Ryan Merkel (William Blair) asked what is driving the down-12% one-step residential result and whether tariff refunds were in the prior guide, plus the source of weaker second-half resi margins.
Alok Maskara said the majority was residential new construction (low-margin business walked away from, concentrated in seasonally heavy Q2) with underlying sell-through weak but improving; Michael Quenzer confirmed the guide included a 5% inflation assumption net of Section 232 tariffs and the IEEPA refunds (mostly received in Q2), and that weaker resi margins are simply lower-volume absorption.
Tommy Moll (Stephens) asked about replacement market share trends and Lennox's residential pricing strategy amid market volatility.
Maskara said replacement share ticked up modestly over the past 12 months (versus significant new-construction losses), and that Lennox offsets inflation with competitive pricing, with much of the Section 232 tariff pricing effective July 1, while early tariff-refund arrival let it delay some pricing actions.
Noah Kaye (Oppenheimer) asked for a finer point on residential volume assumptions and the inflation-guide offset, and about the drivers of commercial strength.
Quenzer said HCS volumes are now guided down high single digits (balance-of-year growth mostly indirect channel, direct down low single digits) with inflation held at 5% as commodity/fuel/memory offset the Section 232 benefit; Maskara attributed commercial strength largely to Lennox share gains (emergency replacement, national accounts) plus a market that has stopped declining.
Jeffrey Hammond (KeyBanc) asked whether the HCS core reduction is sell-through weakness or a larger RNC walk-away, and about repair/replace normalization.
Maskara said the reduction is all one-step (two-step still growing), driven largely by residential new construction (a bigger walk-away than originally expected given unacceptable margins), while repair-versus-replace has stabilized, channel confidence has fully returned post-canister-shortage, and consumer confidence bounces with macro/war headlines.
Jeffrey Sprague (Vertical Research) asked how HCS margins progress in the back half, whether they can be up year-over-year, and about channel inventory and industry volumes.
Quenzer said the year-over-year HCS margin headwind should be smaller in the second half (low-single-digit volume growth at ~35% incrementals, a point or two of price, lighter absorption), landing roughly flat-to-slightly-down (M&A and price-cost dilutive, volume accretive); Maskara said channel inventory is normalized with no more destocking, while sell-in has improved but sell-through remains under pressure.
Stephen Volkmann (Jefferies) asked to quantify the walk-away portion of the -12% one-step and whether consumer price normalization is easing affordability.
Maskara declined to quantify but said the vast majority of the 12% was residential new construction, and confirmed contractors and manufacturers are running more consumer promotions to improve affordability as demand destruction pushes some consumers toward repair.
Chris Snyder (Morgan Stanley) asked about the true underlying HCS Q2 margin excluding the ~$25M tariff refund and the sequential margin path.
Maskara cautioned against fully excluding the refunds as one-time since offsetting tariff-pricing costs continue and pricing actions start in Q3; Quenzer steered focus to the guide (low-single-digit second-half volumes at ~35% incrementals, more price coming in) rather than a precise sequential margin split.
Nicole DeBlase (Deutsche Bank) asked whether under-absorption remains a second-half headwind and if BCS's high-20s incrementals continue.
Quenzer said a small absorption headwind remains in the second-half guide (to hit inventory-reduction targets at lower volumes), and that BCS should continue at ~35% incrementals with a price-cost-neutral focus; Maskara praised BCS services, refrigeration, and rooftop execution and said HCS is at the cusp of similar performance as the market turns.
Nigel Coe (Wolfe) asked to reconcile the HCS guide change and where Lennox stands in its customer high-grading, plus remaining IEEPA refunds.
Quenzer confirmed HCS went from +4% to +1% (2 points of M&A gained, 5 points of volume lost); Maskara said the low-margin walk-away is nearly complete (a 'perfect storm' of faster RNC losses and slower AOR share gains), and Quenzer said 100% of expected refunds were recognized in Q2 with much of the cash already received.
Deane Dray (RBC) asked whether return requirements changed and about emergency-replacement share, and Brett Linzey (Mizuho) asked about ER margins and the productivity/tariff-mitigation trade-off.
Maskara said return requirements were unchanged (steady for 4-5 years) but RNC price competition surprised him, with focus staying on valued replacement/new-construction customers; ER share gains span contractor, commercial, and residential-dealer channels at margins in line with national accounts, and the deferred material-cost initiatives are mostly timing-dependent and expected to be recaptured in 2027 absent further tariff changes.