On Wednesday, Lennox Intl (NYSE:LII) discussed first-quarter financial results during its earnings call. The full transcript is provided below.
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Summary
Lennox International Inc reported Q1 revenue of $1.1 billion, a 6% increase year-over-year, with segment margin at 14.4%, down due to factory under absorption.
The company reaffirmed its full-year adjusted EPS guidance range of $23.50 to $25, despite facing inflationary and tariff-related cost increases.
Key strategic initiatives include the successful launch of new products like heat pumps and water heaters, and the ongoing integration of recent acquisitions to enhance business segments.
Notable operational highlights include strong performance in Building Climate Solutions, driven by emergency replacement and national accounts, while Home Comfort Solutions faced challenges due to weak new home construction.
Management remains optimistic about future growth, emphasizing innovation, customer experience, and disciplined capital allocation as central to the company's strategy.
Full Transcript
OPERATOR
Good morning everyone. Welcome to the Lennox International Inc 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. You may enter the queue to ask a question by pressing star and 1 on your telephone. To exit the queue, press star and 2. As a reminder, this call is being recorded. I would now like to turn the call over to Miss Chelsea Polchian from Linux Investor Relations. Chelsea, please go ahead.
Chelsea Polchian
Thank you Bo. Good morning everyone and thank you for joining us as we share our 2026 first quarter results. Joining me today is CEO Alok Naskara and CFO Michael Quentor. Each will share their prepared remarks before we move to the Q and 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 [email protected] now please turn to slide 3 as I turn the call over to our CEO Alok Naskara.
Alok Naskara
Thank you Chelsea. 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 positive.16 million and adjusted earnings per share for the quarter was $3.35. In home comfort solutions, industry conditions began to stabilize. As expected, 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. 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, Lenox 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. 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 stabilize, 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 SEPCO 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. Now let's turn to Slide 5 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 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 constraint applications. 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.
Michael Quentor (Chief Financial Officer)
Thank you Alok. Good morning everyone. Please turn to Slide 6. 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% growth from our Duradyne and SEPCO acquisitions completed in Q4 2025 contributed 6%, while growth in Building Climate Solutions (BCS) was offset by continued sales declines in HCs. As expected, residential end markets remained down year over year, but the rate of decline improved sequentially versus the fourth quarter of last year as inventory levels normalized. The segment profit was negatively impacted by approximately $15 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 7 in our fourth quarter earnings call, we noted that the first quarter end markets would remain challenging which should show signs of improvement. Overall, Home Comfort Solutions (HCS) revenue declined 10%. MA contributed a positive 2% while organic revenue declined 12% with one step down approximately 10% and two step down approximately 15%. 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 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. Product costs were a $23m headwind driven by materials inflation and under absorption due to lower production levels. Finally, acquisitions contributed approximately $2 million of profit and SGA cost. Actions taken last quarter mostly offset SGA inflation. Please turn to slide 8 for an overview of the Building Climate Solutions segment. Building Climate Solutions (BCS) delivered another exceptionally strong quarter with organic sales up 26%, MA 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 454B refrigerant. Similar to Home Comfort Solutions (HCS), Building Climate Solutions (BCS) experienced absorption pressure as we optimized inventory levels, but manufacturing cost efficiencies offset this impact. MA contributed $7 million of profit growth, offsetting SGA inflation and distribution investments. Please turn to slide 9 for cash flow and capital deployment. Free cash flow in Q1 2026 was a $39 million use of cash and 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 second half of the year. 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 bolt on M and 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 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. As Alok 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 the third quarter. 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. Looking at the segment revenue guidance, ACS is now expected to grow 4% compared to the previous guidance of 2% and Building Climate Solutions (BCS) is now expected to grow approximately 16%. Organic volumes are still expected to decline low single digits net of approximately 1 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 $23.5 to $25 range. Free cash flow remains expected to be $750 million to $850 million driven by inventory normalization and higher profitability. Overall, we feel good about the underlying momentum in the business while recognizing that the 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 Alovik.
Alok Naskara
Thanks Michael. 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. 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. 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. So let's go to Q and a.
