Lennox (LII) Q1 FY26 earnings call: guidance and Q&A

How should investors think about the timing of cost increases and price realization, given that many costs won't impact until Q3? Does the previous H1/H2 EPS split still apply?

Most cost and price impacts will fall in the second half of the year. A price increase was announced, with full impact expected later in Q2 and predominantly in H2. The revenue split will shift more to H2, but overall profitability by quarter should remain similar to last year.

“Most of the cost impact and the price impact would fall within the second half. We've announced a price increase earlier this week, it will take some time before we start to see the full impact, maybe you'll start to see a little bit later in the second quarter. But predominantly, both of these should come into the second half of the year.”

asked by Noah Kaye · answered by Michael Quenzer

The cost inflation forecast increased from 2.5% to 5%, implying an extra $100 million headwind. Are there competitive implications, and how is price elasticity playing out in HCS?

The numbers are roughly correct. Management does not foresee a competitive disadvantage as inflation and tariffs impact all manufacturers. They remain sensitive to competitive dynamics. The increased price actions are expected to stick better due to the broad-based inflation.

“I don't see any competitive dynamic or drawback to us [indiscernible] inflation in oil, commodities, components [ are adapted ] in all of us. The Section 232 derivative tariff impact, that hits deeper differently, but it does hit every manufacturer.”

asked by Julian Mitchell · answered by Alok Maskara

Can management provide more detail on the scope and impact of the new Section 232 tariffs, considering the complexities of cross-border manufacturing and steel content?

The scope is wide, and secondary impacts are challenging. Lennox has experience navigating these uncertainties by adapting, moving raw materials, and working with vendors. While the situation is dynamic, they believe they are handling it with resiliency. They are not alone in being impacted, as it affects any manufacturer dealing with metal.

“The scope is pretty wide. And also, as time progresses, the secondary impacts are coming out to be also quite challenging or new. So the primary impact is often well understood. Once you understand all the different products and the classification codes.”

asked by Amit Mehrotra · answered by Alok Maskara

Is the stabilization in repair vs. replacement due to consumers moving back to replacement, or simply repair activity not worsening? Is this a leading indicator for potential destocking if consumer activity doesn't pick up?

The sentiment from dealers indicates that the situation is not worsening, and deferred replacements are now occurring. Contractors are more confident with new refrigerants and training. Consumers are making more economic decisions, opting for replacement over repair due to better efficiency, warranty, and financing. This suggests green shoots in consumer confidence.

“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 a replacement.”

asked by Amit Mehrotra · answered by Alok Maskara

What is the current percentage of U.S. production for residential/commercial units, and are there plans to redomesticate production over time, or does it still make sense to pay tariffs for Mexican production?

Lennox needs policy stability before making major decisions like massive reshoring. Currently, they are fine-tuning operations, changing metal sources, and making smaller adjustments. They have flexibility with three residential factories in the U.S. and one large one in Mexico. It still makes sense to mitigate tariff impacts product by product rather than a large-scale transformation given policy uncertainty.

“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, changed a bunch of like a smaller division but before we make any large decisions, we do want to see some stabilization in policy and more of a consistent approach versus seem like the approach is [indiscernible] so no major changes in the pipeline in terms of massive reshoring.”

asked by Nigel Coe · answered by Alok Maskara

Can management quantify the recent price increases and their dollar effect? If equipment is a small portion of total installation cost, does it meaningfully change consumer price elasticity?

The price increases were announced recently and will be worked through. The changes in overall revenue reflect the expected price impact. Equipment pricing is considered the least variable in the total installation cost, which is typically 40% equipment/parts/supplies and 60% contractor labor/margin. Therefore, it is not expected to change consumer price elasticity meaningfully.

“I don't think it changes the consumer price elasticity in any meaningful way. But we are sensitive to the market demand supply agreement, but remain convinced that equipment pricing is the least of the variable in that equation.”

asked by Joseph O'Dea · answered by Alok Maskara