Lennox International - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 revenue grew 2% to $1.07B, GAAP diluted EPS was $3.37; segment/operating margin compressed 140 bps to 14.5% on tariff and factory ramp inefficiencies.
• Wall Street consensus: LII posted a clean beat vs S&P Global estimates — EPS $3.37 vs $3.25*, revenue $1.073B vs $1.022B*; EBITDA was essentially in line ($180.3M vs $180.4M*).
• Guidance: revenue growth maintained at ~2%; adjusted EPS range narrowed to $22.25–$23.50 (raised lower end from $22.00 in Jan), with price actions and surcharges offsetting higher inflation/tariffs.
• Strategic/capital catalysts: $1.0B increase to buyback authorization and dividend raised 13% to $1.30/quarter (post-quarter), plus JV with Ariston to launch Lennox-branded water heaters — supportive of medium-term multiple and cash returns.

What Went Well and What Went Wrong

What Went Well

• Home Comfort Solutions (HCS) delivered 7% revenue growth to $721M; segment profit +4% to $117M on strong price/mix with ~50% of equipment sales R-454B and ~10% price yield on the new product family.
• Management executed tariff mitigation via two mid-single-digit price increases (one permanent, one largely surcharge) with good stick rates; updated pricing expected to offset inflation/tariffs and volume softness.
• Balanced-sheet and capital deployment solid: net debt/adj EBITDA 0.8x; $85M buybacks in Q1; FCF guide unchanged at $650–$800M for FY25.

What Went Wrong

• Building Climate Solutions (BCS) revenue -6% to $351M; segment profit -32% to $53.5M with margin down 580 bps (15.2%) on expected ramp inefficiencies, tariff timing, and emergency replacement investments.
• Gross profit declined YoY ($328.5M vs $340.0M) with operating cash outflow ($35.8M) on inventory positioning for customer fulfillment; FCF negative ($60.8M) in-seasonal Q1.
• Segment/operating margin fell 140 bps YoY to 14.5% as LIFO timing recognized tariff costs ahead of price realization; BCS inefficiencies to linger into Q2 before easing.

Transcript

Operator (participant)

Please stand by. Your program is about to begin. If you need audio assistance during today's program, please press star 0.

Welcome to the.

Lennox first quarter earnings conference call. All lines are currently in listen-only mode and there will be a question-and-answer session at the end of the presentation. You may enter the queue to ask a question by pressing Star and one on your telephone keypad. You can exit the queue by pressing Star and two. As a reminder, this call is being recorded. I would now like to turn the call over to Chelsey Pulcheon from Lennox Investor Relations. Chelsey, please go ahead.

Chelsey Pulcheon (Director of Investor Relations)

Thank you. Good morning everyone. Thank you for joining us as we share our 2025 first quarter results. Joining me today is CEO Alok Maskara and CFO Michael Quenzer. Each will share their prepared remarks before we move to the Q&A session.

Turning to Slide 2, a reminder that during today's call we will be making certain forward-looking statements which are subject to numerous risks and uncertainties as outlined on this page. We may also refer to certain non-GAAP financial measures that management considers relevant indicators of underlying business performance. Please refer to our SEC filings available on our Investor Relations website for additional details, including a reconciliation of GAAP to non-GAAP measures. The earnings release, today's presentation, and the webcast archive link for today's call are available on our Investor Relations website at investor.lennox.com. Now please turn to Slide 3 as I turn the call over to our CEO Alok Maskara.

Alok Maskara (CEO)

Thank you, Chelsey. Good morning, everyone. Before we get into the details of our quarterly performance, I want to start by recognizing the incredible effort and adaptability of our team, the loyalty of our customers. The current trade environment has introduced several new uncertainties and I'm proud of how our organization continues to respond with focus, agility, and a commitment to improve our customers' experience. The ability to navigate these changes while staying grounded in our core values is what enables us to deliver differentiated growth in even the most complex environments. Let us turn to Slide 3 for an overview of our first quarter financials. Revenue this quarter grew 2%. Our segment margin was 14.5%, a decrease of 140 basis points. Operating cash usage was $36 million, which is typical given the seasonality of our business. Adjusted earnings per share in this quarter were $3.37.

We are seeing steady transitions toward new low-GWP product across both Home Comfort and Building Climate segments. Current order rates in both the segments remain healthy as replacement demand continues to provide a solid foundation. In HCS, we did not experience much destocking in Q1 but continue to expect some destocking in the second quarter. In BCS, we had a slow start to the year given the expected destocking and the timing of low-GWP transitions. BCS margins were impacted due to short term inefficiencies related to the manufacturing transition and new factory startup. We now estimate that our full year adjusted earnings per share will be within the narrowed range of $22.25-$23.50. This updated guidance includes all known and anticipated impacts of tariffs including incremental price actions, inflation and potential volume softness.

Now please turn to Slide 4 to review the tariff landscape and how it is influencing economic outlook in each of our segments. As we navigate the current global trade landscape, I want to highlight why we feel that Lennox is competitively positioned to deliver differentiated growth even during this period. Approximately 90% of our cost structure is in North America, which includes the USMCA compliance spend in Mexico. This spend is not directly impacted by tariffs but faces indirect tariff impacts including price of commodities such as steel and aluminum. Approximately 10% of our spend faces direct impact of tariff and about half of that spend is from China. Our exposure to China manufactured products has been declining over the past few years and the JV with Samsung is another big step towards reducing our exposure to tariffs on imports from China.

We are actively pursuing longer term tariff mitigation strategies including production shifts to better serve our U.S. and Canadian customers. We are also working closely with our supply partners on tariff sharing models and leveraging more U.S.-based components to enhance flexibility within our North American network. Anything we cannot mitigate through these measures is being offset by pricing adjustments or surcharges. Majority of our manufacturing and distribution is in the United States, giving us the resilience and flexibility to win during these tariff and regulatory changes. We continue to invest in our supply chain with increased manufacturing capacity and by dual sourcing key components. The competitiveness of our supply chain is significantly stronger than it was during prior disruptions including severe weather events and the pandemic. Through all of these, our focus remains on being a reliable and a transparent partner to our customers.