OPERATOR
Certainly, Mr. Naskara. 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 2. Additionally, we do ask that you please limit yourself to one question and one follow up will go first this morning to Noah Kay with Oppenheimer.
Noah Kay (Equity Analyst)
Good morning. Thanks for taking the questions. Michael, the SEPCO conversion continues to give us talking points and 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 really layer in until 3Q. How do we think about pricing and should we still think about kind of the previous guidance for first half second half eps splits still applying or is anything shifting given these moving pieces in the outlook?
Michael Quentor (Chief Financial Officer)
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. 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 second half of the year. When you look at the revenue splits, they'll put a little bit more revenue. Obviously not 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.
Noah Kay (Equity Analyst)
Okay, and as a follow up you know you called out the 15 million under absorption impacting this quarter. You know, any lingering under absorption headwinds to think about here for two Q or are we kind of mostly caught up now that restocking is underway and you haven't increased your inventories too much?
Michael Quentor (Chief Financial Officer)
I think, as you saw within our results in the first quarter, we continue to not grow inventory as much as we did previous years. So we had some absorption headwinds. We reduced our productions about 30% in the first quarter. So there'll be a little bit of absorption that will go into the second quarter. But by the end of the second quarter, the inventory normalization will have occurred.
Noah Kay (Equity Analyst)
Perfect. I'll turn it over.
Ryan Merkel (Equity Analyst)
Thank you. We'll go next now to Ryan Merkel with William Blair. Hey everyone, Good morning. Thanks for the question I wanted to ask first on HCS, the revenue outlook for 2Q. 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'm just curious if April has been a little bit, little bit better.
Michael Quentor (Chief Financial Officer)
Hey, Ryan. Good morning. You know, it's very hard to call quarters, especially given some of the impact of weather that is still very unknown. So 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 going to mostly fall in the second half.
Ryan Merkel (Equity Analyst)
Okay, got it. 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?
Michael Quentor (Chief Financial Officer)
You should have asked conservative a CFO as I have Brian. 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. I mean, there's just so much more to go given the. There's just a shorter season. So I won't read too much into Q1 on BCS. First of all, it's congratulations to the team. I mean, the execution out there is just superb. 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 position all over us, is paying off meaningfully. And more importantly, the fact that now Stuttgart is more stabilized is also helping us win back national account and gain additional volume from that. And don't forget the 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. So just a good success story and something that we think we're going to start seeing in HCS as well as our markets stabilize and the end markets are not such a big drag on us. So congratulations to the BCS team. Nothing unusual, just strong execution on a very well defined strategy.
Ryan Merkel (Equity Analyst)
All right, that's great. I'll pass it on.
OPERATOR
Thank you. We go next now to Julian Mitchell with Barclays.
Julian Mitchell (Equity Analyst)
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. How quickly do those margins kind of climb up out of that hole?
Michael Quentor (Chief Financial Officer)
So I'll speak to the overall margin guys 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. But you're correct, within bcs, organically we expect margins to be up there. Within hcs, organically we expect them to be down. M and A will have a slight drag overall in the enterprise, 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 the year for HDS to see that challenge behind us. Yeah, and 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. We were able to offset inflation and volume with pricing and efficiency, but it's 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. Thanks very much.
Julian Mitchell (Equity Analyst)
And then my follow up I suppose was around. So the cost inflation numbers moved 2.5% to 5%. Is that right? That that's roughly kind of a hundred million or so extra gross cost headwinds. And then I suppose, do you see any competitive implications from that cost Base movement and sort of tied to that. How is the price elasticity of volume playing out in hcs at present, please?
Michael Quentor (Chief Financial Officer)
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 drawback to us. The 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. Some will bring metal components from overseas, some bring finished products from overseas. So 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. But we remain very sensitive to those competitive dynamics and we'll continue adjusting those as we go along. Sorry, Michael. Yeah, I'll just add, I mean if you looked at the spot market since our last guidance, aluminum is up 25%, steel 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. But overall these input costs are up significantly since our last guidance.
Julian Mitchell (Equity Analyst)
That's helpful, thank you.
OPERATOR
We'll go next now to Chris Snyder of Morgan Stanley.
