How has market share progressed in residential replacement, and has there been any pressure?

Lennox has seen small market share gains in residential replacement, while experiencing significant loss in new construction due to walking away from low-margin business. The company is pleased with its market share position in replacement. “Yes. On replacement, we have seen the small market share gain, while in new construction, we have seen a significant loss as we talked about earlier.”

Given the bifurcation between residential and commercial, what are the drivers of light commercial strength, and how much is due to underlying market versus Lennox share gains?

Significant share gains are attributed to the team's execution, focus on emergency replacement, and winning back national accounts. The market itself is also improving after a long decline, but a large portion of the improvement is due to share gains. “I think there is significant like share gain that I want to give credit to the team. As we build a new factory, we have focused a lot more on emergency replacement, and that's clearly playing out as we expected, maybe slightly better than we expected.”

Is the RNC walkaway number bigger now than previously thought, or is the revision primarily due to underlying replacement weakness?

The RNC walkaway impact was bigger than originally looked at, as that market remains extremely competitive with unacceptable margins. This contributed to a larger decline than initially anticipated. “It is bigger than what we had originally looked at. That market remains extremely competitive and the margins were there were just not acceptable.”

LII

Lennox (LII) Q2 FY26 earnings call: guidance and Q&A

Earnings call· Jun 2026 (Q2 FY26)· Industrials· Jul 29, 2026

Source: earnings call transcript

Executive summary

Lennox Q2 FY26 — Mixed Performance with Commercial Strength Offsetting Residential Weakness

Lennox reported a mixed second quarter, with robust performance in Building Climate Solutions driven by strong commercial execution and emergency replacement activity, largely offsetting continued weakness in Home Comfort Solutions. Residential demand recovery has been slower than expected, leading to a revised full-year EPS outlook, though the company maintains its revenue and free cash flow targets. Management emphasizes long-term market attractiveness and continued strategic investments despite short-term market fluctuations.

Highlights

Total revenue increased 3% to $1.5 billion.
Total segment profit increased 2% to $355 million.
Building Climate Solutions revenue increased 24% (12% organic) with strong execution and market momentum.
Operating cash flow generated $172 million, with 92% trailing 12-month free cash flow conversion.
Net debt to adjusted EBITDA at 1.3x, indicating a strong balance sheet.

Concerns

Adjusted EPS was flat at $7.72.
Home Comfort Solutions revenue declined 7%, driven by a 12% decline in unit volumes.
Full-year adjusted EPS guidance reduced to $23-$24 from a prior higher range.
Productivity expectation reduced to $60 million from $75 million due to absorption headwinds and delayed cost reduction.
Residential demand recovery slower than anticipated, with most meaningful benefits now expected in 2027.

Guidance & targets

Category	Target	Timeline	Confidence
Full-year Adjusted EPS	$23 to $24 high materiality	FY26	Medium
Full-year Revenue Growth	approximately 8% high materiality	FY26	Medium
Home Comfort Solutions Revenue Growth	approximately 1% high materiality	FY26	Medium
Building Climate Solutions Revenue Growth	approximately 20% high materiality	FY26	Medium
Full-year Productivity	approximately $60 million medium materiality	FY26	Medium
Interest Expense	approximately $70 million medium materiality	FY26	Medium
M&A Amortization	approximately $25 million medium materiality	FY26	Medium
Full-year Free Cash Flow	$750 million to $850 million high materiality	FY26	High
Full-year Capital Expenditure	approximately $225 million medium materiality	FY26	Medium
Residential Demand Recovery	most meaningful recovery benefits to extend into 2027 high materiality	FY27	Medium
Home Comfort Solutions Volume Growth	high single digits medium materiality	FY26	Medium
Home Comfort Solutions Direct Channel Volume	down kind of low single digits or so low materiality	Balance of FY26	Medium
Inflation Expectation	5% medium materiality	FY26	Medium
Home Comfort Solutions Incremental Margins	35% medium materiality	Balance of FY26	Medium
Building Climate Solutions Incremental Margins	35% medium materiality	Balance of FY26	Medium
Material Cost Reduction Initiatives	all next year medium materiality	FY27	Medium

Segment performance

Segment	Revenue	YoY	QoQ	Margin
Total Company Solid second quarter performance with revenue and segment profit growth.	$1.5 billion	3%	—	$355 million
Home Comfort Solutions Challenging residential market conditions, though demand trends improved sequentially from Q1. Volume declines were partially offset by pricing, mix, and acquisitions. Significant headwinds from lower volumes and factory absorption were partially mitigated by tariff refunds. Unit volumes: -12%Mix and pricing contribution: 3%Acquisitions contribution: 2%Two-step volumes: relatively flat YoYOne-step volumes: declined mid-teensResidential new construction revenue: down approximately 30%EBIT headwinds from lower sales volumes: approximately $50 millionFactory absorption headwinds: approximately $10 millionTariff refunds benefit: approximately $25 million	—	-7%	—	Declined $30 million
Building Climate Solutions Maintained strong momentum with improving commercial end markets and execution on growth initiatives. Growth driven by national accounts, emergency replacement, and service business. Higher volumes and favorable mix/price benefited segment profit. Organic sales growth: 12%Mix and pricing contribution: 3%Acquisitions contribution: 9% (primarily DuroDyne)Tariff refunds benefit: approximately $5 millionDuroDyne M&A accretion: approximately $11 million	—	24%	—	Increased

Deals & partnerships

Comfort Air, Century and Costar Air brands Expands reach into small and midsized distributed channel and broadens product offering. approximately $200 million

Disciplined bolt-on M&A approach. Meaningful opportunities to drive margin improvement through product integration, logistics synergies and streamline SG&A through the application of the Lennox unified management system.

