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DATE

Wednesday, April 29, 2026 at 9:30 a.m. ET

CALL PARTICIPANTS

  • Chief Executive Officer — Alok Maskara
  • Chief Financial Officer — Michael P. Quenzer
  • Operator

TAKEAWAYS

  • Revenue -- $1.1 billion, reflecting a 6% increase year over year as channel conditions normalized and recent acquisitions contributed to growth.
  • Segment Margin -- 14.4%, declining 130 basis points due to $50 million of factory under-absorption as production was reduced by about 30% sequentially.
  • Adjusted EPS -- $3.35, aligning with management’s full-year reaffirmed guidance range of $23.5 to $25.
  • Operating Cash Flow -- $16 million, with free cash flow usage improved to $39 million versus $61 million in the prior year’s quarter, aided by a $150 million lower inventory build.
  • Home Comfort Solutions (HCS) Revenue -- Decreased 10%, with acquisitions contributing 2% growth and organic revenue declining 12% (organic volumes down 21% versus a 32% decline in the previous year).
  • HCS Channel Performance -- One-step channel revenue declined about 10% due to new construction weakness, and two-step channel revenue fell 5% as distributor confidence and restocking moderately improved.
  • Building Climate Solutions (BCS) Performance -- Organic sales increased 26%, M&A growth added 12%, and profit margins expanded by 300 basis points; sales volumes up 17%, driven by national accounts and emergency replacement.
  • Price and Mix Impact -- BCS achieved 9% revenue growth from price and mix, with price as the key lever in the first quarter and mix expected to taper off in following quarters.
  • Acquisition Contribution -- DuroDyne and Subco acquisitions provided a combined $9 million in profit growth, with $2 million to HCS and $7 million to BCS, offsetting SG&A inflation and investment.
  • Cost Inflation -- Material cost pressures and tariffs drove inflation projections from 2% up to 5%, with aluminum, steel, and diesel up 20%-50% since last guidance, and hedging in place for about 70% of these inputs.
  • 2026 Revenue Guidance -- Raised to approximately 8% growth, compared to prior guidance of 6%-7%, on higher anticipated price and mix, and recent price actions.
  • HCS & BCS Updated Guidance -- HCS revenue growth expected at 4% (up from 2%); BCS now projected to grow approximately 16% for the year.
  • Free Cash Flow Outlook -- Maintained at $750 million to $850 million, reflecting expected inventory normalization and higher profitability.
  • Capital Expenditure Plan -- $250 million focused on innovation, digital and AI investments, ERP modernization, distribution network, and training centers.
  • Product and Channel Developments -- Recent launches in heat pump technology, water heaters (with Ariston), and compact air handlers broaden the portfolio and address new market segments, while service bundling and dealer engagement underpin BCS gains.

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RISKS

  • Michael P. Quenzer said, "When we talked in January, we expected a slight increase in the enterprise margin. Now, with the increase to revenue and cost, we expect a slight decline in the margin," due to higher-than-expected input cost inflation and continued absorption pressure.
  • Material cost inflation—including aluminum, steel, copper, and fuel—increased substantially, with Michael P. Quenzer noting, "aluminum is up about 25%, steel is up 20% to 25%, diesel is up 50%, and copper is up 10% to 15%. We have."
  • Factory under-absorption remained a headwind, with $15 million impacting Q1 and a small headwind anticipated in Q2, as inventory normalization lags production recovery.
  • Residential new construction volumes were down above 30% in HCS, and "That share loss will negatively impact us through the year and is baked into guidance," per Alok Maskara.

SUMMARY

Lennox International (LII +4.46%) delivered 6% revenue growth to $1.1 billion, marking a return to expansion after two quarters of year-over-year declines. Management raised full-year revenue guidance to approximately 8%, driven by pricing actions, resilient execution in BCS, and acquisition contributions. Significant cost inflation, primarily from commodities and recent Section 232 tariffs, led to management now expecting a slight decline in enterprise margin for the year. Inventory normalization progressed, with a $150 million lower build versus last year, supporting operating cash flow improvements. Capital deployment remained focused on innovation, targeted digital upgrades, and AI investments to drive productivity and pricing benefits.

