Lennox International Inc. (LII) Q2 2026 Earnings Report, Transcript and Summary

Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0, and a member of our team will be happy to help you. Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0 and a member of our team will be happy to help you. Thank you for your continued patience. Your meeting will begin shortly. And a member of our team will be happy to help you. Welcome to the Lennox 2026 Second Quarter Earnings Call. All lines are in a listen-only mode. And there will be a question-and-answer session at the end of the presentation. You may enter the queue to ask a question by pressing star one on your phone. To exit the queue, press star two. As a reminder, this call is being recorded.

I will now turn the call over to Chelsey Pulcheon from Lennox Investor Relations. Chelsey, please go ahead.

Thank you, Madison. Good morning, everyone. Thank you for joining us as we share our 2026 second quarter results. Joining me today is CEO Alok Maskara and CFO Michael Quenzer. Each will share their prepared remarks before we move to the Q&A session. Turning to slide 2. A reminder that during today's call, we will be making certain forward-looking statements which are subject to numerous risks and uncertainties as outlined on this page. We may also refer to certain non-GAAP financial measures that management considers relevant indicators of underlying business performance. Please refer to our SEC filings available on our Investor Relations website for additional detail including a reconciliation of GAAP to non-GAAP measures. The earnings release today's presentation and the webcast archive link for today's call are available on our Investor Relations website at investor.lennox.com. Now, please turn to slide 3 as I turn the call over to our CEO, Alok Maskara.

Thank you, Chelsey. Good morning, everyone. And thank you for joining us today. Please turn to slide 3. The second quarter demonstrated the strength of our direct-to-dealer business model, our dedicated talent, and proactive actions taken to manage the current operating environment. I want to thank our employees for improving our customer experience through enhanced digital and distribution capabilities. I also want to thank our customers and channel partners for navigating a dynamic market environment alongside us. Lennox delivered a solid second quarter. Revenue increased 3% to $1.5 billion. Total segment profit increased 2% to $355 million, and adjusted earnings per share were flat at $7.72. Within Home Comfort Solutions, year-over-year quarterly performance improved sequentially though the pace of end-market recovery remains muted. Elevated market rates, inflationary pressures and historically low consumer confidence are constraining underlying demand. Looking ahead, channel confidence is continuing to grow and consumer confidence is starting to rebound, which supports our positive long-term outlook for the market. Building climate solutions once again performed exceptionally well. We are seeing signs of progress across commercial end-markets, momentum in emergency replacement, and strong execution in the field to gain share and grow margins. Taken together, the results from the two segments demonstrate the value of our portfolio and the balance it provides across market cycles. Our long-term demand outlook remains unchanged even though the residential demand recovery has been slower than anticipated. As a result, we now expect the most meaningful recovery benefit to extend into 2027 rather than occur in the back half of this year. While we are reducing our earnings outlook, several key elements of our 2026 financial framework such as revenue and free cash conversion, have not changed. Our balance sheet remains healthy and we remain on track with our inventory reduction plans. That combined strength and the industry's long-term outlook provides us with the confidence to continue investing in the business, advancing strategic initiatives, and strengthening our competitive position. Now please turn to slide 4. Let me spend a minute on our recently completed acquisition of the Comfort-Aire, Century and Coast-Air brands. This acquisition is an excellent example of a disciplined bolt-on M&A approach. The acquisition expands our reach into small and midsized distribution channel, and broadens our product offering, allowing us to further accelerate growth. It also sharpens our focus on customer experience, by enabling one order, one invoice, and one shipment to our distribution and contractor partners for most HVACR equipment, accessories, and parts. Finally, we see meaningful opportunities to drive margin improvement through product integration, logistics synergies, and streamlined SG&A through the application of the Lennox Unified Management System, and expect the business to be accretive to our EPS in 2027. This strategic bolt-on acquisition along with DuraDyne and Supco acquisitions, completed in 2025 and the AES acquisition completed in 2023, reinforce our disciplined capital deployment strategy. Now let's turn to slide 5 and discuss the current demand environment and how we are positioning the business for growth acceleration. The factors affecting residential demand today, including affordability pressures, weather variability, softer consumer sentiment, and suppressed new construction activity are, in our view, temporary. We believe that much of the shift from replace to repair represents deferred replacements and the underlying demand profile remains unchanged. Our focus remains on controlling the controllables. We continue to invest in innovative heat pumps and our direct-to-dealer model to make it easier for customers to work with Lennox. Leveraging our successful acquisitions, we are expanding our parts, accessories and service offering, thus creating additional touchpoints with customers. At the same time, we are leaning into initiatives that strengthen our long-term competitive position, including distribution network optimization, and partnerships like Samsung and Ariston to grow share of wallet. Rather than getting weighed down by short-term market fluctuations, we are executing our strategy and investing in the capabilities that matter most when demand returns. With that, I will turn it over to Michael to review our financials.