DuroDyne and SubCo Reinforced disciplined capital deployment strategy.

Acquisitions completed in 2025.

AES Reinforced disciplined capital deployment strategy.

Acquisition completed in 2023.

Samsung and Arista Partnerships to grow share of wallet.

Leaning into initiatives that strengthen our long-term competitive position including distribution network optimization and partnerships like Samsung and Arista to grow share of wallet.

Risks & headwinds

Muted Residential End Market Recovery Extends into 2027

Revenue declined 7%, unit volumes down 12% in HCS.

Mitigation:Investing in innovative heat pumps, emergency placement capabilities, direct-to-dealer model, expanding parts/accessories/service offerings, distribution network optimization, partnerships.

Elevated Market Rates, Inflationary Pressures, Low Consumer Confidence Current operating environment

Constraining underlying demand.

Mitigation:Focus on controlling controllables, investing in capabilities, channel confidence growing, consumer confidence starting to rebound.

Factory Absorption Pressures Ongoing

Approximately $10 million of EBIT headwinds in HCS in Q2. Reduced full-year productivity guidance by $15 million.

Mitigation:Aligning inventory levels with market demand, adjusting cost structure, expecting better margin headwind in H2.

Delayed Material Cost Reduction Initiatives Delayed to 2027

Contributed to $15 million reduction in full-year productivity guidance.

Mitigation:Resources shifted to tariff mitigation; expected to resume and be realized in 2027 assuming stable tariff rules.

Residential New Construction (RNC) Low-Margin Business Q2 FY26, larger than expected

Significant loss of market share and revenue decline (approx. 30% in Q2 for RNC) due to walking away from unprofitable business.

Mitigation:Protecting margins, making smart business choices, focusing on value replacement customers, adjusting cost structure and sales force.

What to watch in Q3 FY26

Residential Demand Recovery Timeline

Next quarter

Current Most meaningful recovery benefits expected to extend into 2027

Target Signs of earlier or stronger recovery

Why it matters

The timing of residential market recovery is a key driver for HCS performance and overall company growth.

As a result, we now expect the most meaningful recovery benefits to extend into 2027 rather than occur in the back half of this year.

Find out whether LII delivers this. Inve re-checks your case every morning.

Q&A highlights

What are the key issues driving the 12% decline in one-step residential revenue, and what steps are being taken to improve results?

The majority of the decline was due to residential new construction, specifically low-margin business Lennox walked away from, which had a larger impact in Q2 due to seasonality. Underlying sell-through remains weak but is improving, and comps will get easier in the second half.

“Ryan, majority of the decline was due to residential new construction, where we talked earlier about, we walked away from really low margin business. And a large portion of that impact is beet in Q2 due to seasonality.”

asked by Ryan Merkel · answered by Alok Maskara

2 min read 6 chapters

Detailed narrative

Residential Market Dynamics

The residential market remains challenging due to elevated interest rates, inflation, and low consumer confidence, leading to muted end-market recovery. The shift from "replace to repair" is viewed as deferred replacements, with the long-term demand outlook unchanged. Lennox expects the most significant recovery benefits to extend into 2027 rather than occur in the back half of this year.

Commercial Segment Strength

Building Climate Solutions (BCS) demonstrated exceptional performance, with revenue up 24% (12% organic). This was driven by improving commercial end markets, momentum in emergency replacement activity, and strong execution in gaining national account customers and growing service business. Management attributed a large portion of this strength to share gains, noting the market is no longer declining.

Strategic Acquisitions and Capital Deployment

Lennox completed the acquisition of Comfort Air, Century, and Costar Air brands, expanding reach into small and mid-sized distributed channels and broadening product offerings. This acquisition, valued at approximately $200 million, is expected to be EPS accretive in 2027. This follows other bolt-on acquisitions in 2025 (DuroDyne, SubCo) and 2023 (AES), reinforcing a disciplined M&A strategy.

Tariff Refunds and Inflation

The company received approximately $25 million in tariff refunds in Q2 for Home Comfort Solutions and $5 million for Building Climate Solutions, which were originally expected later in the year. While these provided a partial offset, overall inflation expectations remain at 5% for the full year, with benefits from 232 tariff adjustments offset by continued inflation in commodities, fuel, and memory costs.

One-Step vs. Two-Step Channel Performance

Home Comfort Solutions saw varied performance, with two-step volumes relatively flat year-over-year, while one-step volumes declined in the mid-teens. The significant decline in one-step was primarily attributed to residential new construction, where Lennox walked away from low-margin business. This impact was larger than initially anticipated, contributing to a 30% revenue decline in residential new construction for the quarter.

Channel Inventory and Affordability

Channel inventory for residential products is normalized, with no further destocking expected. Management noted that the "repair versus replace" trend has stabilized. Efforts are being made by both manufacturers and contractors to improve affordability for consumers through promotions, addressing demand destruction and encouraging consumer purchases.

Summary of the company's earnings call; see how call summaries are prepared. Not investment advice.