  • Alok Maskara stated, "that under-absorption continues to become less of an issue as we go into Q2 and the second half," positioning the margin for recovery as volumes improve.
  • Emergency replacement initiatives and national accounts volume gains propelled BCS, while service bundling and expanded regional reach supported ongoing momentum.
  • Recent product introductions, including the Stratagos rooftop heat pump and water heaters via the Ariston joint venture, expand Lennox International's market and reinforce strategic differentiation.
  • HCS organic volume decline improved from 32% the previous year to 21% in the first quarter, suggesting sequential stabilization even as new construction remains a drag.
  • Management reiterated commitment to margin resiliency through pricing, cost mitigation strategies, and agile supply chain and manufacturing adjustments in response to dynamic tariff and input cost developments.

INDUSTRY GLOSSARY

  • One-step channel: Direct sales to contractors/installers rather than through distribution.
  • Two-step channel: Sales made to distributors, which then sell to contractors or end customers.
  • Under-absorption: A cost accounting term describing when fixed manufacturing costs cannot be fully allocated to production units due to reduced output, negatively impacting margins.
  • Section 232 tariffs: U.S. trade measures imposing duties on certain metal imports based on national security considerations, impacting costs of aluminum and steel products/components.
  • R454B: A next-generation refrigerant with lower global warming potential, subject to recent product transitions in the HVAC industry.
  • National accounts: Large, typically multi-site corporate customers purchasing HVACR equipment and service contracts directly from manufacturers.
  • Vitality index: Share of sales derived from products introduced in the past few years, measuring innovation effectiveness.
  • SIOP: Sales, inventory, and operations planning; a demand and fulfillment process to optimize supply chain and inventory outcomes.
  • Absorption pressure: Margin headwind from manufacturing under-absorption due to lower production relative to installed capacity.

Full Conference Call Transcript

Alok Maskara: 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 were $3.35.

In Home Comfort Solutions, industry conditions began to stabilize as expected. One-step results continue to be impacted by a weak new home construction market, 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 $23.5 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, Lennox International Inc.-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 operations, 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 Subco 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 Supply, 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 International Inc.

Our recently launched products further elevate our competitive position to meet the evolving needs of our customers, particularly around efficiency, backward compatibility, and ease of installation. In commercial, our new Stratagos 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-constrained applications.

We are also extending our presence within the home through high-efficiency Lennox International Inc. 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 International Inc. home control platform. Together, these innovations expand our addressable market, increase share of wallet, and reinforce Lennox International Inc.'s long-term competitive position. With that, I will turn it over to Michael to review our financials.

Michael P. Quenzer: 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 DuroDyne and Subco acquisitions completed in Q4 2025 contributed 6%, while growth in 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 $50 million of manufacturing cost 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, HCS revenue declined 10%. M&A contributed a positive 2% while organic revenue declined 12%, with one-step down approximately 10% and two-step down approximately 5%. Organic sales volumes declined 21%, but this represented a meaningful improvement from a 32% decline in 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 $23 million headwind, driven by materials inflation and under-absorption due to lower production levels. 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 R454B 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. Please turn to Slide 9 for cash flow and capital deployment. Free cash flow in Q1 2026 was a $39 million use of cash, an improvement versus a $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&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. Please turn 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 International Inc. 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, HCS is now expected to grow 4% compared to the previous guidance of 2%, and BCS is now expected to grow approximately 16%. 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.

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 external environment remains dynamic and will require continuous focus and execution. With that, please turn to Slide 11, and I will hand it back to Alok.

Alok Maskara: Thanks, Michael. As we close, I want to take the opportunity to share why, four years in, I am still genuinely excited about Lennox International Inc. We operate in an attractive growth industry with an enduring place in the market. However, what really sets Lennox International Inc. 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 continue 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 International Inc. 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 will be happy to answer your questions now. We will now open the call for questions.

Operator: Certainly. Ladies and gentlemen, if you do have any questions, please press 1. As a reminder, you can remove yourself from the queue by pressing 2. Additionally, we ask that you please limit yourself to one question and one follow-up. We will go first this morning to Noah Kaye with Oppenheimer.

Noah Kaye: 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, how to think about the timing difference in cost increases versus price realization. You mentioned the incremental costs; many of them will not really layer in until the third quarter. How should we think about pricing? And should we still think about the previous guidance for first-half/second-half EPS splits as still applying, or is anything shifting given these moving pieces in the outlook?