Thank you, Alok. Good morning, everyone. Please turn to slide 6. The quarter reflected a mixed operating environment across the portfolio. Residential demand is still challenging, while strong commercial execution and contributions from recent acquisitions help support overall performance. We continue to navigate cost inflation and factory absorption pressures associated with lower residential production levels. These headwinds were partially offset by pricing actions and the timing of certain tariff refunds. Cash generation and a disciplined focus on working capital management supported strong cash flow performance during the quarter. Against that backdrop, let's turn to Home Comfort Solutions on slide 7. Residential market conditions remain challenging during the second quarter. Although year-over-year demand trends improved compared to the first quarter. Compared to the prior year period, revenue declined 7% driven primarily by a 12% decline in unit volume. Favorable mix and pricing contributed 3% growth, while acquisitions added another 2% partially offsetting the volume decline. While volumes were down year-over-year again, this represented a meaningful improvement from the 21% decline experienced in the first quarter. Performance varied across channels, two-step volumes were relatively flat compared to the prior year, while one-step volumes declined in the mid-teens. Driven largely by continued weakness in residential new construction revenues were down approximately 30% during the quarter. Segment profit declined million. Lower sales volumes created approximately $50 million of EBIT headwinds during the quarter. Mix and price were favorable and mostly offset cost pressures, including ongoing inflation and approximately $10 million of factory absorption headwinds as we align inventory levels with market demand. Product costs also benefited from approximately $25 million tariff refunds that we had originally expected later in the year. Let's move to slide 8 and discuss our Building Climate Solutions segment. While we have strong growth in the first quarter, Building Climate Solutions maintained its momentum in the second quarter, supported by improving commercial end-markets, and continued execution on our growth initiatives. Revenue increased 24% with organic sales up 12%. Growth was driven by success with national account customers and an increase in emergency replacement activity. Our service business also grew as customers increasingly leverage our combined equipment and service capabilities. Mix and price contributed 3%, while acquisitions added 9% primarily from DuraDyne. Segment profit also increased, benefiting from higher volumes and favorable mix and price. Product costs reflected inflationary and production cost pressures and were partially offset by approximately $5 million tariff refunds. Within other costs, DuraDyne contributed approximately $11 million of M&A accretion offset in part by investments in customer-facing digital capabilities, and innovation. Now let's turn to slide 9 to review cash flow and capital deployment. We generated million of operating cash flow in the second quarter, and delivered 92% trailing 12-month free cash flow conversion. reflecting disciplined working capital execution, and progress on inventory reduction. While inventory dollars were flat to December, due to inflation and tariff-related cost increases, unit inventory levels continued to decline, and we remain on track to achieve our full-year inventory reduction implied in our full-year free cash flow guidance. Our balance sheet is strong with net debt to adjusted EBITDA of 1.3x at quarter-end. During Q2, we repurchased approximately $130 million of shares, and after quarter-end, we completed the acquisition of the Comfort-Aire and Century brands using approximately $200 million of debt. We are also refining our full-year capital expenditure outlook to approximately $225 million down from $250 million. The change reflects project timing. But our key investment priorities are unchanged. With that, let's turn to slide 10 and discuss our updated financial guidance. As Alok outlined, we are updating our full-year adjusted EPS guidance range to $23 to $24. While our overall revenue growth outlook holds at approximately 8%, the composition of that growth has evolved since our prior guidance. At the segment level, we now expect home comfort solutions revenue growth of approximately 1% compared to our prior expectation of 4%. Building Climate Solutions revenue growth is now expected to be approximately 20% compared to our prior expectation of 16%. These changes reflect lower expected residential volumes, stronger commercial demand and approximately 1 point of enterprise revenue growth from the Comfort-Aire and Century brands acquisition. This acquisition adds approximately two points within HCS. The reduction in our EPS outlook is primarily driven by lower net volume expectations. Stronger commercial demand is more than offset by lower expected residential volumes. We now expect approximately $60 million of productivity versus our prior expectation of $75 million reflecting ongoing absorption headwinds from lower residential volumes and the delayed timing of some material cost reduction initiatives as resources were shifted to tariff mitigation. Interest expense is expected to increase to approximately $70 million and M&A amortization to approximately $25 million following the Comfort-Aire and Century brands acquisition. Importantly, our free cash flow outlook remains unchanged at $750 million to $850 million reflecting confidence in our inventory reduction plans and working capital execution. Other guidance assumptions, inflation, investments, tax rate and share count have not changed. 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.

