Lennox International Inc Q1 FY2026 Earnings Call

Good morning, everyone. Welcome to the Linux 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 Ms. Chelsea Polchian from Linux Investor Relations. Chelsea, please go ahead.

Thank you, Bill. Good morning, everyone, and thank you for joining us as we share our 2026 first quarter results. Joining me today is CEO Alok Mascara and CFO Michael Quenzer. Each will share their prepared remarks before we move to the Q&A session. Turning to slide two, a reminder that during today's call, we will be making certain forward-looking statements which are subject to numerous risks and uncertainties as outlined on this page. 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 archived link for today's call are available on our Investor Relations website at investor.linux.com. Now, please turn to slide three as I turn the call over to our CEO, Alok Mascara.

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 three, 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 continue 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 discipline 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 four to discuss the current economic outlook. The industry environment continues to gradually improve.

Channel destocking has largely concluded as dealers regain confidence and replacement 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 costs. We are also further streamlining our supply chain, optimizing manufacturing operation, and implementing thoughtful pricing actions. In home comfort solutions, sales volume year-over-year improved sequentially during the quarter, supported by better performance in the two-step channel. Repair versus replacement stabilized, providing greater visibility into underlying demand trends. New product introductions, including a successful water heater launch and growing traction with new heat pump products, contributed positively. In addition, the on-track integration of sub-cob 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 Linux. 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 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 constraint applications. We are also extending our presence within the home through high-efficiency Lenox heat pump water heaters via our Ariston joint venture. This new product integration supports the convergence of HVAC and water heating and strengthens the Linux home control platform. Together, these innovations expand our addressable market, increase share of wallet, and reinforce Linux's long-term competitive position. With that, I will turn it over to Michael to review our financials.

Thank you, Alok. Good morning, everyone. please turn to slide six. After two consecutive quarters of year-over-year sales declines, we were pleased in the first quarter to return a year-over-year revenue growth of 6%. Growth from our Duradyne and Subco acquisitions completed in Q4 2025 contributed 6%, while growth in BTS was offset by continued sales declines in HTS. As expected, residential end markets remain down year-over-year, but the rate of decline improved sequentially versus versus the fourth quarter of last year. If 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 solution segment on slide seven. 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 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 $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. BTS 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 454B refrigerant. Similar to HCS, BCS experienced absorption pressure as we optimized inventory levels, but manufacturing cost efficiencies offset this impact. M&A contributed $7 million of profit growth, offsetting SG&A inflation and distribution investments. Please turn to slide 9 for cash flow and capital deployment. Pre-cash flow in Q1 2026 was a $39 million use of cash and 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 and 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 with healthy leverage while supporting the $550 million acquisition completed in Q4 2025 and continued sharing purchases. We also see a healthy pipeline of both 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. With that, let me move to slide 10 to review our updated 2026 financial guidance. Our updated full year 2026 guidance reflects Q1 results and trends including higher cost inflation and tariffs. The tariff environment continues to evolve with little notice. Earlier this month, new Section 232 tariffs were announced. 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 a modestly higher mix in price, reflecting the Lenox 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 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 $23.50 to $25 range. Pre-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'll hand it back to Elok.

Thanks, Michael. As we close, I want to take the opportunity to share why, four years in, I'm still genuinely excited about Lenox. We operate in an attractive growth industry with an enduring place in the market. However, what really sets Lenox 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, not this would be possible without the strong foundation that is our culture. Guided by core values and guiding behaviors, the Linux 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&A. Certainly, Mr. Mascara. Thank you. Ladies and gentlemen, at this time, if you do have any questions, please press star 1. 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. We'll go first this morning to Noah Kay with Oppenheimer. Good morning. Thanks for

taking the questions. Michael, the SIPO 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 won't 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 as still applying? Or is anything shifting given these moving pieces in the outlook? Yeah. First, we'll write 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 that full impact, maybe start to see a little bit later in the second quarter. But predominantly, both of these should come into the end of the second half of the year. When you look at the revenue splits, they'll put a little bit more revenue, obviously, now in the second half than

the first half. But overall, profitability should still be about the same as we reflected last year

by the quarters. 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 2Q, or are we kind of mostly caught up now that restocking is underway and you haven't increased your inventories too much? 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 have some absorption headwinds, we reduce our productions about 30% in the first quarter. So there'll be a little bit of absorption that will go into the second quarter. But by the end of the second quarter, the inventory normalization will have occurred. Perfect. I'll turn it over.

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 HDS, the revenue outlook for 2Q. I think previously you thought 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 better. Hey, Ryan, good morning. You know, it's very

hard to call quarter, especially given some of the impact of weather that is still very unknown. So I don't think at this point we would give you any further clarifications compared to what we said in the past. I would go with the same assumptions. 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.

