In addition to weak new construction, CEO Alok Maskara said elevated mortgage rates, inflation, low consumer confidence, affordability pressures, and weather variability all helped constrain residential demand.  

“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,” he said. 

In residential, performance varied by distribution channel, said Michael Quenzer, chief financial officer at Lennox.  

“Two-step volumes were relatively flat compared to the prior year, while one-step [direct channel] volumes declined in the mid-teens. This was driven largely by continued weakness in residential new construction (RNC), where revenues were down approximately 30% during the quarter.” 

Much of that decline reflects Lennox’s decision to walk away from the notoriously low-margin RNC business. Maskara said that market remains extremely competitive but that the margins are “just not acceptable.” Even so, Lennox lost more of that business, and lost it faster than the company had anticipated. 

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“In Q2, it was a perfect storm,” said Maskara. “We lost the RNC business a little sooner, and the share gain in add-on/replacement (AOR) was a little slower than we expected. Net-net, we feel good about where we are to protect our margins and make smart business choices, so we don't fall victim to taping $100 bills to every unit that is being shipped out to some of these accounts. We don't want to do that again.” 

Maskara expects comparisons to be easier in the second half of the year, as Lennox begins to “lap some of the residential low margin loss.” 

Replacement demand held up better, said Maskara, and Lennox gained a small amount of residential replacement share during the past 12 months.  

“At the end of the day, our focus is going to remain on our valued replacement customers and our valued new construction customers, where there's appreciation for the value that we provide versus commodity-type business,” he said. “I think we feel good about where we are, but we do understand there's short-term repercussions for that.” 

During the Q1 call, Lennox said contractors had become more comfortable recommending replacement as R-454B training improved and refrigerant cylinder shortages eased. That contractor confidence has now “returned fully,” said Maskara, and the repair-versus-replace trend appears to have stabilized. 

Lennox believes many repairs represent deferred replacements rather than permanently lost equipment demand and that the underlying demand profile remains unchanged. 

Affordability remains a barrier, however, which is leading some contractors to run more promotions and become more aggressive, said Maskara.  

“We are all very aware of that. Both the channel and the manufacturers are doing our part to increase affordability and make sure promotional dollars get applied to the consumer purchase.” 

Pricing and favorable product mix contributed 3% to residential revenue, partially offsetting the decline in volume, said Quenzer. Lennox delayed some price increases after receiving tariff refunds earlier than expected, but additional pricing tied to Section 232 tariffs took effect July 1. 

“That is consistent with what some of the other competitors have done,” said Maskara. “We feel good about where we are in the replacement side of the business on the residential portion. Obviously, we continue monitoring it, and we want to be fair with our channel.” 

Excluding residential new construction, Maskara said Lennox has generally been able to offset higher inflation through pricing while remaining competitive. Quenzer added that Lennox continues to expect approximately 5% inflation this year, as commodity, fuel, and memory chip costs offset some tariff relief. 

For the second half of the year, Quenzer expects residential results to improve gradually with Q3 performing better year-over-year than Q2 and Q4 improving further from Q3. He added that HCS volume is expected to be up in the low single digits for the balance of the year. 

“While residential demand is still below our expectations, the strength of our commercial business and continued cash generation position us well for the balance of year profit growth,” said Quenzer. 

For the full year, Lennox reaffirmed its expectation for overall revenue growth of approximately 8%, although the composition of that growth has changed since its prior guidance. The company now expects HCS revenue to increase about 1%, down from its previous forecast of 4%, while BCS revenue is projected to rise about 20%, up from 16%. Lennox said the revised mix reflects lower expected residential volumes, stronger commercial demand, and additional enterprise revenue from acquisitions. 

“I want to reemphasize that while current market conditions are dynamic, I believe the long-term growth trajectory of the industry is very attractive,” said Maskara. “Our fundamentals are strong, our strategy is clear, and our best days are still ahead of us.”