With that, I will turn the call back to Alok.

Thanks, Michael. As we close, I want to reemphasize that while current market conditions are dynamic, I believe the long-term growth trajectory of the industry is very attractive. What gives me confidence is the performance of our portfolio, the durability of our cash generation, and our ability to continue investing towards growth. We are committed to innovation and operational excellence while continuing to allocate capital to expand our capabilities and improve our customer offerings. Most importantly, the dedication of our employees, and the values that define our culture continue to drive excellence at Lennox. Our fundamentals are strong, our strategy is clear. and our best days are still ahead of us. Thank you. We are happy to answer your questions now. Madison? Let's go to Q&A.

Thank you. To leave the queue at any time, press star two. Thank you. And we will take our first question from Ryan Merkel with William Blair. Please go ahead.

Hey, everyone. Thanks for the questions. Wanted to start on the resi revenues. The down 12% for the one-step is surprising. What are the what are the key issues, Alok? And then any steps you are taking to improve the results?

Sure. Right now, majority of the decline was due to residential new construction. When we talked earlier about we walked away from really low-margin business. And a large portion of that impact is being felt in Q2 due to seasonality. That masks that the underlying sell-through also remains weak, but is improving both sequentially and as we look at this going forward. That is a way we kind of look at the negative 12%. We have internally done a lot of analysis and feel confident that starts improving because we lapped some of the residential low-margin loss in the second half and the comps get easier. Even on the overall market dynamics.

Got it. Okay. That is helpful. And then on the guidance cut, it sounds like you had included the, refunds from some tariffs in the guide. So just confirm that for us. And then, you know, it looks like resi going to have weaker margins in the second half. Is that just the fixed cost absorption on the lower volumes? Or is there anything else in there that is pressuring the margins?

That is correct. On the tariff guidance, had built an inflation assumption of 5%. That includes the net impact of all increases within the 301 tariffs that we saw earlier in the year. And the IEEPA refunds that we expected initially in the second half of the year that we have now gotten most of them in the second quarter now.

And there is nothing else based on the second question, Ryan. It is just simply impact of lower volume and the absorption impact related to that.

Okay. Got it. Alright. Thanks. Pass it on.

Thank you. And we will move next to Tommy Moll with Stephens. Please go ahead.

Morning and thank you for taking my questions. Alok, first question for you on the one-step trends for resi. Noted that there is the new construction headwind. Some of that relates to business you have-- low-margin business you have walked away from. I am more interested on the replacement side there what is your view on how market share has progressed? Have you seen any evolution or pressure there?

Yeah. On replacement, we have seen small market share gain. While in new construction, we have seen a significant loss as we talked about earlier. And we continue to, build our distribution network efficiencies, continue investing in the sales team, but we are pleased with our market share position in the replacement, which has actually ticked up over the past 12 months.

Related question for you on pricing. Alok specific to resi, it seems like there have been some different strategies year to date. Some have raised and then lowered depending on differing tariff assumptions. Others have been slower to move. Just characterize for us what the Lennox strategy has been there and what you have seen across the market? There has just been a lot of volatility on that point.