Chris Snyder (Equity Analyst)
Thank you. I also wanted to follow up on the price cost drivers into the back half. 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. So just maybe if you could provide a little bit more, you know, nuance around that. 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.
Michael Quentor (Chief Financial Officer)
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 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, but essentially given all the inflation that we just talked about and the additional pricing actions we have taken this week, that just gives us better drop through because it's just going to stick better. Going back to each of the inflation pieces that Michael just talked about, Michael, specific to the 90% within that, there's really two guide points. First, we have price that has a incremental 100% because we have costs on the other side of our guidance and then mix normally what happens there is there's an incremental somewhere in the 50ish 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 mix because the mix is generally behind us now from the carryover the regulatory change last year.
Chris Snyder (Equity Analyst)
Thank you, I appreciate that. And then if I could just follow up on the HCS revenue trajectory from here. It seems like on Mymass 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. Correct me if you guys disagree with that. And I guess is that a function of, you know, the channels restocking, demand's getting better, you guys are taking share more price, you know, any, any color there would be helpful. Thank you.
Michael Quentor (Chief Financial Officer)
Let me start with the second half. I mean the comps get much easier in the second half. I mean that's where we say massive declines last year. Michael did talk earlier about pricing will have more of an impACSt in the second half. 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. 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 the transition and buying a lot of R-410A inventory. So large part of the answer is just comps what happened last year and then the pricing impACSt. Michael, what would you add to that? Remember, Q2 had the canister issue last year. That's significantly within that quarter with the canister shortage issue.
Chris Snyder (Equity Analyst)
Thank you, I appreciate that.
OPERATOR
Thank you. We'll go next now to Jeff Sprague with Vertical Research.
Jeff Sprague (Equity Analyst)
Hey, thanks. Good morning. Just back to the inflation. Yeah, Michael, that litany you went through, aluminum, steel, copper, etc. We've been watching that ourselves. Obviously how would you parse kind of the inflation headwind between the tariff changes and just kind of the general inflation going on. And then obviously you know, there's an annualized impact on what, you know, what
Michael Quentor (Chief Financial Officer)
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. So I'll speak to the input costs. We do have hedging programs and fixed contracts for a lot of that as I mentioned. So we're about on average 70ish percent hedged on that. But there is a piece of our overall inflation guide for that remaining 30%. And then the balance is mostly tariffs 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. 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. Yeah. And I'm pretty optimistic on our ability, 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 U.S. steel in Mexico moves. They just take a lot of time. So we are working through all of that to continue mitigating the impact.
Jeff Sprague (Equity Analyst)
Thanks for that.
Michael Quentor (Chief Financial Officer)
And then just on the channel behavior. Right. It's kind of always interesting how we can quickly move from destock to restock. Do you sense in the channel that there was sort of pre buy in front of inflation or there's been some early heat in some places. Maybe a realization that things got a little bit too lean. Just kind of the behavior animal spirits in the channel right now. A little more color on what you're seeing. 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. So there's just absolutely no opportunity or knowledge within a channel to do any pre buy around it. We think the restock is pretty normal. I mean we do like the word re versus D when it comes to stock. 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. I'm not concerned, but remember, we haven't had 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. So we think that inventory levels are reaching normal for the channel and for us. 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.
Jeff Sprague (Equity Analyst)
Great, thank you.
OPERATOR
We'll go next now to Amit Mehrotra at ubs.
Amit Mehrotra (Equity Analyst)
Thanks a lot. Good morning everybody. I guess I just wanted to come back on the section 232 changes from my feet. 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 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. It's actually in the scope of the new section 232, what the net effect is in terms of 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. 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 just so we get a little bit of a flavor of what's going on.
Alok Naskara
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. I think there's a 7am 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, I'm happy to join. The scope is pretty wide and also as time progresses, 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. But from our perspective, this is not new. The tiny thing took us by a little surprise last year when we had titles by the country. This year we are getting some refunds, we are paying some more. What we have done is get ourselves and our team used to working through these uncertainties, remaining very adaptable, very flexible, moving products, raw material all of needed and working with our vendors to share the pain. 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 metal is impacted. So clearly we are not the only one. And 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. So can't go into details on that. Amit, happy to have offline conversation but the teams are very qualified, very capable and we're working through it.