As the trade landscape continues to evolve, we are confident in our ability to adapt while continuing to drive long-term value for all our stakeholders. In addition to the evolving tariff landscape, we are also closely monitoring key macroeconomic factors affecting both our Home Comfort and Building Climate Solutions segment. In HCS, consumer confidence and mortgage interest rates continue to influence homeowner decisions, particularly around new home construction and large renovation projects. Our replacement demand has remained relatively stable and to date, we have not observed any adverse trends in the repair versus replace trade-off. In our BCS segment, monthly order rates improved sequentially as destocking ended during the quarter. Our full life cycle value proposition for key account continues to gain traction, resulting in incremental share gains.

We are driving positive momentum due to increased availability of our emergency replacement products, but at the same time we are mindful of potential delays and project slowdown related to both tariff impacts and the transition to new low GWP products. I will now hand it over to Michael to walk you through our financial results and full year guidance.

Michael Quenzer (EVP and CFO)

Thank you, Alok. Good morning, everyone. Please turn to Slide 5. In the first quarter, we experienced complexities driven by the regulatory transition and rapidly changing tariff implications. Despite these challenges, we had solid execution and achieved a 2% revenue growth driven by favorable mix initiatives from our new R-454B products. These initiatives are progressing as expected and are poised to deliver more growth in the coming quarters. Segment profit was $11 million lower than the prior year primarily due to the timing of LIFO accounting for tariff related costs, which were recognized ahead of benefits from pricing actions. Additionally, BCS faced cost headwinds due to expected inefficiencies from the new factory ramp up and regulatory transition, coupled with increased investments to support our emergency replacement growth initiative. Let's now turn to Slide 6 to review the Home Comfort Solutions segment performance.

Home Comfort Solutions delivered another solid quarter, successfully managing challenging end markets as the industry transitions to the new low GWP equipment. This transition is progressing as expected, and our R-410A inventory levels are nearly depleted. Sales increased by 7% driven by positive mix, as approximately 50% of our equipment sales in the quarter were the new R-454B product. Price yields for this product were in line with our 10% expectation. Sales volumes were flat to prior year as the destocking headwinds from the fourth quarter of 2024 pre-buy were offset by stocking of the new R-454B products. Operating margins declined due to tariff and commodity related cost inflation, as well as investments in distribution designed to enhance product availability.

Moving on to Slide 7, the Building Climate Solutions segment experienced a 6% decline in revenue with sales volumes down 9% due to expected destocking and delays in customer orders caused by the transition to the new R-454B product. Our emergency replacement initiative is showing steady progress driving growth in this specific revenue segment. Additionally, our emergency replacement inventory is well positioned for the upcoming summer season, although we encountered some customer order delays with the new R-454B product. The mixed yields achieved on this new product met our expectations. Segment profit decreased by $25 million due to tariff related cost headwinds, anticipated factory inefficiencies and increased SG&A investments to support our emergency replacement growth initiative. Turning to Slide 8, let's review cash flow and capital deployment. In the first quarter, operating cash outflow was $36 million compared to $23 million in the prior year.

This increase was primarily due to inventory investments aimed at enhancing customer experience through better fulfillment rates. After several years of significant capital expenditures to expand factory capacity, capital expenditures have now moderated in line with depreciation. We continue to prioritize our capital expenditure investments in front end digital systems and initiatives to improve the efficiency of our distribution network. We maintain a strong balance sheet with net debt to adjusted EBITDA at 0.8 times, an improvement from 1.4 times in the prior year quarter. Amid ongoing global macroeconomic uncertainties, we remain committed to preserving a disciplined leverage profile while supporting strategic bolt-on M&A opportunities and efficiently returning excess capital through share repurchase programs.

If you will now turn to Slide 9, I will review our 2025 full year guidance based on the first quarter results and the latest end market outlook, we are confirming our revenue growth of 2% and raising the lower end of our adjusted EPS guidance to $22.25 from $22. Consequently, our adjusted EPS guidance range is now $22.25-$23.50. Since our last guidance, we have three key assumption changes. First, due to the tariff related costs, we now expect our total cost inflation to be 9% compared to our previous guidance of 3%. This includes estimates for both direct tariffs and the secondary effects of tariffs on our suppliers. Second, to mitigate tariffs, we have implemented two new price increases effective early in the second quarter which will boost our price gains to 7% up from the previous guidance of 1%.

Finally, due to the possible macroeconomic weakness and BCS order delays in the first quarter, we now anticipate sales volumes excluding the impact of the 2024 pre-buy destocking to decrease by 4% compared to the previous guidance of a 2% increase. With that, please turn to Slide 10 and I'll turn it back over to Alok.

Alok Maskara (CEO)

Thanks, Michael. Nice job. To close, I would like to highlight why Lennox remains a compelling opportunity for all our stakeholders even amid today's uncertainties. The attractive growth of our industry supported by steady replacement demand provides a strong foundation for our growth initiatives. These initiatives drive growth through enhanced customer digital experiences, expansion in the ductless market via our Samsung joint venture, new capacity for commercial replacement product, and the continued growth of our parts and services portfolio. We continue to expand our resilient profit margins to fully capture the benefit of being a manufacturer and a distributor through pricing, productivity, and mix optimization. Our recent investment in upgrading our distribution network will further increase customer satisfaction while expanding our profit margins. Our commitment to consistent execution has been evident in how we have managed recent regulatory transitions while gaining share and expanding margins over the past few years.

We have also delivered higher fill rates and Net Promoter Score, strengthened by customer experience and reduced customer churn. These wins are supported by the continued rollout of our Lennox Unified Management System which provides a structured operating framework that drives accountability, process excellence and continuous improvement across the entire organization. We are making meaningful strides in advanced digital technology to upgrade both our product offerings and how customers interact with us. Upgrades to our e-commerce platform have simplified the customer journey. Increased loyalty and AI capabilities have improved attachment rates. We are also strengthening our competitive differentiation by leveraging our proprietary data assets. These proprietary data assets are best-in-class within the HVAC industry given that we have been both a manufacturer and distributor for over 130 years.