Sure. Putting residential new construction aside because that is a different story. We continue to see higher inflation being offset by pricing actions across the wide spectrum. We continue to remain focused and do pricing competitively. You know, a large portion of the Section 232 tariff pricing is going to get into effect on July 1, which is consistent with how some of the other competitors have done, and we feel good about where we are in the replacement side of the business on the residential portion. And, obviously, we continue monitoring it. We want to be fair with our channel. Some of the early arrival of tariff refunds also, like, impacted how we thought about pricing and how we are going to take this going forward. So we were able to delay some of the pricing actions because of the early arrival of the direct refunds.

Thank you, Alok. I will turn it back.

Thank you. We will move next to Noah Kaye with Oppenheimer. Please go ahead.

Good morning. Thanks for taking the questions. I guess just to make sure that we have got it then on the revised guide, two points. One, so I think you would contemplated resi volumes down mid-single digits for the year. Does that sort of shift now to down high-single digits, down 10%? Is that can you, you know, give us a finer point on that? And the guidance on inflation expectations remaining unchanged with the February partial reprieve was there an offset to some of that goodness to keep the inflation guide intact?

Sure. No. I will give you a little bit of insights on that. Yeah. So, within the HCS volume guide, it now is high-single digits. We expect most of the balance-of-year growth to happen within the indirect channel as you have a favorable comp over year. On the direct channel, we expect balance-of-year to be down kind of low-single digits or so within the direct channel in the balance of the year. Then within inflation, we still expect to be 5%. There is a little bit of benefit that we saw with the adjustment to the February, but then we continue to see inflation on commodities, fuel, memory. Those mostly offset that benefit.

Okay. Thanks. And then when we look at the two segments, and the demand trends juxtaposed, I mean, really, is seemingly a tale of two markets. Feels a little unusual to have such bifurcation, but can you talk a little bit about the drivers of the light commercial strength? You mentioned some nice wins. You know, clearly, national accounts, emergency replacement. But how much of this is sort of underlying versus Lennox share gains?

You know, I think there is significant amount of share gain that I want to give credit to the team. As we build a new factory, we are focused a lot more on emergency replacement. And that is clearly playing out as we expected, maybe slightly better than we expected. At the same time, the extra capacity is helping us win back the national accounts. But also from end-market perspective, remember, this is the end-market that was from the data down continuously for, like, 17, 18 months in a row. And now it is finally turning the corner. But I would say among the improvement, large portion of share gain. And then there is definitely a benefit of the market not declining anymore. And showing some signs of life.

Helpful. Thank you, Alok.

Thank you. And we will move next to Jeffrey Hammond with KeyBanc Capital Markets. Please go ahead.

Hey. Good morning, guys.

Hi, Jeffrey.

So just back, it looks like your, you know, HCS, you are bringing down five points on a core basis. Like, is that just all sell-through demand weakness? Or is, like, this RNC you know, walk-away a bigger number? Or is there some other nuance in there? And then just my second one would be, just repair versus replace. You know, a lot of people are saying, like, it is normalizing, exiting the A2L transition, and this canister issue, and just what are you seeing there?

Sure. The answer is first is it is all one-step. Two-step, we continue to see good growth, and we are forecasting, the lack of destocking leading to good growth in the second half as well. So what I would say is, one-step the RNC loss is within the one-step. So I think that is why those two numbers overlap. I would say the large part of the decline in Q2 in one-step was driven by RNC. And that is a heavy quarter for RNC, as you know. And then even our reduction in the second half is primarily to that. Now we do see some underlying demand recovery that has been delayed. But we think from our perspective, the repair versus replace trend has stabilized. We see the channel confidence which was impacted last year because of canister shortage, has returned fully. And we all know that the consumer confidence is sort of bouncing along based on weather and other pieces. But a short answer to your question, Jeffrey, is that a large portion of the one-step decline is residential new construction, low-margin business that we walked away from.

Yeah. But I guess my question is that walk-away number bigger now than you thought? Or you knew that was there and your revisions really all underlying replacement weaker?

It is bigger than what we had originally looked at. That market remains extremely competitive. And the margins were there, which is not acceptable. So it is a little more than what we originally thought. And talked about.