Okay, got it. Thanks. And then as my follow-up, BCS was really strong. You mentioned good execution. Anything else you'd call out there? And why not raise the guidance a little bit more

there? You should have as 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, So 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, like there's just a shorter season. So I won't read too much into Q1. On BCS, first of all, it's congratulation to the team. I mean, the execution out there is just super. Like, you know, the new factory is paying strong dividends. We are getting the right amount of productivity that we expected, maybe a little more than we expected. The emergency replacement initiative, now that we have inventory position all over U.S., 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 our other two businesses. The service business is benefiting from the full lifecycle value proposition, and the refrigeration business also continues to set records both in growth and profitability. So just a good success story and something that we think we're going to start seeing an 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, very defined strategy. All right. That's great. I'll pass it on. Thanks.

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

Hi. Good morning. Maybe just wanted to start on the overall operating margin guide for the company um 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 um hcs down bcs up and just trying to understand sort of hcs margins understandably had a tough time in q1 for many reasons you know how how quickly do those margins kind of climb up out of that hole? So I'll speak to the overall margin

guide. When we talked in January, we expected a slight increase in the enterprise margin expansion. Now with the increase to revenue and costs, we expect a slight decline in the margin. When you're correct, within BCS, organically, we expect margins to be up there. Within ACS, organically, we expect them to be down. M&A will have a slight drag overall in the enterprise, but we should expect to see as volumes are covered in the second half of the year, the incrementals within HDS improve. We just need to go through the first half of the year for HDS to see. 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 in the second half, we are very confident in the margin going back to normal.

Thanks very much. And then my follow-up, I suppose, was around, you know, so the cost inflation numbers moved from 2.5% to 5%. So is that right that that's roughly kind of a hundred million or so extra gross cost headwind? And then I suppose, do you see any competitive implications from that cost-based movement? And, you know, sort of tied to that, how is the price elasticity of volume playing out in HCS at present, please?

Yeah, so I guess on the first piece, your numbers are roughly right, as usual, Julian, so no surprises. I don't see any competitive dynamic or drawback to us. I mean, 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 look at the spot market, since our last guidance, Aluminum is up 25%. Steel is up 25%. Diesel is up 50%. Copper is 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. It's our last guidance. That's helpful. Thank you. We'll go next now to Chris

Snyder of Morgan Stanley. Thank you. I also wanted to follow up on the price cost drivers into the back half, you know, I guess there might be some rounding involved, but you guys are still calling for mid-single-digit price, but it does sound like more is coming. So just maybe if you could kind of 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. I'll take 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, you know, that just gives us better a drop-through because it's just going to stick better going back to each of the inflation pieces

that Michael just talked about. Michael? Yes, specific to the 90% within that, there's really two guide points. First, we have price that has an incremental of 100% because we have costs on the other side of our guidance. And then mix, normally what happens there is there's an incremental somewhere in the 50-ish percent range that we have within that. So when you blend the two together, you start to get a higher drop-through because there's now more price than mix because The mix is generally behind us now from the carryover, the regulatory change last year.

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

Let me start with the second half. I mean, the comms 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 impact in the second half. I think in Q2, remember, mix will still benefit us because we hadn't completed the 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 410A inventory. So a large part of the answer is just comps, what happened last year, and then the pricing impact.

Michael, what would you add to that? And remember, Q2 had the canister issue last year. That was significantly within that quarter with the canister shortage issue.

Thank you. I appreciate that.

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

Hey, thanks. Good morning. Just back to the inflation. Yeah, Michael, you with that litany, you went through aluminum, steel, copper, et cetera. We've been watching that ourselves, obviously. um how would you parse you know kind of the inflation headwind between the tariff changes and you know just kind of the general inflation going on uh and then obviously uh you know there's an annualized impact on what you know what you laid out here given sort of the half-year dynamics um the price that you're putting in 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, 78% 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.

Thanks for that. 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, you know, sort of pre-buy in front of, you know, inflation or, you know, there's been some early heat in some places, maybe a realization that things got a little bit too lean? just kind of the, you know, that behavior, animal spirits, you know, in the channel right now,

a little more color on what you're seeing. No, we have no indication of any pre-buy ahead of price increase or inflation. I mean, the April tariff announcement took most of us by surprise. So there's just absolutely no opportunity or knowledge within the channel to do any pre-buy around it. We think the restock is pretty normal. I mean, we do like the word re versus 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 seer 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. Great. Thank you. We'll go next now to

Ahmet Mehrotra at UBS. 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 the steel content versus the total value. You buy compressors, you move them down to the south and bring it back up north. There's just a lot of moving parts. Maybe you can just kind of pull back the curtain a little bit and just explain to us kind of, you know, what the scope is and just so we get a little bit of a flavor of what's going on.