At the same time, we are broadening our ducted and ductless heat pump lineup to meet rising demand and are continuing to embed intelligent diagnostics and controls into our systems, helping our customers operate more efficiently and with greater confidence. Underpinning all of these investments is our talent and culture. Our high performing team is grounded in our core values and guiding behaviors. Our pay-for-performance structure reinforces alignment, empowering our teams to focus on the levers that drive profitable growth. As I look forward, I remain confident that our best days are ahead. Thank you. We will be happy to take your questions now. Margo, let's go to Q&A.

Operator (participant)

Perfect. Thank you so much. As a reminder, ladies and gentlemen, if you'd like to ask a question, please press Star one on your telephone keypads. If you need to remove yourself from the queue at any time, press Star two. Once again, that is Star one to ask a question and we'll take our first question from Ryan Merkel with William Blair. Please go ahead.

Ryan Merkel (Co-group Head of Industrials)

Hey, good morning everyone and good job with the script given all the moving pieces. Wanted to start with the commercial. Yeah, of course. Wanted to start with the commercial which was the surprise for the quarter. Just talk about the order delays that you saw. Why was that? Then more importantly, are we past that issue? It sounds like orders have improved. Is that the right read?

Alok Maskara (CEO)

Yeah, I think Ryan, that's the right read. We had a very slow start and we talked about destocking in commercial, but it happened sooner than we had anticipated. Essentially, for the first few weeks of the quarter everybody was waiting for the new products to get established, get their tools upgraded, and people were just finishing up their jobs with 410A, but order rates improved sequentially. Our productivity also took a hit as changing these lines from 410A to 454B while moving some lines from Stuttgart to Saltillo. All of that we were able to do because of the slowdown or pause in some of the sales. Yeah, it's largely behind us. I would expect some inefficiencies to continue in Q2, but then we start lapping the startup cost that we were having last year.

I would think of it as more of a one time event with some inefficiencies carrying into Q2.

Ryan Merkel (Co-group Head of Industrials)

Got it. Okay, helpful. My second question is just on the outlook and I realize there's a lot of uncertainty, but can you talk about the decision to lower the resi volume to now down mid single digits versus flat prior and then commercial same thing, down low single digits versus up mid single digit prior. Just curious what the drivers are and are you seeing any of that slowdown in April or are you just trying.

To get ahead of expected slowdown?

Alok Maskara (CEO)

We are trying to get ahead of the expected slowdown, if there is any. We have not seen any slowdowns. In fact, Michael and I were checking our orders and everything right before the call. No, I mean we have not seen any slowdown. We just read the same news you guys read and if tariffs slow down the U.S. economy with inflation, we are just prepared for that. I mean it's highly uncertain as you said. I think the core assumption which we stand behind is that if inflation and pricing causes any macro slowdown, our results are still going to be managed as we offset tariffs with pricing and volume declines will again get offset because we have additional pricing that will take effect. Our visibility is no more than anybody else's.

Just to go back, we have not seen any slowdown in either of the segments right now.

Ryan Merkel (Co-group Head of Industrials)

Got it.

Thanks a lot.

Operator (participant)

Thank you. We'll take our next question from Tommy Moll with Stephens. Please go ahead.

Tommy Moll (Managing Director)

Good morning and thank you for taking my questions.

Alok Maskara (CEO)

Morning Tommy.

Tommy Moll (Managing Director)

A couple follow ups for me on some of the same themes. First on pricing, Alok, you or perhaps it was Michael in the prepared remarks mentioned, there were two increases effective early in the second quarter. What additional detail can you give us there? Did I correctly hear you say, Alok, one is more meant to offset tariff and one is more meant to offset volume declines. Or maybe I misunderstood there.

Alok Maskara (CEO)

Yeah, let me just clarify. Yes, we have done two price increases. I think the first one, which is already in effect, was done to offset changes in pricing for aluminum, copper, and I would call it that was to offset indirect impact of tariffs because tariffs were still a moving bogey at that stage. That is in effect and we have seen a good stick rate. Think of mid single digits across both the segments. The second one, which we announced last week, is to offset the direct impact of tariffs and that is another mid single digit price increase. It changes a little bit based on the product types, but again mid single digit overall impact. None of them, of course, is for volume softness because our customers continue to buy and we have to look at this purely to offset the cost impact of that.

Two price increase both mid single digits and so far pleased with the stick rate and it's consistent with what we have seen other industries and the competition do as well. From our perspective this is all about just staying neutral and maintaining our margin profile.

Tommy Moll (Managing Director)

Thank you, Alok. On the new volume assumptions for Home Comfort Solutions for the year, moving from flat previously to down mid singles, what can you tell us in terms of sell-in versus sell-through? Are you assuming balance there, new home versus replace market share assumptions? Any other key inputs into that new outlook would be appreciated. Thank you.

Alok Maskara (CEO)

Sure. Let's start with the new home construction there Tommy. We are assuming new home construction is going to be worse compared to where we had predicted when we gave the guidance earlier this year. I think that's something and we can see that from the starts and other pieces. Think of that a little bit more data driven versus driven by future news and future expectations. We maintain the fact that there's going to be some destocking in Q2. Yes, we do expect there's delta between sell-in and sell-through and we think that's going to largely happen in Q2 as 410 inventory depletes.

Beyond that, there is just conservatism built into it based on everything that we are seeing, whether it is about reduction in forecasted growth rate, but there are just so many swings. Tommy, if you want to go be wrong, we want to be wrong on the conservative side, especially given some of our pricing actions.

Tommy Moll (Managing Director)

Thank you, Alok, I'll turn it back.

Operator (participant)

Thank you, and our next question comes from Jeff Hammond with KeyBank. Please go ahead.