Amit Mehrotra (Equity Analyst)
Okay, I appreciate that Alok. And then maybe just a follow up on your comment about replace versus repair sort of stabilizing and 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 and 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.
Alok Naskara
Yes. Remember first of all, in our One Step channel we are very close to thousands of dealers, right? Maybe ten thousand direct customers. And we have multiple conversations with them every hour, every day. 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. 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. They were short on canister, they were not fully trained on R-454B. 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 1012 volt system versus look for replacement, which gives you better efficiency, better warranty, better financing. 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.
Amit Mehrotra (Equity Analyst)
Right, that makes good sense. Thank you very much Alok, appreciate it.
OPERATOR
We'll go next now to Tommy Mohl with Stevens.
Tommy Mohl (Equity Analyst)
Good morning and thank you for taking my questions. Good morning, Tommy. 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, 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, but any context you can share would be helpful, thanks.
Alok Naskara
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. 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. But some of it's also just confident. Back in the channel where folks are 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 hard start to the summer. So yes, sequentially things have improved.
Tommy Mohl (Equity Analyst)
And then 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.
Alok Naskara
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, but we 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 Lenox dealers to to get back in the game, support us and themselves and start using and getting back into the rooftop business with us. 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 two order factory dedicated to national Account. 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 so early innings in emergency replacement. But also pleased with the momentum in national account. The two words we were trying to use. I'm really pleased you said that is momentum in BCS and stabilization in hcs. Those are our buzzwords for the quarter as we were practicing. And I'll just add to that.
Michael Quentor (Chief Financial Officer)
The bundling of the service offering with the national accounts continues to perform very well.
Tommy Mohl (Equity Analyst)
Thank you both. I'll turn it back.
OPERATOR
Thank you. We'll go next now to Jeff Hammond with KeyBanc Capital Markets.
Jeff Hammond (Equity Analyst)
Hey, good morning, guys. Hi, Jeff. Hey. Just going. I mean it seems like the lean is more. Your inflation impact is 232 and you mentioned a couple times like you think everyone has the same issues. But I'm just wondering. It seems like there's one OEM that does not make product in Mexico. And just what do you think happens if most people move on price but not everybody moves on price?
Michael Quentor (Chief Financial Officer)
Yeah, there are a bunch of game theory scenarios, Jeff, which is hard to get into this. But remember 232, derivative tariffs are not about products made in Mexico. They are 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 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 so nobody's immune to it. I think 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. 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.
Jeff Hammond (Equity Analyst)
Okay, great. And then just another one of BCS. I mean it sounds, I mean the 1Q numbers were pretty eye popping. I understand easy comp and just all the comments you made in the previous question were pretty positive but it seems like the raise is pretty small. So maybe were there any aberrations in one Q or is there any reason to temper maybe the enthusiasm on emergency replacement national comp momentum? No, besides what you already said last year we got beat down because they were bad so we had easier comps in Q1. The comps get tougher and we go along 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. Okay, thanks a lot.
OPERATOR
We go next now to Nicole Deblace with Deutsche Bank.
Nicole Deblace (Equity Analyst)
Yeah, thanks. Good morning guys. Morning Nicole. Maybe just on the BCS business, you guys obviously have a lot going on with respect to various drivers of market share. G hard to see what's happening with the underlying commercial unitary market. So Alok, I'd be curious how you'd frame the performance of the overall market and is it still down overall and Linux is just outperforming that much or have you seen any improvement at the same time?
Alok Naskara
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 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. 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. I mean from our perspective we continue to have significant opportunity to regain national account and enter emergency replacement in a meaningful way. But at this stage based on all the data we look at is we are pleased with the fact that we outperforming the market.
Nicole Deblace (Equity Analyst)
Okay, got it. Thanks Alok. 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 in the second quarter. Can we just put a finer point on that relative to the 50 million I think you spoke to in 1Q, what are you expecting for 2Q?
Michael Quentor (Chief Financial Officer)
Yeah, it's 15 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. 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. So.
Nicole Deblace (Equity Analyst)
Got it. Thank you so much. I'll pass it on.
OPERATOR
Thank you. We go next now to Steven Volkman with Jeffries.