Michael P. Quenzer: Yes. Right now, for guidance, most of the cost impact and the price impact will fall within the second half. We announced a price increase earlier this week. It will take some time before we start to see the full impact, maybe starting 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, that will put a little bit more revenue in the second half than the first half. But overall, profitability should still be about the same by quarters as we reflected last year.

Noah Kaye: As a follow-up, you called out the $15 million under-absorption impacting this quarter. Any lingering under-absorption headwind to think about for 2Q, or are we mostly caught up now that restocking is underway and you have not increased your inventories too much?

Michael P. Quenzer: As you saw within our results in the first quarter, we continued to not grow inventory as much as we did in previous years, so we had some absorption headwinds. We reduced our production about 30% in the first quarter. There will 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.

Operator: Thank you. We will go next to Ryan Merkel with William Blair.

Ryan Merkel: 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 are seeing a bit of stabilization. Has April been a little bit better?

Alok Maskara: Hey, Ryan. Good morning. It is pretty hard to call the quarter, especially given some of the impact of weather that is still unknown. I do not 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. 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: Got it. Thanks. As my follow-up, BCS was really strong. You mentioned good execution. Anything else you would call out there, and why not raise the guidance a little bit more there?

Alok Maskara: You should expect a conservative CFO as I have, Ryan, so I do listen. On the guidance piece, it is such a seasonal business. Weather makes an impact, and I think based on everything we know, Q1 is not a quarter to raise guidance anyway. There is just so much more to go given it is a shorter season, so I would not read too much into Q1. On BCS, first of all, congratulations to the team. The execution 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.

The emergency replacement initiative, now that we have inventory positioned all over the U.S., is paying off meaningfully. More importantly, the fact that now Stuttgart is more stabilized is also helping us win back national accounts and gain additional volume from that. Do not 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. It is a good success story and something that we think we are going to 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 well-defined strategy.

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

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 have a flattish operating margin dialed in at the total company for the year? And then within that, you have HCS down and BCS up? How quickly do HCS margins climb out of that hole?

Michael P. Quenzer: I will speak to the overall margin guide. When we talked in January, we expected a slight increase in the enterprise margin. Now, with the increase to revenue and cost, we expect a slight decline in the margin. You are correct. Within BCS, organically, we expect margins to be up. Within HCS, organically, we expect them to be down. M&A will have a slight drag overall on 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 HCS to see that challenge behind us.

Alok Maskara: I think one thing as we dug into the results in Q1 is that the decline in margin, which we do not love at all, is 100% driven by factory under-absorption. We were able to offset inflation with price and efficiency, but it is the under-absorption. As that under-absorption continues to become less of an issue as we go into Q2 and the second half, we are very confident in the margin going back to normal.

Julian Mitchell: Thanks very much. My follow-up is around the cost inflation moving to 5%. Is that roughly $100 million or so of extra gross cost headwind? Do you see any competitive implications from that cost base movement? And tied to that, how is price elasticity of volume playing out in HCS at present?

Alok Maskara: Your numbers are roughly right, as usual, Julian. I do not see any competitive dynamic that disadvantages us. Inflation in oil and components is hitting all of us. The Section 232 derivative tariff impact hits people differently depending on whether they bring metal components or finished products from overseas, but it does not put us at a competitive disadvantage overall. We remain very sensitive to those dynamics and will continue adjusting as we go along.

Michael P. Quenzer: I will add that, since our last guidance, aluminum is up about 25%, steel is up 20% to 25%, diesel is up 50%, and copper is up 10% to 15%. We have hedging programs and fixed contracts that delay some of that, but overall these input costs are up significantly since our last guidance.

Operator: We will go next now to Chris Snyder of Morgan Stanley.

Chris Snyder: Thank you. I wanted to follow up on the price/cost drivers into the back half. You are still calling for mid-single-digit price, but it sounds like more is coming. Can you provide a little more nuance around that? Also, why is the incremental on the price action getting better? I think now it is expected to be 90% versus prior 75%. Thank you.

Alok Maskara: There is a bit of rounding. Mid-single digit is still a broad range. Given all the inflation we just talked about and the additional pricing actions we have taken this week, that gives us better drop-through because it is going to stick better.

Michael P. Quenzer: Specific to the 90%, there are 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 has an incremental somewhere in the 50%-ish range. When you blend the two together, you get a higher drop-through because there is now more price than mix. The mix is generally behind us now from the carryover from the regulatory change last year.