Jeff Hammond (Managing Director and Equity Research Analyst)

Hey, good morning guys. Morning Jeff. Hey. I guess on the Destock being more Q2 than Q1, just any reason why that is? I think you had said early on the pre-buy was pretty substantial and maybe you backed off of that and it was more share, and I did not know if any of that change is reflected in the outlook.

Alok Maskara (CEO)

Yeah, I think especially we had a lot of 410A inventory remaining. Q1, a lot of the sales were 410A. That is the reason we did not see a significant impact of pre-buy. Our view, we have not changed the numbers because remember we talked about $125 million or so of pre-buy. We talked about $25 million or so was probably commercial, $100 million or so residential, all with lots of ranges and approximation error bars. I think the commercial is behind us.

I think that's what we saw in Q1 resi. We didn't experience it so either it was mostly share gain and there was no pre-buy impact which is highly unlikely. I still think there was pre-buy and we're going to experience that in Q2 as others start depleting their 410 inventory. On the positive side, majority, vast majority of our sales are now on 454B and even the quarter in Q1 was 50/50. It has been a smooth transition, it has been a good transition. We are prepared for any pre-buy impact in Q2. If it turns out to be share gain then good for us.

Jeff Hammond (Managing Director and Equity Research Analyst)

Okay. The tariff impact in Q1 seemed to be a little bit more than kind of what other companies are saying. You know, just given that people have inventory, I didn't know how much of that is.

You know, the initial Mexico, Canada tariffs that were, that were higher but now we have USMCA compliance, you know, kind of exclusion. So I'm just wondering obviously a lot of moving pieces but you know, is there a chance that maybe, you know, that U.S. Mexico impact gets better, not worse, you know, versus Q1.

Michael Quenzer (EVP and CFO)

Jeff, what we saw in the first quarter was a little bit higher than others because we do LIFO based accounting. We expense that almost as incurred. We saw that mostly from Mexico on copper or on aluminum and steel tariffs coming through. Mexico is where we saw that.

Alok Maskara (CEO)

I hope we had never had to use the word LIFO in an earnings call again, Jeff, but that's basically what it was. We do expect the impact of tariff assuming the rates don't change to keep going down as our mitigation actions start yielding results. Right now, these are sort of unmitigated numbers that we got impacted by in Q1.

Jeff Hammond (Managing Director and Equity Research Analyst)

Okay, thanks for the help, guys.

Operator (participant)

Thank you. We will take our next question from Joe O’Day with Wells Fargo. Please go ahead.

Joe O'Dea (Managing Director)

Hi, good morning. Just on the inflation guide and going from 3%-9%. Can you unpack that a little bit from a dollar's perspective and just sizing the dollar impact tied to metals, the dollar impact tied to China and anything else. As we think about really trying to tie that to the pricing response to it. If you see any changes to tariffs, kind of what that could mean for price.

Michael Quenzer (EVP and CFO)

Sure. Overall it was a 6% increase in the inflation guidance, predominantly on our total cost. Think of cost of goods sold plus SG&A. About $4 billion of spend there annualized. Balance of the year, it's something less than that. If you apply that 6% to $4 billion for the full year, it's about $240 million of additional cost.

A good portion of it would be China, where you can see our exposure is 5%. That cost has obviously doubled with the tariff. The balance is mostly related then in Mexico around steel and aluminum, and then we do see some secondary inputs into the United States. Even though we supply from a U.S. supplier, they have tariff implications that we made some estimates in there as well. A good nearly 50% is almost related to China, which we continue to monitor and we will see how that progresses and do pricing adjustments if necessary.

Joe O'Dea (Managing Director)

Sorry, just the pricing that's been put in place in response to that, is that in any way tied to tariffs such that if there's a change in the China tariff rate, that pricing changes or those are kind of list prices and you'll decide what to do based on how tariffs change?

Alok Maskara (CEO)

No, there will be some correlation. Right. I mean, we're trying to be fair to all our stakeholders. The second tariff that went into effect, some of that's through surcharges that could get withdrawn if the China tariffs go away or change. I think there's going to be some impact of that. We think from that perspective our volume assumptions will turn out to be more conservative if the China tariff goes away. Some of the economic impact of that is overestimated in our guide.

Joe O'Dea (Managing Director)

Last one, just what is.

Is that you source from China and how does your China sourcing compare to competitors in the U.S. Overexposed, underexposed. Are you seeing similar type of exposure that requires similar type of pricing?

Alok Maskara (CEO)

Yeah, it depends on the competition. Maybe much longer discussion. I mean I'll tell you what we source are typically like, you know, a lot of electronics for our control boards. We do buy some motors from China. We do buy some of the smaller components like parts and accessories from China. We don't source things like mini splits that we used to source from China. That's our move to Samsung, who makes it in Korea. Given that and given what we know, we think we are underexposed to China versus other competition just because we've historically been a more US manufacturer. And over the past three years the China spend has come down substantially. I mean a few years earlier that number would have been three to four times as much. But we were focused on dual sourcing and near sourcing pretty aggressively over the past three years.

I can't say for sure and it depends on the competition. We also feel very confident that many of these products have alternate suppliers and we have mitigation strategies in place to continue reducing that number.

Joe O'Dea (Managing Director)

Got it. Thank you.

Operator (participant)

Next we'll go to Joe Ritchie with Goldman Sachs. Please go ahead.

Joe Ritchie (Managing Director)

Hey guys, good morning.

Alok Maskara (CEO)

Hi, Joe.

Joe Ritchie (Managing Director)

I think I'd like to start just on the building climate solutions margins and I'm trying to think about how these margins will progress sequentially as the year goes on.

If you take a look at.

Slide 7, clearly you talked about the LIFO impact product cost and other was roughly a $22 million impact. How does that look sequentially as we head into Q2 and then if there's any other clarity you can give me on the rest.

Of the year, that'd be helpful.