Steven Volkman (Equity Analyst)
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.
Michael Quentor (Chief Financial Officer)
Yeah. So ERP first let me take away any fear. We're not doing any massive big ERP changes. We love 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. 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 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. 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 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 HGA side. And you saw we did really good on the cost control on sga. 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, sunsetting old IT systems. But as we upgrade our tech stack and we sunset Legacy 1, there's just a little bit of bump along the curve. Right. 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 outweigh the cost of all the investments we are making. So very pleased with the progress there. Great.
Steven Volkman (Equity Analyst)
Okay, thank you for that. And then alok I'm interested both Samsung and Ariston 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'm just curious if you've changed the way you're thinking about those opportunities given the realities of the world today.
Alok Naskara
So 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 just launched in March. But in Q1 and March on both those products, the fact that these are joined 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. So we appreciate the partnership spirit with both those companies, but 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. So now we are moving with the industry and have no concerns around the structure.
Steven Volkman (Equity Analyst)
Thank you guys.
OPERATOR
I'll pass it on.
Nigel Koh
We'll go next now to Nigel Koh with Wolf Research.
Alok Naskara
Thanks. Good morning. By the way, look, I'm down for the 7am crisis call so I'll ask Chelsea to send me the details of that. Could be interesting call,
Nigel Koh
maybe we'll start charging you guys and that could be part of our tariff mitigation effort. It could be. 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 the crooked guy look, but I'll let you get away with that 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. Yeah, like the first innings of the first day. Something like that. That's right.
Alok Naskara
So sorry, I do want to go back to the tariffs. You know, roughly where are we today in terms of U.S. production of residential like commercial units? And are you planning to redomesticate production? I'm not saying next week or next month, but over time. 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 wondering what sort of non price mitigations you're competing right now. So if you're playing a T20 cricket game, we are in the third over of the first party. That's early in that thought process. First of all, we need things to stabilize before we make any big decisions or changes. And things seems to be moving around quite a bit. Obviously the USMCA agreement is coming up for renewal and we'll see where that moves. But currently we are continuing to fine tune change. Things change, the source of metal change, bunch of smaller decisions. But before we make any large decisions, we do want to see some stabilization in policy and more of a consistent approach versus seem like the approach is still evolving. So no major changes in the pipeline in terms of massive reshoring. 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. And we have one large one for residential in Mexico. So we have plenty of flexibility in our network and we will continue making changes. 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're doing and just mitigate the impact one product at a time, one screw at a time and one sheet metal part at a time.
Nigel Koh
Okay, it doesn't sound like you want to give me the number on the percentages of production domestic, but in case you, in case you do, just thought I'd remind you there. Going back to the sell through the -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.
Michael Quentor (Chief Financial Officer)
Yeah, 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. Down above 30% of volumes in the channel not necessarily all just customers moving to other competitors. It's a combination of just weak new construction and that. But we definitely saw that channel way on the overall one step volume growth. Yeah. And that share loss, which is what it'll show in print, is going to negatively impact us all through the year. And that's built into Michael's overall guidance. As we said, two steps going to do better than one step. From a profitability perspective, that's going to work in our favor because the margins were negative to zero of those businesses that we have lost. Okay, thanks guys.
OPERATOR
We'll go next now to Joe o' Day with Wells Fargo.
Joe o' Day
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 two to four, but presumably where your pricing is on a narrower scope of products. Just looking for any quantification of the recent price increases. In addition to that perspective on the dollar effect. When we think about this, if consumers today are paying 10k for a unit, 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.
Michael Quentor (Chief Financial Officer)
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. 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. So there's going to be announcement number, there's going to be a stick rate number as there is normal. But what we are confident is we'll offset the increased cost inflation through those actions is the way I would look at it. Then 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 since most is the contractor, labor and margin still. Yeah, I think 40% includes equipment, parts, supplies and in some cases it's less than 30% as well depending on the install at time. So I don't think it changes the consumer price elasticity in any meaningful way. We are sensitive to the market demand supply agreement, but remain convinced that equipment pricing is the least of the variable in that equation.
