speaker #8: That will obviously help our margins and then when you get on the the second half of the year you'll start to have even better absorption within those those margins.

Speaker #8: That's what we're expecting right now. But we'll watch the summer play out. Q2's a big quarter for us that we need to get through.

Alok Maskara: Q2 is a big quarter for us that we need to get through, and once we see that play out, I think we'll have a really good line of sight for the year.

Michael Quenzer: Q2 is a big quarter for us that we need to get through, and once we see that play out, I think we'll have a really good line of sight for the year.

Speaker #8: And once we see that play out I think we'll have a really good line of sight for the year.

Joe O'Dea: Got it. Okay. Thank you.

Speaker #4: Got it. Okay. Thank you.

Alok Maskara: Yep.

Michael Quenzer: Yep.

Speaker #8: Yep.

Operator 3: We'll go next now to Deane Dray with RBC Capital Markets.

Operator: We'll go next now to Deane Dray with RBC Capital Markets.

Speaker #4: We'll go next now to Dean Dray with RBC Capital Markets.

Deane Dray: Thank you. Good morning, everyone.

Speaker #20: Thank you. Good morning everyone.

Alok Maskara: Good morning.

Speaker #8: Good morning.

Deane Dray: Hey, I appreciate the update on the new products on slide five. Can you just remind us, do you track a new product vitality index or the contribution from the new products? Just kind of related, I believe you gave an indirect update in Stephen Volkmann's question on ductless, but, you know, anything on the Samsung JV would be helpful too.

Speaker #20: Hey. I appreciate the update on the new products on slide five. Can you just remind us do you track a new product vitality index or the contribution from the new products?

Speaker #20: And then, just kind of related, I believe you gave an indirect update in Steve's question on dockless. But, you know, anything on the Samsung JV would be helpful too.

Alok Maskara: Sure. Yes, we track vitality pretty closely, and we track vitality where we do not consider refrigerant changes as a new product. Excluding that, our vitality remains in the 45% to 50% range. If we didn't exclude that, clearly 80%, 90% vitality. Excluding the refrigerant change and SEER changes, we do remain quite pleased with our vitality number. I think the exact number is, like, 48 or something right now, but it's holding the 45 to 50 range. We are very pleased with heat pump introductions, indoor air quality introductions, you know, the control changes. You probably saw a lot more of that during Prakash's presentation at the investor day. We remain quite pleased on where you're coming down.

Speaker #8: Sure. So yes, we track vitality pretty closely. And we track vitality where we do not consider refrigerant changes as a new product. So, excluding that, our vitality remains in the 45% to 50% range.

Speaker #8: If it didn't exclude that clearly eighty ninety percent vitality. So but excluding the refrigerant change and sear changes we do remain quite pleased with our vitality number.

Speaker #8: And I think the exact numbers like forty-eight or something right now. But it's always in the forty-five to fifty range. And we see a very pleased with heat pump introductions.

Speaker #8: Indoor air quality introductions. A lot of the control changes you probably saw a lot more of that during precautious presentation at the investor days.

Speaker #8: So we remain quite pleased on where we're coming down. On the Samsung joint venture you know we talked last year that the meaningful impact's gonna be this year because it takes almost a year for us to kind of get it through the channel.

Alok Maskara: On the Samsung joint venture, you know, we talked last year that the meaningful impact's gonna be this year because it takes almost a year for us to kind of get it through the channel, get dealer conversion, work through phase in, phase out of the inventory. We are pleased with the current momentum and feel like there's a lot more upside as we take this forward, especially as we look at, you know, everybody's impacted the same way from tariff. The feedback from the channel and the consumer has been very good. These are high-quality products with much better controls, much quieter than some of the competitive product. The contractors like the fact that the same truck that's gonna deliver in the unitary product also delivers this. The same rebate program can be added.

Speaker #8: Get dealer conversion. Work through phase in phase out of the inventory. And we are pleased with the current momentum. And feel like there's a lot more upside as we take this forward.