Chris Snyder: Thank you. As a follow-up on the HCS revenue trajectory from here, to get to the full-year guide, the build into Q2 and Q3 off the Q1 level seems steeper than typical on my math. Is that a function of channels restocking, demand getting better, share, more price?

Alok Maskara: In the second half, the comps get much easier. That is where we saw massive declines last year. Pricing will have more of an impact in the second half. In Q2, mix will still benefit us because we had not completed the R454B conversion all the way by Q2 last year. Q1 last year mix was very tough because a lot of people were stocking up in preparation for the transition and buying a lot of R410A inventory. So part of the answer is just comps and then the pricing impact.

Michael P. Quenzer: Remember, Q2 last year had the canister shortage issue that significantly impacted that quarter.

Operator: We will go next now to Jeff Sprague with Vertical Research.

Jeff Sprague: Hey. Thanks. Good morning. Back to inflation, Michael, you went through aluminum, steel, copper, etc. How would you parse the inflation headwind between the tariff changes and general inflation? And given the half-year dynamics, would the price you are putting in place fully cover you for carryover headwind impacts into 2027?

Michael P. Quenzer: We have hedging programs and fixed contracts. On average, we are about 70% hedged. There is a piece of our overall inflation guide for the remaining 30%, and then the balance is mostly tariffs. On the annualized impact, we are going to continue to find ways to mitigate. We still have a lot of levers that take time on supply chain and manufacturing processes to continue to mitigate that cost. Our goal is to keep focusing on cost mitigation; some efforts take a little longer.

Alok Maskara: I am optimistic on our ability, just like we have done before, to reduce the mitigated impact of tariffs. Supply chain moves, manufacturing moves, product SKU moves, buying U.S. steel in Mexico moves—they just take time. We are working through all of that.

Jeff Sprague: On channel behavior, do you sense there was pre-buy in front of inflation, or was it just a realization that inventories got too lean?

Alok Maskara: We have no indication of any pre-buy ahead of price increases or inflation. The April tariff announcements took most of us by surprise. We think the restock is pretty normal. Folks are looking at the upcoming summer season, and nobody wants to be short. Inventory levels are pretty normal. We have not had a normal year in years; this will be the first time without a refrigerant or canister transition complicating things. We think inventory levels are reaching normal for the channel and for us.

Michael P. Quenzer: We continue to look at our warranty registration data that suggests inventory in the channel continues to be normal, especially on the one-step side.

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

Amit Mehrotra: Thanks a lot. Good morning, everybody. I wanted to come back on the Section 232 changes. There are a lot of moving parts—Mexico, cross-border scope, steel content versus total value, component flows. Can you pull back the curtain a bit on scope and net effects?

Alok Maskara: The scope is pretty wide. We have a lot of tariff experts in our company and are running daily crisis-type calls to work through it. The primary impacts are understood once you align on product classifications, but secondary impacts are also emerging. This is not new—we had tariff-by-country surprises last year; this year we are getting some refunds and paying more elsewhere. We have trained ourselves to work through these uncertainties, remaining adaptable and flexible, moving products and raw materials as needed, and working with vendors to share the pain. Every manufacturer who deals with metal is impacted. We are dealing with it with appropriate resiliency and determination, while recognizing things could change again quickly.

Happy to have offline conversations on the details.

Amit Mehrotra: Follow-up on repair versus replacement stabilizing. Are you seeing consumers move back into replacement, or is repair just not getting worse?

Alok Maskara: We are very close to thousands of users in the one-step channel. The sentiment from contractors is that it is not getting worse, and some deferred replacements from last year are now coming back as replacements. Last year we heard more hesitancy to recommend replacement versus repair due to canister shortages and limited R454B training. Now contractors are more confident, and consumers are returning to economic decisions—replacing 10–12-year systems to get better efficiency, warranty, and financing. Definitely stable with some green shoots.

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

Tommy Moll: Morning, and thank you for taking my questions. On the one-step channel, there are some green shoots. How have volumes progressed year-to-date? It seems like the year started slow, but March and April started to pick up.

Alok Maskara: Things have improved sequentially month over month since the beginning of the year. Some of it is driven by easier comps versus last year’s holding patterns ahead of regulations, and some is confidence coming back in the channel. Two-step is eager not to be left behind if we have a hot start to the summer.

Tommy Moll: On BCS, you mentioned emergency replacement momentum. What inning are we in, and how are you attacking the market?

