Release Date: July 29, 2026
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Lennox International Inc LII reported a 3% increase in revenue to $1.5 billion for the second quarter.
- The Building Climate Solutions segment showed strong performance with a 24% revenue increase, driven by national account successes and emergency replacement activity.
- The company completed the acquisition of Comfort-Aire, Century, and Coast Air brands, which is expected to be accretive to EPS in 2027.
- Lennox International Inc (LII) maintained a strong balance sheet with a net debt to adjusted EBITDA ratio of 1.3 times.
- The company generated $172 million of operating cash flow in the second quarter, with a trailing 12-month free cash flow conversion of 92%.
Negative Points
- Residential demand remains challenging, with a 7% decline in revenue driven by a 12% decline in unit volumes.
- The company reduced its full-year adjusted EPS guidance due to lower net volume expectations in the residential segment.
- Lennox International Inc (LII) faced cost inflation and factory absorption pressures, impacting profitability.
- The residential new construction market saw a significant decline, with revenues down approximately 30% during the quarter.
- The company experienced a reduction in expected productivity from $75 million to $60 million due to ongoing absorption headwinds and delayed material cost reduction initiatives.
Q & A Highlights
Q: The residential revenues were down 12% for the one-step channel. What are the key issues, and what steps are being taken to improve results?
A: The majority of the decline was due to residential new construction, where we walked away from low-margin business. This impact is felt in Q2 due to seasonality. The underlying sell-through remains weak but is improving. We expect improvement as we lap some of the residential low-margin loss in the second half, and the comps get easier.
Q: Regarding the guidance cut, was the tariff refund included in the guide? Also, will residential margins be weaker in the second half due to fixed cost absorption on lower volumes?
A: Yes, the tariff guidance included the refunds. The weaker margins in the second half are primarily due to the fixed cost absorption on lower volumes, with no other significant factors impacting margins.
Q: On the one-step trends for residential, how has market share progressed, particularly on the replacement side?
A: We have seen a small market share gain in replacement, while in new construction, we have seen a significant loss. We continue to build distribution network efficiencies and invest in the sales team, and we are pleased with our market share position in replacement, which has ticked up over the past 12 months.
Q: Can you clarify the revised guidance for residential volumes and inflation expectations?
A: Residential volumes are now expected to be down high single digits. The inflation expectation remains at 5%, with benefits from the 232 tariff adjustments offset by ongoing inflation in commodities, fuel, and other areas.
Q: How do you view the light commercial strength, and how much of it is due to underlying market conditions versus Lennox share gains?
A: There is a significant amount of share gain, supported by our new factory and focus on emergency replacement. The market is also showing signs of improvement after a long period of decline. A large portion of the improvement is due to share gain, with some benefit from the market not declining anymore.
Q: Regarding HCS margins in the back half, how do you expect them to progress relative to Q2 or last year?
A: We expect the margin headwind year-over-year in the second half to be better than the first half, driven by volume growth and improved pricing initiatives. The underlying mix is positive due to walking away from low-margin accounts, although this is masked by other factors like absorption.
Q: Is there more work to do on channel inventory related to Lennox, and are there any related absorption headwinds in the back half?
A: The channel inventory is normalized, and there is no more destocking expected. We are complete on that front.
Q: On the emergency replacement business, is it accretive to segment margins now, or do you still need more scale?
A: The emergency replacement business is attractive, with margins in line with our large national account business. We have opportunities to expand margins further through distribution excellence, and there are many years of growth opportunities ahead.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
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