Alok Maskara (CEO)

Sure. I'll start and then Michael will give you exact numbers. I would look at primarily these things as short term inefficiencies related to manufacturing moves. Remember we did a lot of moves in Q1 from R-410A to R-454B, moving some of our standard products to Saltillo, focusing Stuttgart on retooled machines so we can do configured products and create capacity for that. I would say there are short term inefficiencies that continue winding down now as you do it sequentially. Michael will get into this with you in a minute. Remember last year factory startup happened mostly in the second half starting in Q2. We start lapping some of those inefficiencies. By the end of the year we should close at zero inefficiency. I mean that's our goal. Michael, anything to add to that?

Michael Quenzer (EVP and CFO)

Alok mentioned factory inefficiencies. That'll start to go. The other thing is we'll start to experience a full run rate on our mix that'll start to transition more in the second quarter. We'll lap some of our year over year investments that we started to do mid last year within SG&A. Also expect to have some volume benefit in the, in the second half of this year from the emergency replacement initiative. All of those should sequentially help margins.

Joe Ritchie (Managing Director)

Got it.

That's helpful. Maybe just to follow up on that then as you're kind of thinking about second quarter specifically and the margins. Like it sounds like there's still going to be a little bit of inefficiency there but like the margins should get materially better sequentially versus the first quarter. Is that a fair statement?

Alok Maskara (CEO)

Yeah, I think that's a fair statement. Like I hate to give quarterly guide and you know, with factories you can't predict exactly which week things start getting back to normal. But we have seen improvements and they'll sequentially get better.

Joe Ritchie (Managing Director)

Okay, great. All right, thanks guys.

Operator (participant)

Thank you. Next, we'll take our next question from Nigel Coe with Wolfe Research. Please go ahead.

Nigel Coe (Managing Director)

Oh, thanks. Good morning. Alok, I apologize. And you just said you don't like to give quarter guidance. Just given the kind of the second half first half dynamics and the kind of beat through from Q1 to Q2. I was just curious if you were to like try and ring fence the.

Two Q EPS versus the full year.

If you just eyeball the past 10 years, like low 30% would be about the right number. Is that sort of the ballpark?

Michael Quenzer (EVP and CFO)

I think maybe what we'll do is more speak toward the first half second half revenue guidance. I think in the last earnings call I said about 45% first half of year. The year for revenue seasonality, 55% second half still feels that's appropriate. I think that implies about kind of a flat revenue in the second quarter. As much as we can see right now. That seems like a good guide.

Nigel Coe (Managing Director)

Okay, that's helpful. Thanks, Michael. And then just thinking about the A2L, there's a lot of chatter out there about shortages more on the refrigerant side than the equipment side. Just wondering kind of how that's factored into your sort of second quarter perspective.

Alok Maskara (CEO)

Yes, we have. I mean, I think first of all, industry, all the equipment manufacturers have done a good job. So there's no shortage in equipment. As you said, where there is shortage is in the retail service canister for R-454B. I think that's a transitional migratory issue. Like, you know, we are taking countermeasures, so are other manufacturers. There's enough refrigerant available in bulk situation, it's just not available in smaller packages. I don't think it fundamentally changes the demand profile nor does it change anything else in the long term.

In the short term there's just a skirmish to get those equipment for servicing. Now in practical perspective our units are pre charged. So if the installation is done right and under normal circumstances you do not need this. It's mostly for service and repair. It's more about dealer getting confident and not wanting to do a rerun. I expect the industry to be normal by the time we are talking again at the end of Q2 and beginning of Q3.

Nigel Coe (Managing Director)

Okay, that's great. Thanks a lot.

Operator (participant)

Next we'll go to Julian Mitchell with Barclays. Please go ahead.

Julian Mitchell (Equity Research Analyst)

Hi, good morning. Maybe just the first question on the operating margin outlook. Just total company. I think before you'd said the core assumption was flattish for the year as a whole. Seems like that's still I think the framework but just wanted to check on that. When we're thinking about the sort of rate of change year on year, you know, if you're flat for the year and down 140 bps or so in the first quarter, I think you mentioned a steady improvement.

Is the way to think about.

That sort of flattish margin second quarter.

Year on year and then you get.

That growth in the back half. Is that the right dynamic on operating margins? Just kind of thinking about tariffs and the Mexican plant ramp up and so forth.

Michael Quenzer (EVP and CFO)

I think that's pretty much implied in the guide. Right now we're assuming about flat margins full year for the enterprise. That would assume about a 50 basis point improvement in the balance of the year, mostly around BCS. I mentioned a few of those initiatives. The live margins will expand their mix kind of year over year, investments tripping those as well as some volume gains as well as factoring efficiencies. That's really where the margin gain is going to happen in the balance of the year is on the BCS side.

Alok Maskara (CEO)

Yeah.

Julian, if I could add to that, the good or the bad news here is that this is all internally caused pain, right? I mean it was our manufacturing moves. We knew this was going to happen. And it is all internal factors that can fix. It is not related to external factors. We are actually pleased with the pricing stick rate. We are pleased with how we are able to pass on tariffs. This is simply like our ongoing, we talked about last year as well, starting a new factory, moving production. We are just doing it cautiously to make sure there is no supply chain disruption. Overall, I am not concerned about any long term challenges here.

Julian Mitchell (Equity Research Analyst)

That is helpful, thank you. Just my second one, just trying to circle back to the slide 9 which is very helpful. The pieces there on the price.

Assumption going up six points from previously and the volume assumption coming down I.

Think six points from previously. Just thinking about those two moving.

Pieces.

I think part of it is an anticipated deceleration in broader sort of.

Macro and so on.

Just trying to understand, are you just assuming a sort of one-for-one offset or elasticity there of higher price equals the volume reduction, or is there some other items in there that we need to think about, and just what's the historical experience around price elasticity of volume demand?

If you could give us any color there.

Alok Maskara (CEO)

Sure, Julian, it turns out that they turn to be nearly equal as you said, roughly 6%. Right. If we take the volume piece and we get deeper into that, we have taken a significant slowdown in new construction both in HCS and BCS and we see some of those signs already in industry data. Rest all it was based on consumer confidence, softness, mortgage interest rates and all the other things we see around decline in consumer confidence. Our products are mostly replacement and they are like a necessary must do have. The impact to us is going to be lower than some of the other discretionary spends since it's non discretionary. We sort of took all of that and given limited visibility, we just wanted to draw a line in the sand and have that dialogue that we're having right now.