Alok Maskara: We are still early—call it the second inning of a nine-inning game. Last year we were not fully covered in the U.S.; we are still not fully covered, but we now serve most metro areas, launching each region one at a time. A positive surprise has been our Lennox International Inc. dealers getting back into rooftop with us. Another benefit is shifting most emergency replacement volume away from Stuttgart, making Stuttgart more of a configured-to-order factory dedicated to national accounts. That has restored confidence in national accounts with shorter lead times and more custom products. Early innings in emergency replacement, with good momentum in national accounts.

Michael P. Quenzer: I will add that bundling service with national accounts continues to perform very well.

Operator: We will go next now to Jeff Hammond with KeyBanc Capital Markets.

Jeffrey David Hammond: Hey. Good morning, guys. It seems like your inflation impact is more Section 232. You mentioned everyone has the same issues, but what happens if most people move on price and not everybody does?

Alok Maskara: There are many game-theory scenarios. Section 232 derivative tariffs are about metal content thresholds on imports from outside the U.S., regardless of where they are made, so it impacts a broader group than just Mexico-made products. Also, secondary impacts—higher steel and aluminum costs—affect everyone. We are confident we have taken thoughtful price actions to avoid share disadvantages and are sharing the pain with vendors and customers.

Jeffrey David Hammond: On BCS, 1Q numbers were strong. The raise seems small. Any aberrations in 1Q or reasons to temper enthusiasm on emergency replacement or national accounts?

Alok Maskara: Besides easier comps in Q1, there is nothing to temper the outlook. The comps get tougher as the year progresses, but nothing beyond that.

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

Nicole DeBlase: Maybe on the BCS business: with various drivers of market share gain, it is hard to see the underlying commercial unitary market. Is the overall market still down and Lennox International Inc. is outperforming, or have you seen any improvement?

Alok Maskara: The overall market remains challenged. The latest AHRI data shows declines moderating, but the market is still down. We are clearly outperforming, and not just on unitary—services and full lifecycle offerings are contributing. Our market share remains small in the commercial space, leaving significant opportunity.

Nicole DeBlase: A quick follow-up for Michael. You expect under-absorption to continue but at a lesser rate in Q2. Relative to the $15 million in 1Q, what are you expecting for 2Q?

Michael P. Quenzer: It was $15 million in Q1. In Q2, it will not be zero; there will be a small headwind. By the end of Q2, that should be behind us, and we should start to see year-over-year absorption benefits in the second half.

Alok Maskara: Also, $15 million makes a big difference in Q1, one of our softest quarters. In Q2, one of our more profitable quarters, it does not move the needle as much.

Operator: We will go next now to Stephen Volkmann with Jefferies.

Stephen Volkmann: Thank you, and good morning. Michael, you mentioned spending on ERP and targeted AI. Any details?

Alok Maskara: On ERP, we are not doing any massive changes. As we integrate recent acquisitions, we are moving them to our platform, one at a time. On AI, we are seeing good results in three areas: pricing (higher win ratios and profitability), demand planning/SIOP (improving inventory outcomes), and general productivity (agentic AI in call centers, HR help desk, RPA). These require investments in data lakes and partnerships with LLMs. We are also reducing costs by cutting unused subscriptions and sunsetting legacy systems. In the long term, productivity and pricing benefits should outweigh the costs.

Stephen Volkmann: On Samsung and Ariston—have tariffs changed how you think about those opportunities?

Alok Maskara: Strategically, we remain committed to ductless and water heaters. We had solid momentum in Q1, and we launched the water heater in March. These are joint ventures with supply agreements, giving us flexibility to discuss supply chain moves, tariff cost sharing, and longer-term mitigations. Almost all ductless today is imported; we are moving with the industry and have no concerns around the structure.

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

Nigel Coe: Thanks. Good morning. On tariffs, roughly where are we today in terms of U.S. production of residential/light commercial units? Are you planning to redomesticate production over time, or does it still make sense to keep production in situ and pay the tariff?

Alok Maskara: It is early in that thought process. We need policy stabilization before making major changes. The approach is still evolving, and USMCA renewal is coming up. We are making smaller adjustments—source of metal, component moves—but no major reshoring in the pipeline today. We have three residential factories in the U.S. (Grenada, Orangeburg, and Marshalltown) and one large residential factory in Mexico, giving us network flexibility. Today, it still makes sense to continue as we are and mitigate impact product by product.

