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    LII
    Earnings call· Jun 2026(Q2 FY26)

    LENNOX INTERNATIONAL Q2 FY26 earnings call LII

    Jul 29, 2026 Source

    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

    5

    • 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

    5

    • 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

    16
    CategoryTargetConfidence
    Full-year Adjusted EPS
    $23 to $24
    high materiality
    Medium
    Full-year Revenue Growth
    approximately 8%
    high materiality
    Medium
    Home Comfort Solutions Revenue Growth
    approximately 1%
    high materiality
    Medium
    Building Climate Solutions Revenue Growth
    approximately 20%
    high materiality
    Medium
    Full-year Productivity
    approximately $60 million
    medium materiality
    Medium
    Interest Expense
    approximately $70 million
    medium materiality
    Medium
    M&A Amortization
    approximately $25 million
    medium materiality
    Medium
    Full-year Free Cash Flow
    $750 million to $850 million
    high materiality
    High
    Full-year Capital Expenditure
    approximately $225 million
    medium materiality
    Medium
    Residential Demand Recovery
    most meaningful recovery benefits to extend into 2027
    high materiality
    Medium
    Home Comfort Solutions Volume Growth
    high single digits
    medium materiality
    Medium
    Home Comfort Solutions Direct Channel Volume
    down kind of low single digits or so
    low materiality
    Medium
    Inflation Expectation
    5%
    medium materiality
    Medium
    Home Comfort Solutions Incremental Margins
    35%
    medium materiality
    Medium
    Building Climate Solutions Incremental Margins
    35%
    medium materiality
    Medium
    Material Cost Reduction Initiatives
    all next year
    medium materiality
    Medium

    Segment performance

    3
    SegmentRevenueYoYQoQMargin
    Total Company
    Solid second quarter performance with revenue and segment profit growth.
    		$1.5 billion3%—$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

    Operational metrics

    29
    Adjusted Earnings Per Share
    $7.72flat
    Q2 FY26

    Adjusted earnings per share were flat at $7.72.

    Free Cash Flow Conversion
    92%
    Trailing 12-month

    delivered 92% trailing 12-month free cash flow conversion, reflecting disciplined working capital execution and progress on inventory reduction.

    Net Debt to Adjusted EBITDA
    1.3x
    Q2 FY26

    Our balance sheet is strong with net debt to adjusted EBITDA of 1.3x at quarter end.

    Share Repurchases
    $130 million
    Q2 FY26

    During Q2, we repurchased approximately $130 million of shares.

    Tariff Refunds
    $25 million
    Q2 FY26

    Product costs also benefited from approximately $25 million of tariff refunds that we had originally expected later in the year.

    Tariff Refunds
    $5 million
    Q2 FY26

    Product costs reflected inflationary and production cost pressures and were partially offset by approximately $5 million of tariff refunds.

    Tariff Refunds Recognized
    100%
    Q2 FY26

    So on the refunds, we recognized 100% of our expected refunds that we think we can -- that were entitled to within the quarter.

    HCS Volume Decline
    21%
    Q1 FY26

    While volumes were down year-over-year again, this represented a meaningful improvement from the 21% decline experienced in the first quarter.

    Inventory Dollars
    flat
    Q2 FY26 vs December

    While inventory dollars were flat to December due to inflation and tariff-related cost increases, unit inventory levels continue to decline, and we remain on track to achieve our full year inventory reduction implied in our full year free cash flow guidance.

    Unit Inventory Levels
    continue to decline
    Q2 FY26

    unit inventory levels continue to decline, and we remain on track to achieve our full year inventory reduction implied in our full year free cash flow guidance.

    Residential New Construction Revenue Decline
    approximately 30%
    Q2 FY26

    driven largely by continued weakness in residential new construction, but revenues were down approximately 30% during the quarter.

    HCS Volume Decline (Q2)
    12%
    Q2 FY26

    revenue declined 7%, driven primarily by a 12% decline in unit volumes.