I mean this could all change if the China tariff gets withdrawn tomorrow and impact is less. We would simply look at lower pricing and higher volume. In that case, we just wanted to give you guys a framework to analyze and get our thoughts together.

Julian Mitchell (Equity Research Analyst)

Great, thank you.

Operator (participant)

Thank you. Next we'll go to Jeff Sprague with Vertical Research. Please go ahead.

Jeff Sprague (Managing Partner of Electrical Equipment and Multi-industry)

Hey, thank you. Good morning everyone. I just want to come back just thinking about the Destock, you know, happening or continuing into Q2, you know, on a kind of a gross dollar basis. I mean your sequential inventories to me do not look too different than what is normal.

Just kind of want to understand.

The view on the Q2D stock, right. You're out of 410A. You're selling 454B now. Your view is just in the channel. There's still excessive inventory that kind of backs up to you on the demand side in Q2.

If you could elaborate on that at all.

I appreciate it.

Alok Maskara (CEO)

Sure. Jeff, I think your last statement is what we are trying to reflect is that in the channel, which, remember, 30% of our sales are through indirect, goes through distributor, and that we believe there is 410A that everybody will try and get out of in Q2. They may pause ordering 454B product, especially given Q2 is heavy. That is where sort of the cooling season, typical seasonality works. A lot of the distributors are going to try and run the entire cooling season with 410A if they have enough inventory, because remember, it is still lower cost to them. That is out of the assumption. We do not have any further visibility. Compared to when we spoke last year where we said, hey, overall, $125 million pre-buy, roughly $25 million that we are confident is behind us. HCS is $100 million.

It's going to be less than 100 because some of it was share gain. When we shift out by the end of Q2, we'll have greater visibility. We do think there's some impact or air pocket in Q2 as distributors run out of 410A and only then they start altering 454B.

Jeff Sprague (Managing Partner of Electrical Equipment and Multi-industry)

Yeah. It doesn't sound like there's any reason to believe though, they make it through the whole season on 410A. Right. There's just not enough out there. I guess a lot of this hinges on just doesn't get hot and all those sorts of things in terms.

Of when they pivot back to kind.

Of refilling on 454B. Is that the way you're thinking about it?

Michael Quenzer (EVP and CFO)

Yeah.

is also a rule within the transitions. They have to sell by the end of the year. I think that also helps make sure this is all going to sell-through to sell-through into second quarter, into third quarter.

Alok Maskara (CEO)

You're generally right, there's not enough 410 to last the entire cooling season unless we have a really, really cold summer, you know.

Jeff Sprague (Managing Partner of Electrical Equipment and Multi-industry)

Okay, great. Thank you, guys. Appreciate it.

Operator (participant)

Thank you. Next, we'll go to Noah Kaye with Oppenheimer.

Please.

Go ahead.

Noah Kaye (Managing Director and Senior Analyst)

Thanks.

I was just going to follow up on Jeff's question.

Can you talk about the behavior of the direct versus the two-step in Q1, what the volumes behavior was like in those two different parts of the home climate.

Home Comfort Solutions?

Michael Quenzer (EVP and CFO)

Yep.

In the Home Comfort Solutions in the first quarter we saw total revenue up 11% in the two-step, up 5% in the one-step.

We continue to see some of.

That sell-through of the 410A and the two-step in the first quarter.

Noah Kaye (Managing Director and Senior Analyst)

Okay. And you're thinking that that kind of reverses here in Q2 just to unpack your prior comments.

Michael Quenzer (EVP and CFO)

Yeah, that's the underlying assumption right now.

Noah Kaye (Managing Director and Senior Analyst)

Great.

You know there's a ton of moving pieces here. You guys, as others have said, done.

A nice job of detailing your assumptions.

Assuming the status quo.

Right. Can you help us understand what

Alok Maskara (CEO)

Scenario

Might look like if USMCA exemptions were no longer to be in effect?

At least the kinds of discussions that.

You've had with customers around that.

What we might expect to see from the company?

Yeah, I mean that's a very hard thing to speculate on. I'll tell you because there were certain days when we woke up and we thought that's exactly what's going to happen. Our discussions with customers have in that scenario there's going to be some mix impact because products made in U.S., which remember we have majority of our manufacturing still in U.S., would probably accelerate and products from Mexico we will still offset it through productivity. Peso will probably decline. That will help us offset some of those pieces there as well, and we'll have to offset that price. Actually, that will make our mix go more towards premium products, which are more likely to be made in U.S., and those are higher margin for us versus lower tier products in Mexico.

There is going to be a series of short term and long term actions that we have already outlined and we kind of have it in our back pocket if that happens. It is too early to kind of speculate through that. I mean, it is almost like we were hoping that is not the announcement that comes in while we are on a conference call. I mean, that was Michael's and my most nightmare that there would be a tweet that we missed while we were sitting on the call. We have multiple scenarios planned. We have key action items planned. The team is very disciplined. The dealers have tons of confidence in us right now that we are doing the right thing by protecting their business, protecting the supply chain, and being fair in passing on those costs as appropriate.

Noah Kaye (Managing Director and Senior Analyst)

Yeah, if anything, the news we're getting this morning suggests we may be going.

The other way, which is a positive. I would appreciate the thoughts and thanks again.

Operator (participant)

Next we're going to go to Chris Snyder with Morgan Stanley. Please go ahead.

Chris Snyder (Equity Research Analyst)

Thank you for the question.

I guess just maybe on the topic of consumer elasticity in the repair versus replace of all the price that's coming through, whether it be the refrigerant changeover or the tariff commodity related price.

I'm just wondering how much is the.

Homeowner feeling of that today? Because it seems like that is still a bit on the horizon for them. As that cost or that higher.