Nigel Coe: You mentioned rationalizing residential new construction exposure last quarter. Was that an impact during the quarter, and is that process complete?

Michael P. Quenzer: Residential new construction is about 25% of HCS. We definitely saw volumes down more than others—above 30% in that channel. It is a combination of weak new construction and share decisions. That weighed on overall one-step volume growth.

Alok Maskara: That share loss will negatively impact us through the year and is baked into guidance. Two-step will do better than one-step. From a profitability perspective, that works in our favor because margins were negative to zero in businesses we exited.

Operator: We will go next now to Joe O’Dea with Wells Fargo.

Joe O’Dea: Good morning. On the pricing announcements over the past week, can you give any color? We see the HCS guide go from 2% to 4%, but presumably you priced a narrower scope of products. Any quantification of recent price increases and the dollar effect to the homeowner?

Alok Maskara: Our price increases went to customers on Monday, and some competitors announced the week before. We need to work through it over the next several weeks. Michael’s changes to our revenue guidance reflect what we are expecting in price. There is the headline announcement and then a stick-rate. We are confident we will offset increased cost inflation through these actions.

Michael P. Quenzer: On the impact to the homeowner, equipment is maybe 40% of total installation cost. We will have to see how that evolves, but we do not see this as a big driver of total install cost; contractor labor and margin are the larger components.

Alok Maskara: In some cases, equipment plus parts and supplies can be less than 30% depending on install time. It should not change consumer price elasticity in a meaningful way. We are sensitive to market dynamics, but equipment pricing is the least variable component for the homeowner.

Joe O’Dea: On HCS seasonality and margins, the past couple of years stepped from 16%–17% in Q1 up to 23%–25% in Q2. Is that a reasonable benchmark for the seasonal step-up in Q2 this year?

Michael P. Quenzer: The main driver will be volume recovery within HCS. We had unusual comps last year, but we are building sequential year-over-year improvement: Q2 vs. Q1, Q3 vs. Q2, and Q4 vs. Q3. That will help margins, and in the second half, absorption will further benefit margins. We will watch the summer play out—Q2 is a big quarter—and then we should have strong line of sight for the year.

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

Deane Dray: Thank you. Good morning, everyone. On new products from Slide 5, do you track a new product vitality index? And any update on the Samsung JV would be helpful too.

Alok Maskara: We track vitality closely and do not consider refrigerant changes as new products. Excluding that, our vitality remains in the 45% to 50% range; the current figure is about 48%. We are pleased with heat pump introductions, indoor air quality, and control changes, as we shared at Investor Day. On the Samsung joint venture, the meaningful impact is this year as we work through the channel and dealer conversion. We are pleased with momentum and see upside through the year. Feedback is that these are high-quality, quieter products with better controls, and contractors like the combined logistics and rebate programs.

Deane Dray: Second question, on recent litigation against residential HVAC manufacturers. Are you able to comment?

Alok Maskara: The matter is a pending legal complaint. The lawsuit contains only plaintiffs’ allegations, and there has been no finding of wrongdoing. We dispute the accuracy of the allegations and will actively and vigorously defend our position through proper legal channels.

Operator: We will go next now to Analyst with JPMorgan.

Analyst: Hi. Good morning. Tying the “inventory being normal” comment with growth on the balance sheet year-over-year—some of that is acquisitions—can you give color on residential units within that bucket year-over-year or versus current sales levels relative to history?

Alok Maskara: Typically, from Q4 to Q1 we build inventory for the peak season. Last year we built about $210 million; this year we built $60 million—think of that as a $150 million reduction versus a normal build. We ended last year with $100 million to $150 million more inventory than needed; we are essentially back to a normal seasonal stance. We still have opportunities as demand planning and SIOP improve to work inventory down further. We will continue to invest in parts and supplies and emergency replacement to maintain high fulfillment rates. We are pleased with the drawdown progress and feel on track to normal inventory.

Analyst: Cleanup on price/mix. For the 9% in the first quarter, how much came from price versus mix? And for the year’s mid-single-digit, how much is price vs. mix?

Michael P. Quenzer: In the first quarter, the majority was mix. That mix should taper off in the second quarter. For the balance of the year, it is essentially all price.

Operator: Thank you for joining us today. Since there are no further questions, this will conclude Lennox International Inc.’s 2026 first quarter earnings conference call. You may disconnect your lines at this time, and have a great day.