    HCS One-Step Volume Decline
    mid-teens
    Q2 FY26

    while one-step volumes declined in the mid-teens, driven largely by continued weakness in residential new construction

    HCS Two-Step Volume Change
    relatively flat
    Q2 FY26

    Two-step volumes were relatively flat compared to the prior year

    HCS EBIT Headwinds from Lower Sales Volumes
    $50 million
    Q2 FY26

    Lower sales volumes created approximately $50 million of EBIT headwinds during the quarter.

    HCS Factory Absorption Headwinds
    $10 million
    Q2 FY26

    approximately $10 million of factory absorption headwinds as we align inventory levels with market demand.

    BCS Organic Sales Growth
    12%
    Q2 FY26

    Revenue increased 24%, with organic sales up 12%.

    BCS Mix and Price Contribution
    3%
    Q2 FY26

    Mix and price contributed 3%, while acquisitions added 9% primarily from DuroDyne.

    BCS Acquisitions Contribution
    9%
    Q2 FY26

    Mix and price contributed 3%, while acquisitions added 9% primarily from DuroDyne.

    DuroDyne M&A Accretion
    $11 million
    Q2 FY26

    Within other costs, DuroDyne contributed approximately $11 million of M&A accretion

    HCS Market Share in Replacement
    small market share gain
    Past 12 months

    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.

    HCS Market Share in New Construction
    significant loss
    Q2 FY26

    while in new construction, we have seen a significant loss as we talked about earlier.

    Emergency Replacement Share Gain
    definitely gained share
    Q2 FY26

    Yes, we have definitely gained share within emergency replacement, our core contractor business in commercial, our residential dealers and working through distribution, all three have gained, and we are pleased with the progress there.

    HCS Margin Headwind (H2 YoY)
    better than the first half
    H2 FY26

    we expect the margin headwind year-over-year in the second half to be better than the first half

    HCS Price Contribution (H2)
    point or two
    H2 FY26

    and then we're going to pick up a point or two of price in the second half versus the first half, some of the new pricing initiatives that Alok mentioned in -- starting in July come in.

    HCS Margins (H2 YoY)
    slightly negative
    H2 FY26

    Well, you're going to get some headwind from the M&A that dilutive. -- price cost is a bit dilutive. That's the volumes accretive. So all of that still might lend to slightly negative.

    Absorption Headwind (H2)
    small headwind
    H2 FY26

    Yes. There's a small headwind within the guide now. We reduced some of that cost productivity for that additional absorption, mostly related to now that we have lower sales volumes, we still want to hit our inventory reduction targets within the free cash flow.

    HCS Revenue Growth (FY26, M&A contribution)
    2 points
    FY26

    So within the guide, yes, you picked up 2 points within M&A for the HCS revenue guidance and then you lost 5 for volume.

    HCS Volume Impact (FY26)
    lost 5
    FY26

    So within the guide, yes, you picked up 2 points within M&A for the HCS revenue guidance and then you lost 5 for volume.

    Industry KPIs

    8
    MetricValueDetails
    Price cost—
    Order backlog—
    Book to bill ratio—
    Data center hvac exposure—
    Organic operating leverage—
    Service aftermarket attach—
    Order lead times placement horizon—
    Orders bookings growth by vertical—

    Deals & partnerships

    4
    Comfort Air, Century and Costar Air brandsExpands 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 SubCoReinforced disciplined capital deployment strategy.

    Acquisitions completed in 2025.

    AESReinforced disciplined capital deployment strategy.

    Acquisition completed in 2023.

    Samsung and AristaPartnerships 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

    5
    Muted Residential End Market RecoveryExtends 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 ConfidenceCurrent operating environment

    Constraining underlying demand.

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

    Factory Absorption PressuresOngoing

    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 InitiativesDelayed 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 BusinessQ2 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

    5

    Residential Demand Recovery Timeline

    Next quarter
    CurrentMost meaningful recovery benefits expected to extend into 2027
    TargetSigns 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.

    Q&A highlights

    5

    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 read6 chapters

    Detailed Narrative

    01

    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.

    02

    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.

    03

    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.

    04

    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.

    05

    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.

    06

    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.

    AI-generated summary of the company’s earnings call. Not investment advice.