Okay. Appreciate it. Thanks.

Thank you. And we will move next to Jeffrey Sprague with Vertical Research. Please go ahead.

Hey, thanks. Good morning. I just wanted to get some insight into how to think about sort of margins for HCS into the back half So we got some absorption issues. Right? But we are walking away from lower margin business. I guess you have some time for price to catch up a bit. So can you just give us some insight on how you think margins progress over the balance of the year in HCS?

Maybe relative to, you know, what we posted here in Q2 or relative to last year. Certainly be helpful. Yes, Jeffrey, we expect the margin headwind year-over-year in second half to be better than the first half even after you adjust for some of the tariff refunds, mostly driven by the volume growth that we expect now of low-single digits balance of the year to get the 35% incrementals on that. Also, we had a much heavier first half absorption headwind, and then we are going to pick up a point or two price in the second half versus first half. it is some of the new pricing initiatives that Alok mentioned in July come in. So better margin performance in the second half is the volumes start to come back.

And Jeff, to your earlier point, I want to add that our product mix is positive right now because of walking away from loss-making accounts. That is just masked by the other factors that Michael mentioned. Because of all the noise around absorption and the pieces. But the underlying mix is positive for us. Given our decision to not compete on those lower margin, negative margin accounts.

Is it overly optimistic to think that HCS margins are up on a year-over-year basis in the back half?

Well, you are going to get some headwind from the M&A that is a bit dilutive. Price-cost is a bit dilutive. The volume is accretive. All of that still might lean to slightly negative.

No.

So I think overall, we think it is pretty balanced, Jeffrey. We do not think it is optimistic nor do we think it is super conservative. Trying to put a very balanced picture forward.

Right. But something around sort of flattish to slightly down margins in the back half, I think, is what you are indicating. If I read that right.

Yeah. That is basically within the guide. That is approximate.

Within the range.

Yeah. And what do you actually think industry volumes were in Q2?

The June AHRI data and everything else that we looked at, like, you know, continues to show us continued difference between sell-in and sell-through. That is obviously going to become a much longer conversation, Jeffrey. But we think the sell-in has obviously improved substantially, and we see that in our numbers. And I think the sell-through, we still have to get more data and see how everybody comes through. I think that still remains under pressure.

And maybe last one. Do we still have a little bit more work to do on channel inventory as it relates to Lennox and some related absorption headwinds from that in the back half?

No. I think we are pretty complete on that, Jeffrey. Channel inventory is pretty normalized, and there is no more destocking.

Okay. Great. Thanks, guys. I will leave it there.

Thank you. And we will move next to Steve Volkmann with Jefferies. Please go ahead.

Good morning, guys. Thanks for taking the question. Maybe just to put a sharp point on it, the one-step down 12%, are you willing to sort of say what the walk-away business was of that 12%?

No. We are not willing to kind of go into that level of account details of where it was, but we can just tell you vast majority of that 12% was residential new construction.

Okay. Alright. Worth a shot. Look, I think on previous calls, we have talked a little bit sort of affordability and inflation in the end-market. And maybe some demand destruction. I think your view was that the most likely source of kind of, give there was going to be in the installer, margins. And that was two or three quarters ago we had that conversation. So I am curious if you are starting to see any sort of price normalization to the consumer that might sort of address this affordability issue. Issue?

Right, and I think this obviously is the problem is synonymous with the repair versus replace. So when there is demand destruction for equipment, they still have to repair it. And we do see movement there. I think the contractors are adding more promotions. They are getting more aggressive. We are, and also the manufacturers are earning more consumer-based promotions to take this forward. So, yes, I think we are all very aware of that. All the channels and the manufacturers are doing our part. To increase affordability and make sure promotional dollars can apply to consumer purchase.

Okay. Appreciate it. Pass it on.

Thank you. And we will move next to Christopher Snyder with Morgan Stanley. Please go ahead.

Thank you. I wanted to follow-up on some of the HCS margin discussion. I guess if we adjust out $25 million from Q2 operating profit, it seems like it takes that 23.7% to, like, 21.0%. So maybe, just like is that right? And then it seems like almost every year segment margins decline sequentially into both Q3 and Q4. And I guess the question is, should we be running sequential declines off that 21% number? I could not really follow all of the communication before. Thank you.