Speaker #8: Especially as we look at you know everybody's impacted the same. Different tariffs. The feedback from the channel and the consumer has been very good.

Speaker #8: I mean these are high quality products. It's much better controls. Much quieter than some of the competitive products. And the contractors like the fact that the same truck that's gonna deliver them the Unitree product also delivers this.

Speaker #8: The same rebate program can be added. So we are pleased with the direction it's going. And feel there's continued to be a lot of upside as we work through the rest of the year.

Alok Maskara: We are pleased with the direction it's going and feel there's continue to be a lot of upside as we go through the rest of the year.

Deane Dray: That's real helpful. Then just a second question, and I'm really not sure the extent whether you can comment, if at all, but regarding the recent litigation against the resi HVAC manufacturers. If it helps, we had an expert call and published on this where the expert declared the case very weak as it stands today. Just are you able to comment on it? Thanks.

Speaker #20: That's real helpful. And then just a second question. And I'm really not sure the extent whether you can comment if at all. But regarding the recent litigation against the Resy HVAC manufacturers.

Speaker #20: And if it helps we had an expert call. and published on this where the expert declared the case very weak as it stands today.

Speaker #20: But just are you able to comment on it? Thanks.

Alok Maskara: Well, thanks to you and others who had experts call in their own analysis. I really wanna say a lot about this, Deane, and maybe we'll have to wait for some other occasion because at this point, I'd have to read a prepared statement given to me by my lawyers, but I'm glad you asked. Our response is the matter is pending legal complaint. The lawsuit contains only plaintiff's allegation, and there has been no finding of wrongdoing. We dispute the accuracy of the allegation and will actively and vigorously defend our position through proper legal channels. Again, there's a lot more I wanna say, but I'm currently constrained because of the lawsuit to saying only the prepared legal portion of this.

Speaker #8: Well thanks to you and others who had experts call and their own analysis. I really wanna say a lot about this Dean. And maybe we'll have to wait for some other occasion.

Speaker #8: Because at this point I'll have to read a prepared statement given to me by my lawyers. But I'm glad you asked. Our response is the matter is pending legal complaint.

Speaker #8: The lawsuit contains only the plaintiff's allegation, and there has been no finding of wrongdoing. We dispute the accuracy of the allegation and will actively and vigorously defend our position through proper legal channels.

Speaker #8: Again there's a lot more I wanna say. But I'm currently constrained because of the lawsuit to saying only the prepared legal portion of this.

Deane Dray: That's great. I'm glad I asked. I'm glad you were able to read that statement, and we certainly agree. We'll leave it there. Thank you.

Speaker #20: th+that's great. I'm I'm glad I asked. I'm glad you were able to read that statement. And we certainly agree. So we'll leave it there.

Speaker #8: Can you give me a general counsel's can you make my general counsel's day that I read the statement sir.

Alok Maskara: You made my general counsel's day that I read the statement, so.

Deane Dray: Appreciate it.

Speaker #20: Appreciate it.

Operator 3: Thank you. We'll go next now to Patrick Baumann with JP Morgan.

Operator: Thank you. We'll go next now to Patrick Baumann with JP Morgan.

Speaker #4: Thank you. We'll go next now to Patrick Baumann with JPMorgan.

Patrick Baumann: Oh, hi, good morning. Lot's been covered. I maybe just wanted to tie the inventory being normal comment with some, like, the growth that we're seeing on the balance sheet year over year. I know some of that's acquisitions. Just wondering if you'd give any color on, like, the residential units within that bucket, either looking year over year or kind of versus, you know, current sales levels relative to history. Any context around, you know, where you are on that front?

Speaker #21: Well hi. Good morning. a lot's been covered. I I I'd maybe just wanted to tie the inventory being normal comment with like what the growth that we're seeing on the balance sheet year over year.