Sure. The scope is pretty wide. I'm not a tariff expert, but I can tell you we have a lot of tariff experts in our company. I think there's a 7 a.m. 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, Amin. I'm happy to join. The scope is pretty wide. 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 tire thing took us by a little surprise last year when we had tires by the country. This year, we're 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, what it comes down to is, I think every manufacturer who deals with metals, is impacted. So clearly you're not the only one and I think overall we seem to be dealing 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 I'm going to tell the details of that. I'm happy to have an offline conversation. The teams are very qualified, very and you're working through it.

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 a potential de-stock unless you're actually seeing real consumer activity moving back towards the replacement paradigm.

Yeah, so remember, first of all, in our One-Step channel,

we are very close to thousands of dealers, right? I mean, we have 10,000 direct customers and we have multiple conversations with them every hour, every day. 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 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 10-12 work system versus look for replacement, which gives you better efficiency, better warranty, better financing. So definitely not getting worse, definitely scalable, and some green shoots in terms of confidence among dealers and consumers returning back to more economic decisions.

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

We'll go next now to Tommy Moll with Stevens.

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.

yeah i think so things have improved sequentially month over month since the beginning of the year so yeah both the statements that you made are accurate some of it is driven by comparison as last year people were holding for 10a at this point and this is now turning out to be more normal but some of it's also just confidence back in the channel where folks are like you're 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. 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. I'm still in the second inning or something out of a nine-inning game. Last year we're not even fully covered in U.S. We're still not fully covered in U.S., but we're 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 Linux dealers 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 to order factory, dedicated to a 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 and emergency replacement, but also pleased with the momentum in national 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 buzzwords for the quarter as we were practicing.

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

Thank you both. I'll turn it back.

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

Hey, good morning, guys.

Good morning, Jeff.

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

I mean, listen, there are a bunch of game theory scenarios, Jeff, which is hard to get into this, right? But remember, 232 derivative tariffs are not about products made in Mexico. 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 a lot of the cost of steel and aluminum, like Michael mentioned, has gone up. So nobody's immune to it. So I think, like, you will 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 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.

Okay, great. And then just another one of BCS. 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 1Q, or is there any reason to temper maybe the enthusiasm on emergency replacement, national comp momentum?

No, besides what you already said, like last year we got beat down because they were bad. So we had easier comps in queue and the comps get tougher as 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.

Thanks a lot.

We'll go next now to Nicole DeBlaze with Deutsche Bank.

Yeah, thanks. Good morning, guys. Good morning, Nicole. Maybe just on the BCS business, You guys obviously have a lot going on with respect to various drivers of market share gain. It's hard to see what's happening with the underlying commercial unitary market. 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?

The overall market remains challenged. The last data that we saw in the HRI, 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 that. Yet, our market remains challenging, but our market share remains very small, Nicole. I mean, from our perspective, we continue to have significant opportunity to regain national account and enter emergency replacement in a meaningful way. But at this stage, based on all the data we look at, we are pleased with the fact that we are outperforming the market.

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 QQ?

Yeah, it's $15 million in Q1. It's not going to be zero, somewhere between that. But there will 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 quarters. In Q2, which is one of our more profitable quarters, it doesn't move the needle at all.

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

Thank you. We'll go next now to Stephen Volkman with Jeffries.

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 that sound like interesting potential projects?

So ERP, first let me take away any fear. We're not doing any massive big ERP changes. We love Fakir. 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 think of any risk concerns about that because it's 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, it's clearly pricing. we are seeing some good benefits on using AI, which increases our win ratio and also increases our overall profitability, which is typically hard to do, but AI enables us to do that. Second piece, which we are seeing good traction, is truly around looking at demand planning, sales inventory ops planning. I know right now the headline news on inventory is not great, but we are getting better. As that initiative moves forward, we are very optimistic on what AI can do there. Third big bucket is just general productivity with agenting AI and how we have looked at everything from staffing our call centers to our own HR help desk to really looking at robotic process automation. I mean, all of those things are helping productivity on the SG&A side. And you saw we did really good on the cost control on SG&A. All of that requires investment, and we are making investments in data lakes. We are making investments in partnerships with LLMs. 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 one, 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. Okay. Thank you for that. And then, Alok, I'm interested, you know, both Samsung and Ariston, you know, kind of your growth programs, I suppose, around distribution. I'm guessing those started before all this tariff noise kind of came to bear. And I'm just curious if you've changed the way you're thinking about those opportunities, you know, given the realities of sort of the world today.