Joe o' Day
Right? Nope, that's what I was getting at, thank you. And then just in terms of seasonality in HCs and margins. I think the past couple of years we've seen 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. But just looking for whether you think the past couple of years are a reasonable benchmark for what you think you can achieve as you get that seasonal step up in Q2 of this year.
Michael Quentor (Chief Financial Officer)
Yeah, I think the main driver is going to be the volume recovery within acs. Obviously we have some weird comps last year, but what we're doing, building within the guides that we expect sequential year over year improvement, Q2 versus Q1, Q3 versus Q2 and Q4 versus Q3. So if 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 second half 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. 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.
Joe o' Day
Got it. Okay, thank you.
OPERATOR
We'll go next now to Dean Dray with RBC Capital Markets.
Dean Dray (Equity Analyst)
Thank you. Good morning, everyone. Morning. Hey, I appreciate the update on the new products on slide 4. Can you just remind us you track a new product vitality index or the contribution from the new products and then just kind of related. I believe you gave an indirect update in Steve's question on Duckless, but anything on the Samsung JV would be helpful too.
Alok Naskara
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. If it didn't exclude that clearly 80, 90% vitality. So. But excluding the refrigerant change and search changes, we do remain quite pleased with our vitality number and I think the exact number is like 48 or something right now, but it's always in the 45 to 50 range. And we are very pleased with heat pump introductions, indoor air quality introductions, the control changes. You probably saw a lot more of that during Prakash's presentation at the Investor Day. So we remain quite pleased on where you're coming down on the Samsung Joint venture.
Dean Dray (Equity Analyst)
We talked last year that the meaningful impact is going to be this year because it takes almost a year for us to kind of get through the channel, 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, especially as we look at everybody's impacted the same way from tariff.
OPERATOR
The feedback from the channel and the
Patrick Bauman (Equity Analyst)
consumer has been very good. These are high quality products with much better controls, much quieter than some of the competitive products. And the contractors like the fact that the same truck that's going to deliver in the unitree product also delivers this. The same rebate program can be added. So we are pleased with the direction it's going and feel there's continue to be a lot of upside as we work through the rest of the year. 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 resi h Vac manufacturers 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. But just are you able to comment on it?
Michael Quentor (Chief Financial Officer)
Thanks. Well, thanks to you and others who had experts call and their own analysis. I really want to say a lot
Patrick Bauman (Equity Analyst)
about this, Dean, and maybe we'll have to wait for some other occasion because at this point I have to read a prepared statement given to me by my lawyers. But I'm glad you asked.
Michael Quentor (Chief Financial Officer)
Our response is the matter is pending legal complaint, the lawsuit contains only plaintiff allegations and there has been no finding of wrongdoing. We dispute the accuracy of the allegation and will actively and vigorously defend our
Patrick Bauman (Equity Analyst)
position through proper legal channels. Again, there's a lot more I want to say but I'm currently constrained because of the lawsuit saying only the prepared legal portion of this. That's great.
OPERATOR
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.
D
It made my general counsel's day that I read the statement, sir. Appreciate it.
A
Thank you. We'll go next now to Patrick Bauman with JPMorgan.
H
Hi, good morning. Lots being covered. Maybe just wanted to tie the inventory being normal comment with 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 residential units within that bucket either looking year over year or kind of versus, you know, current sales levels relative to history Any, any context around, you know, where you are on that front?
C
Patrick. So typically when we go from Q4 to Q1 like this, last year we
D
built about $210 million worth of inventory. This year we built $60 million. So think of that as 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 starting season. When we ended the year last year we talked about we had 100, $150 million more inventory that we needed. So 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 siob 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. Emergency replacement, which we have been talking about in the past to make sure that our fulfillment rate remains at a very high level. But 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.
H
Thanks. And then maybe just a cleanup on price mix. Can you give any Context on the 9% in the first quarter? 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. How much is coming from price and mix within the full year guide?
E
Within the first quarter the majority of it was mix. As Luke mentioned, that mix should really taper off here in the second quarter. Then for the balance of the year it's all price.
H
Okay, thank you,
A
thank you. And ladies and gentlemen, thank you for joining us today. Since there are no further questions, this will conclude Linux's 2026 first quarter earnings conference call. You may disconnect your lines at this time and have a great day.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.
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