Yeah. Let me start by that saying we wanted to give you the tariff refund number for the sake of transparency, and that is how we are as a company. Do not think it is fair to exclude the tariff refunds as one-time because remember, our overall impact of tariff pricing all of that continues in the second half. A lot of our pricing actions are going into effect in the beginning of Q3. So when we gave you the numbers for sake of transparency, do not think It is fair to take it out fully. Because pricing would have offset portions of that if it had not come through. Q2 and Q3, yes. Q2 is the highest margin. But I think today, and this year is not a normal environment. Given lots of changes around pricing dynamics, tariff, inflation, Michael mentioned all those pieces. So we feel very comfortable for the full second half guide as we have given. But it is difficult to break it down between Q3 and Q4 at this stage for you guys.

Thank you. I appreciate that. And I was not really commenting on, you know, whether or not it is appropriate to leave it in EPS. I was just kind of more trying to figure out what the true underlying margin was in Q2. As we build into the back half. Like, so is it fair to run the declines off the 27% or the 21%? If that question makes sense.

Yeah. I would focus more on just our guide points that we expect volumes second half to be up low-single digits. You get 35% incrementals on that price-cost neutral, more price coming in. I think that is what I would focus on the second half, and that is what we are focused on delivering.

Thank you. I appreciate that. And then, if I could also just follow-up on the second half. It seems to me like you guys are calling for HCS revenue in Q3 just to be mid- to high-single digits above Q2. So is that right? And I guess the question I have is I think the only year where HCS revenue increased sequentially into Q3 was Q3 24, which was, of course, the start of the refrigerant build. So I would just want to make sure I have that sequential top line movement right on HCS. Thank you.

We do not give quarterly guidance. What I will say is keep looking back to the second half that we expect Q3 year-over-year better than the Q2 year-over-year. Q4 year-over-year better than Q3. So we continue to see improvement year-over-year as we go through the balance of the year. With the volumes up low-single digits balance of the year mostly around the indirect channel.

Thank you.

Thank you. And we will move next to Nicole DeBlase with Deutsche Bank. Please go ahead.

Yeah. Thanks. Good morning, guys.

Hi, Nicole. Hello.

I guess, I do just have a few nitpicky ones since we have been through a lot of Q&A already. I guess, first, under absorption, I feel like you guys were kind of implying that you had seen most of that headwind in the first half, but that maybe there could be a little bit in the second half. Can you just give us a sense if under absorption is still a headwind in the second half?

Yes. There is a small headwind. Within the-- 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. So a little bit of absorption headwind went into the second half in our new guidance.

Okay, understood. Thanks, Michael. And then BCS, the incrementals here have obviously been pretty good, high-20s in the first half. You guys expecting that high-20s to kind of continue in the second half within your guidance framework?

Overall, we continue to see volume growth there, get 35% incremental, so we are focused on price-cost neutral within that side of the business as well.

Yeah, and we are very pleased with BCS performance. Nicole, the three businesses within BCS -- the services business, the refrigeration business, and the rooftop business -- all continue to do very well. And that is the it can be just a result of great execution and good supporting market dynamics. So we believe that we are now at the cusp of HCS reaching similar performance. As we turn around the corner on market dynamics.

Got it. Thanks, Alok. I will pass it on.

Thank you. We will move next to Nigel Coe with Wolfe. Please go ahead.

Yeah. Look, it definitely bears mentioning BCS was fantastic. But understand there will be a lot of focus here on HCS. Just want to make sure I understand the moving pieces on the guide change for HCS, the plus 1%. That now includes the acquisition of Heat Controller. So is that what I heard? That is two points to HCS, and now we have about four points M&A coming in there. So the core is down three. Is that right?

That is correct. So within the guide, yeah, you picked up two points within M&A for the HCS revenue guidance, then you lost 5 for volume. So you went from 4 positive to 1 positive.