Price comes through, what do you think?

Of the risk on maybe a more.

Significant volume response just as that price hits them?

Or maybe it already has. Thank you.

Alok Maskara (CEO)

Sure.

Chris. I would say that the risk of homeowner price elasticity on replacement remains very low. Few things to keep in mind. Right. The price the homeowner sees is our equipment price plus the installation plus the accessories, plus the dealer profits plus the distributor profit offense. If you pull all of that together, a 5% or 10% increase in equipment does not translate to 5%-10% increase for the homeowners. In the past sometime it was higher than equipment price increase as there was significant labor shortage and there is a lot of consolidation on the dealer base. In today's tariff environment I think it is going to be lower to the homeowner because there is no reason to mark up labor and installation because those do not get impacted by tariff. Net net I do not think there is going to be a significant impact on the homeowner.

This will remain non discretionary spend. The impact that we are baking in is mostly around the new home construction and general slowdown in home sales because some of the sales do happen post a home sale even if it's a used one. The repair versus replace we called it out on the script. That is a possibility if consumer confidence goes much lower and people are going to be looking to save cost. We monitor for that very closely. So far year to date we have not seen any signs of that.

Chris Snyder (Equity Research Analyst)

Thank you, I appreciate that.

And then.

I guess just kind of following.

You know if you guys started shipping the 454B, it sounds like in maybe the back half of Q1 and then you put through the tariff related.

Price increases at the start of Q2.

I believe you said in the script.

Like as that kind of flows through.

The channel and ultimately finds its way to the consumer, does that start hitting in Q2 or do you think those prices start hitting in Q3? Because I know there's just some lag.

Between when you guys sell it and.

It finds its way to the homeowner. Thank you.

Alok Maskara (CEO)

It'll start happening in Q2. It's already happening. Our first price increase is already making it to the homeowners and we have seen no change in the demand pattern.

Chris Snyder (Equity Research Analyst)

Thank you. I appreciate that.

Operator (participant)

Thank you. Next, we are going to go to Brett Linzey with Mizuho. Please go ahead.

Brett Linzey (Analyst)

Hey, good morning all. I wanted to come back to the commercial business. In the R-454 transition delays, was this solely product availability or are you seeing some price sensitivity on the new products and the price uptake there?

Alok Maskara (CEO)

No, it was not product availability, at least not for us. I think that's generally true for the industry as well, Brett. It was mostly driven by people finishing the 410A jobs and then getting their people, employees, trained in the new 454B and some hesitancy when nobody wanted to be the first one to install a 454B on a rooftop and people trying to make sure that the jobs, when you do rooftop replacement, that they have all 18 of the rooftop in 454B. They did not want to have mixed rooftops in there. I think a lot of this was around key accounts planfully finishing up 410A, so I'll put some of that in the destocking bucket. Some of that and just people wanting to make sure that there was availability of inventory and, more importantly, trained technicians and sensors and tools and all together.

We think of it in short term air pocket, little worse than we had hoped for, but not completely unexpected.

Brett Linzey (Analyst)

Got it. More of a learning curve. Maybe just on commercial volumes in the first quarter, the down 9%, how did that track relative to expectations? Maybe any color by vertical. I know the full year outlook for commercial contemplates some accelerating in the two year stack. Is that just the emergency replacement capture that you see ramping there?

Michael Quenzer (EVP and CFO)

Within the first quarter, about half of the 9% volume decline was the destocking. That happened as expected. The rest was the order delays which Alok just mentioned, kind of brought across most of our large national accounts. Going forward, yes, we do expect to see as you get into the season Q2 and Q3, we'll start to see that emergency replacement initiative start to pay off.

Alok Maskara (CEO)

If I could just piggyback on that, we are very optimistic based on the emergency replacement rollout, the pilots and the early signs that we have there. That is one reason we are looking forward to more optimism, especially on our piece even if the industry slowed down because for the first time in multiple years we have the products in stock, we have our folks trained. We have it delivered within day and course back within two hours. We are pretty optimistic on that right now.

Brett Linzey (Analyst)

I appreciate the detail.

Operator (participant)

Next we'll go to Deane Dray with RBC Capital Markets. Please go ahead.

Deane Dray (Managing Director)

Thank you. Good morning everyone.

Alok Maskara (CEO)

Morning, Deane.

Deane Dray (Managing Director)

Hey, like to circle back on the surcharges, it came up a couple different times. Can you just clarify when you talk about the two price increases, are those full pricing increases? The assumption is a surcharge gets rolled back at some point. Some clarification there on when and how do you use surcharges?

Alok Maskara (CEO)

Yeah, it really depends a lot on the business. To be overly simplistic with the answer, think of the first price increase as a price increase, a traditional one, and the second one more as a surcharge. I think numbers will come back. The second one, because there was mostly around the 10% global import duty and the China tariffs, we did that as a surcharge. Not all of it was surcharged, but some customer systems can deal with surcharges. We would think of the first one as more permanent and the second as transitionary, open to adoption and changes as the tariff environment adopts and changes.

Deane Dray (Managing Director)

Okay, that's really helpful and thanks for that clarification. Just to circle back on the emergency replacement, Michael said you're expecting the inventory is now in place. You got people trained. What is the timing of the lift that you're expecting? Like how much of your mix should it be on a run rate basis by year end?

Michael Quenzer (EVP and CFO)

Yeah, right now it's still a very small piece of our business but we're going to continue to see it grow. Again, it's a seasonal product. As we get into the second and third quarter with the inventory we have, that's where we should really start to see some of that growth come in for the season.

Alok Maskara (CEO)

Michael's right.

Overall remains a small portion.

Right.

I mean a long term growth aspiration start delivering results this year. This should be a tailwind for multiple years.

Deane Dray (Managing Director)

Was it a cash flow drag in terms of positioning the inventory?

Alok Maskara (CEO)

A little bit. The HCS and the others inventory kind of made up for it in terms of we were building up some 410A in the past, was not significant. Dean,

Deane Dray (Managing Director)

thank you.