So strategically, we remain very committed to both of those ductless and water heaters remains core part of our portfolio. And we are gaining momentum in both. I mean, we had really solid momentum in Q1 and water heaters just launched in March. But in Q1 and March and both those products. The fact that these are joint 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 ductlets today are imported from outside, especially when it comes to interior, indoor components, and some of the core outdoor components.

So, no, we are moving with the industry and have no concerns around the structure.

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

We'll go next now to Nigel Koh with Wolf Research.

Oh, thanks. Good morning. Oh, by the way, look, I'm down for the 7 a.m. crisis call, so I'll ask Chelsea to send me the details of that. It could be an interesting call.

Maybe we'll start charging you guys, and that could be part of our tariff mitigation effort.

It could be, yeah. I'm sure people will pay for that. By the way, I'm a little disappointed with the baseball analogy. I thought you were more the crooked guy, Alok, 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're 0.2 in the first inning or something.

Yeah, like the first innings of the first day, something like that. Yeah, that's right. 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 re-domesticate 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, you know, what sort of non-price mitigations you're accomplishing right now?

So if you are playing a T20 cricket game, you know, we are in the third over of the first party that's working. So we are early in that thought process. You know, so first of all, we need things to stabilize before we make any big decisions or changes. I mean, things seem to be moving around quite a bit. 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 a 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 seeing that the approach is still evolving. So no major changes in the pipeline in terms of massive reshore. Now, remember, we do have three residential factories today in the U.S., 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.

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

Yeah, what we've said in the past, it's about 25% of the HCS segment of residential new construction. We definitely saw the volumes down there more than others. It was above 30% involved 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 weigh on the overall one-step volume growth.

Yeah, and that share loss, which is what it will 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-step is going to do better than one step. You know, from a profitability perspective, that's going to work in our favor

because the margins were negative to zero on those businesses that we have lost.

We'll go next now to Joe O'Day with Wells Fargo.

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. And so just looking for any quantification of the recent price increases. And in addition to that, perspective on the dollar effect. And so 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 a pretty small number, as long as the channel doesn't try to price on top of that.

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're expecting in price. So there's going to be an 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. It's 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 and 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.

Right. 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, you know, 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 this year.

Yeah, I think the main driver is going to be the volume recovery within ACS. Obviously, we had some weird comms last year, but what we're building within the guides that we expect sequential year-over-year improvement, Q2 versus Q1, Q3 versus Q2, and Q4 versus Q3. 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.

Okay, thank you. We'll go next now to Dean DeRay with RBC Capital Markets.

Thank you. Good morning, everyone. Hey, I appreciate the update on the new products on slide five. Can you just remind us, do you track a new product vitality index or the contribution from the new products? And then just kind of related, I believe you gave an indirect update in Steve's question on ductless, but anything on the Samsung JV would be helpful too.

Sure.

So yes, we track vitality pretty closely. And we track vitality where we do not consider refrigerant changes as a new product. So excluding that, our vitality remains in the 45% to 50% range. If it didn't exclude that, clearly 80-90% vitality. But excluding the refrigerant change and sear changes, we do remain quite pleased with the 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 see a very pleased with heat pump introductions, indoor air quality introductions, a lot of the control changes. You probably saw a lot more of that during Prakash's presentation at the investor days. So we remain quite pleased on maybe coming down. On the Samsung joint venture, you know, 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 it 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 impact in the same different tariff. The feedback from the channel and the consumer has been very good. These are high-quality products with much better controls, much quieter than some of the competitive products. And the contractors like the fact that the same truck that's going to deliver them, 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 continued to be a lot of upside as we go 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 HVAC 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?

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

That's great. 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.

It made my general counsel's day that I read the statement.

Appreciate it. Thank you. We'll go next now to Patrick Bauman with J.P. Morgan.

Well, hi, good morning. Lots being covered. I 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 the residential units within that bucket, either looking year over year or kind of versus, you know, current sales levels relative to history. Any context around, you know, where you are on that front?

yeah sure patrick patrick so typically when we go from q4 to q1 like this last year

we built about 210 million dollars worth of inventory this year we built 60 million dollars 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 sunning season when we ended the year last year we talked about, we had $100 million and $150 million more inventory that we needed. So think of it as we are essentially back to a normal seasonal thing. Now, I feel like we still have opportunities, and Michael referenced through that, as we get better in demand planning, better in SIOP to work some of this down. 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 of 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.

Thanks. And then maybe just to clean up 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?

Within the first quarter, the majority of it was mix. And as Luke mentioned, that mix should really taper off here in the second quarter. Then for the balance of the year, it's all price.

Okay. Thank you.

Yep.

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.