Okay. Okay. And there is a bit more M&A. Okay. Great. And then, look, just taking a step back. You know, you have you have you have had a very, you know, transparent strategy of high-grading the customer base, you know, firing lower margin customers, pushing price. You know, where are we in that process? Are we more or less complete in that process at this point, or is there still some ways to go? And maybe, Mike, could you just maybe just clarify is there any more IEEPA refunds in the second half guide? Thanks.

Sure. So let me take the first one. I would say we are nearly complete on the lower margin. And some of it was just driven by highly competitive RFP processes where we did not want to go into negative margins. But at this stage, like, some of that volume went away faster than we thought. And our offsetting growth in the AOR side is coming through just a little slower than we expected. I think that is what you are seeing in Q2. It is like the perfect storm. You know, we lost the RNC business a little sooner, and share gain in AOR was a little slower than we expected. But net, we feel good about where we are to protect our margin and make smart business choices so we do not fall victim of taping $100 bills to every unit that is being shipped out to some of these accounts. So we do not want to do that again. We have done that in the past. So we feel good about where we are. I will let Michael answer the IEEPA question.

So on the refunds, we recognized 100% of our refunds that we think we can that we are entitled to within the quarter. And we have also received a lot of that cash flow already related to the gain on those refunds.

Great. Thank you.

Thank you. And we will move next to Deane Dray with RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone.

Hey. Sorry to circle back on the walk-away business. But just be really interested in hearing Alok. Did you change your return requirements this quarter in any way? And I would suspect not, but just maybe some color there in terms of, you know, how much of the price competition surprised you?

No. We did not change our return requirements, Deane. I think our return requirements have been pretty steady over the past 4 to 5 years. So and, yes, I was surprised by the price competition in the residential new construction.

At the end of the day, our focus is going to remain on our valued replacement customers, our valued new construction customers. where there is appreciation for the value that we provide versus commodity-type business. So I think we feel good about where we are, but we do understand this. short-term repercussions for that, and we are going to work through that and appropriately adjust our cost structure and our sales force accordingly.

Good. That is helpful. And then it sounds like there was some good news on the emergency replacement business and the reentry there and have you gained share? Any update would be helpful.

Yes. We have definitely gained share in emergency replacement, our core contractor business in commercial, our residential dealers, and working distribution, all three have gained, and we are pleased with the progress there. The new factory is doing very well. And the freed up capacity in Stuttgart is also helping us strengthen and gain share in the key account business. So we feel good about that strategy. And the results there are as you can see in the P&L and otherwise, just working out as we expected, maybe slightly better than we expected.

Good to hear. Thank you.

Thank you. We will move next to Brett Linzey with Mizuho. Please go ahead.

Hey, good morning, all. Just a follow-up on the emergency replacement there. So you called it out as a growth driver. It sounds like you are taking some share. I guess from a margin perspective, historically, you know, ER was above segment margins. Where are we in that ramp process? Is it it accretive to segment margins now? Or do you still need more scale? And uptake in that business? And, you know, any thoughts on the future profitability there?

Yeah. Overall, it is attractive business. The margins are in line with some of our large national account business. We like that business, and we have opportunities that continue to expand those margins as we work on our distribution excellence within that channel. So it is really good business, and many years of growth opportunities still in front of us.

Yeah. I remember it being better than the segment average, but we have always said it is kind of in line with segment averages.

Okay. No. That is helpful. And then on the tariff mitigation sounds like you shifted some resources there, which delayed some of the material cost reduction initiatives. and led to that productivity cut. When do you think those deferred cost-out initiatives resume? And are they volume-dependent and that is really the driver of that? Or is it just timing and maybe there is an opportunity to recapture some of that $15 million here in the coming months and quarters.

It is mostly timing dependent. I mean, there is obviously a small, small element of volume, but it is mostly timing dependent as we move resources. I wish I could tell you that we can get it all in 2027 and we will if there are no more changes to the tariff and the tariff rules. The continuous evolution of tariff rules and tariff changes and Mexico and Canada, and just that has taken up a lot of engineering and other resources to mitigate that. But assuming a stable thing, we get it all next year.

Okay. All makes sense. Thanks a lot. Best of luck.

Okay. Thank you. Since there are no further questions, this will conclude Lennox's 2026 second quarter earnings call. You may disconnect your line.