Operator (participant)

Next we'll go to Nicole DeBlase with Deutsche Bank, please. Go ahead.

Nicole DeBlase (Managing Director and Senior Equity Research Analyst)

Yeah, thanks. Good morning, guys.

Alok Maskara (CEO)

Hi Nicole,

Nicole DeBlase (Managing Director and Senior Equity Research Analyst)

I guess I also wanted to ask a follow up on emergency replacement. You guys have been making the investment in the Salesforce. I think it was an $8 million drag in the first quarter. Are we kind of coming to the end of that Salesforce investment or is that something that's going to continue throughout.

The rest of 2025?

Alok Maskara (CEO)

No, it's ended. We made all those investments last year. I mean, right now it's more than the. We did not have this investment last year. So on a year over year basis, by the time to get to the second half, we'll be lapping itself on the investments. There's no more incremental investment required at this stage.

Nicole DeBlase (Managing Director and Senior Equity Research Analyst)

Okay, got it. That's clear. Thanks. And then just on buybacks, I saw you guys did like $85 million in the first quarter. Market's obviously been weak, I guess. How are you guys thinking about the rest of the year in terms of repurchase activity? Thank you.

Michael Quenzer (EVP and CFO)

Sure. We have programs to buy back for dilution, so that kind of continues on, and then thereafter we're going to be opportunistic. We're going to continue to look at bolt-on acquisitions, and obviously we're going to be very disciplined on that. Share repurchase, opportunistic share repurchases will be a portion of our deployment strategy.

Alok Maskara (CEO)

You can expect a lot more buyback than we did last year, especially at these prices.

Right.

Nicole DeBlase (Managing Director and Senior Equity Research Analyst)

Makes sense. Thanks, guys. I'll pass it on.

Operator (participant)

Thank you. We'll next go to Steve Tusa with J.P. Morgan. Please go ahead.

Steve Tusa (Managing Director)

Hi, good morning.

Alok Maskara (CEO)

Hi, Steve.

Steve Tusa (Managing Director)

Just trying to get a little bit more color on what's going on with this 454B refrigerant issue. Honeywell is out with obviously pretty dramatic price increase. Maybe that's what you're referring to on the retail side, but maybe just describe what you're seeing in the channel. I guess you're saying that you do not expect this to impact industry volumes at all, given it's kind of a, I guess, an aftermarket thing.

Alok Maskara (CEO)

Yeah, it is an aftermarket thing. I mean dealers, it impacts dealers' confidence because they want to carry. Everybody might be experiencing different things. Right. Let me just talk about Lennox. We have no shortage of 454B for our production. We are obviously working with our suppliers, the two suppliers we have, to ensure that we get appropriate fair pricing because some of them are impacted on tariffs and any indirect impact of tariffs through that is already captured in our overall inflation number. What we have heard from our dealers and contractor is there is shortage of retail canisters. These are the Worthington made tanks that they carry in their truck for service and repairs. There is not enough of 454B of those. I think that's where the shortage is. It's kind of unrelated to the Honeywell announcement which also impacts the retail.

There is just a shortage of that purely driven by filling capacity and purely driven by availability of tanks. We think both of those should be behind us and the industry by the end of Q2.

Steve Tusa (Managing Director)

What is the Honeywell price increase of the 40% increase they put through, what is that related to?

Alok Maskara (CEO)

It does not relate to us. That is probably something different. You will have to ask them, Steve. It does not relate to us. We have contractual price that we entered in last year. Maybe it applies to people who did not enter into contractual price or retail canisters.

Steve Tusa (Managing Director)

Yeah, yeah, that makes some sense. Just lastly on commercial, I guess you guys are saying this is temporary and not really a macro thing out there. Were there any particular verticals where you saw more of a pre-buy than others or more of a kind of a destock than others?

Alok Maskara (CEO)

We thought pretty uniform across the different verticals. I mean clearly the retailers have more control over these projects on doing a full floor sweep emergency replacement, you can't really plan just by the nature of that. Yes, it was on the key account and full roof replacement. Our volume assumption and what we saw, we did build in slowdown in commercial new construction, which is only a small portion of our sales. Most of our sales are replacement. That's why we sort of built in. Obviously since we didn't have Q1, we built in the Q1 impact into the full year guide as well.

Steve Tusa (Managing Director)

Okay, great. Thanks for the color as always.

Operator (participant)

Thank you. Our last question comes from Damian Karas with UBS. Please go ahead.

Damian Karas (Senior Equity Research Analyst)

Hey, good morning everyone. Thanks for squeezing me in.

Alok Maskara (CEO)

Good morning, Damian.

Damian Karas (Senior Equity Research Analyst)

Morning, Alok. It sounds like you've taken a.

Few rounds of pricing action so far.

The latter in response to tariffs.

Could you just maybe talk a little bit about how your pricing actions have?

Been aligning with what you're seeing from your peers?

I mean, would you say it's been?

A pretty tight range out there? Are you seeing any notable deviations in pricing behaviors?

Alok Maskara (CEO)

I think just like we have seen in the past, it's been a fairly tight range. Sometimes the announcements language that is public could lead to a different conclusion. When we get market intelligence back I think everybody's in a very tight range here. In some cases we are at a competitive advantage since we buy our mini splits from Korea. I think that puts us in a better position than others, that is just more supply chain related impact on pricing. If we bought stuff from China we would do the same price increase as others are doing, so fairly tight range.

Damian Karas (Senior Equity Research Analyst)

Okay, got it.

That makes sense.

Just a model cleanup question here. You saw a pretty nice step.

Down in the corporate expense in the first quarter.

Just wondering if there's anything to that and what's a good way to think.

About that line item going forward.

Thanks.

Michael Quenzer (EVP and CFO)

Yeah, that's just related to some timing of the expenses and the allocation. For the full year still expected about flat to slightly down to 2024.

Operator (participant)

Thank you for joining us today. Since there are no further questions, this will conclude Lennox 2025 quarter conference call. You may disconnect your lines at this time.