Speaker #21: I know some of that's acquisitions. just wondering if you'd give any color on like the residential units within that bucket either looking year over year or kind of versus you know current sales levels re+relative to history.

Speaker #21: Any context around—you know, where you are on that front?

Alok Maskara: Yeah. Sure, Patrick. Patrick, typically, when we go from Q4 to Q1, like just last year, we built about $210 million worth of inventory. This year, we built $60 million. Think of that as a $150 million reduction compared to what we normally build because we have to build a lot of inventory as we get into the peak summer selling season. When we ended the year last year, we talked about we had $150 million more inventory that we needed. Think of it, we are essentially back to a normal seasonal thing. Now, I feel like we still have opportunities, and Michael referenced through that, as we get better in demand planning, better in SIOP, to work some of this down.

Speaker #8: Yeah. Sure Patrick. Patrick so typically when we go from Q4 to Q1 like just last year we built about two hundred and ten million dollars worth of inventory.

Speaker #8: This year we built sixty million dollars. So think of that as a hundred and fifty million reduction compared to what we normally built. Because we have to build a lot of inventory as we get into the peak summer selling season.

Speaker #8: When we ended the year last year we talked about we had a hundred and a hundred and fifty million dollar more inventory that we needed.

Speaker #8: So think of it's we are essentially back to a normal seasonal thing. Now I feel like we still have opportunities and Michael referenced through that as we get better in demand planning.

Speaker #8: Better in SIOP to work some of this down. And we'll continue to invest in inventory when appropriate, especially when it comes to parts and supplies, which Michael referenced.

Alok Maskara: We'll continue to invest in inventory when appropriate, especially when it comes to parts and supplies, which Michael referenced. Emergency replacement, which we have been talking about in the past, to make sure that our fulfillment rate remains at a very high level. We are pleased with the progress on our inventory drawdown and feel like we are on track to meet our commitments to get to a stage where we are back to normal inventory.

Speaker #8: Emergency replacement which we have been talking about in the past. To make sure that our fulfillment r+rate remains at a very high level. But we are pleased with the progress on of our inventory drawdown.

Speaker #8: And feel like we are on track to meet our commitments to get to a stage where we are back to normal inventory.

Patrick Baumann: Thanks. Maybe just to clean up on price mix. Can you give any context on the 9% in Q1? How much came from price versus mix? For the year, the mid-single digit, it sounds like you added a little bit of price to that. How much is coming from price and mix within the full year guide?

Speaker #20: Thanks. And then maybe just to clean up on price mix. Can you give any context on the nine percent in in the first quarter?

Speaker #20: How much came from price versus mix? and then for the year the mid-single digit it sounds like you added a little bit of price to that.

Speaker #20: h+how much is coming from price and mix within the full year guide?

Michael Quenzer: Within Q1, the majority of it was mix. As Alok Maskara mentioned, that mix should really taper off here in Q2. For the balance of the year, it's all price.

Speaker #8: Yeah. Within the first quarter the majority of it was mix. And as Luke mentioned that mix should really taper off here in the second quarter.

Speaker #8: Then for the balance of the year it's all price.

Patrick Baumann: Okay. Thank you.

Speaker #20: Okay. Thank you.

Alok Maskara: Yep.

Speaker #8: Yep.

Operator 3: Thank you. Ladies and gentlemen, thank you for joining us today. Since there are no further questions, this will conclude Lennox's 2026 Q1 Earnings Conference Call. You may disconnect your lines at this time, and have a great day.

Operator: Thank you. Ladies and gentlemen, thank you for joining us today. Since there are no further questions, this will conclude Lennox's 2026 Q1 Earnings Conference Call. You may disconnect your lines at this time, and have a great day.

Speaker #4: Thank you. And ladies and gentlemen thank you for joining us today. Since there are no further questions this will conclude Lennox's twenty twenty-six first quarter earnings conference call.

Q1 2026 Lennox International Inc Earnings Call

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