Can everybody take a seat? We'll go ahead and get started. It's 9:00 A.M. Welcome. Good morning, everyone. Thanks for joining us, everyone who's listening to the webcast. It's great to have you here today. First, let me introduce the LII senior team who's joining me again this year, as they always do, Joe Reitmeier, who everybody knows, CFO. Next, our business segment presidents, Doug Young, who runs Residential, Gary Bedard, who runs Refrigeration, Elliot Zimmer, who's our new Commercial President, and then the members of our team, John Torres, our General Counsel, Prakash Bedapudi, who's in charge of technology, Dan Sessa, who's our Chief HR Officer, and then everyone knows Steve Harrison in the back, who's in charge of investor relations. Let's go ahead and get started. What we want to accomplish today is what we typically do at this meeting. I'll provide a short overview of Lennox International.
I'll be followed by each of the segment presidents who will talk a bit about their businesses, give you an update on the markets, and our key strategic initiatives. Joe will be up next and refine our 2019 guidance, and then review in some detail our 2020 guidance. As always, we'll end with Q&A. We've shown this chart for nearly a decade now, and I refer to it as our elevator pitch to investors, and it stands the test of time, capitalizing on growth markets. We'll talk about today. Even with sort of some of the noise in 2019 with the cooler temperature impacting our residential market, we still believe the markets in Residential will grow mid-single digits over the next few years. The commercial market's flat in 2020, but potential growth in out years. We're well positioned for continued margin expansion.
We'll talk more about another very good year on material cost reduction in 2020 set up, factory productivity, and continued SG&A leverage as we grow SG&A as a portion of total revenue growth. We're winning in the marketplace with investments in product distribution. Over the last 18 months, our strategy in Residential sort of been muted a bit because of the tornado impact. In 2020, we're back on the attack. Doug's going to talk about we're back opening stores. We're going to be opening 20 new Lennox Plus Parts stores. We now, by the way, refer to them as Lennox Stores rather than PartsPlus. When Doug says Lennox Stores, in your mind, you should hear PartsPlus. Investments in product, Doug's going to talk about our new high-efficiency products in Residential that are going to be launched at our sales meeting.
We're going to give you a sneak preview sort of in the HVAC industry. Pretend this is sort of the teaser for the new Star Wars film that Doug's going to show you. Gary Bedard's going to talk about a whole new array of new products in our Refrigeration segment in response to Department of Energy regulation changes. We continue to make significant investments in digitization to support our dealer customers and drive market share. The fourth bullet point is consistent, which is driving shareholder value with a disciplined use of free cash flow. Joe will talk about it, another $400 million targeted share buyback in 2020 as we continue to generate cash and return cash to shareholders. Tornado financial update. I know everyone gets excited for me to do the update on the tornado. Hopefully, this will be the last year.
In fact, I will state this will be the last year that we have a chart like this. A quick tornado update. I think the most important point on this page is we've reached a final agreement with insurance companies for $368 million. We've always sort of stated that we are going to get this, but I will tell you, until you get it, there's always a chance that you won't. We're extremely excited and appreciate all the hard work of our team as we went and got this. We expect to have the cash by the end of the year. In fact, we may have the cash as soon as this week. A couple minor changes in the specifics on the chart since we last stated at the Q3 earnings call.
Number one is due to the lower rebuild costs in Marshalltown, and our team has done a great job on executing. We've reduced the non-core insurance recovery by $9 million. In other words, it's costing us $9 million less to rebuild the factory than we last guided. Great work by the team. On the core side, lost profits are up $5 million, offset by an additional $5 million in insurance recovery, with the core EBIT impact remaining constant. The increase in lost profits is driven by now looking like we've gotten back 80% of the lost tornado share, down from 85% that we'd guided previously, and from truing up some of our estimates on the reacquisition cost of gaining back the share. A very traditional chart. It takes a look at our business.
It's been consistent over the last year or two as we divested some of our refrigeration businesses. Our Residential business is in red, our commercial HVAC business, which is now North America, is in green, Refrigeration is in blue. We're broadly 60% Residential, 40% Commercial and Refrigeration. Another very traditional chart. It takes a look at our geographical mix. We're now primarily a North America business with a sliver in Europe. Our end markets are three-quarters replacement, which is obviously very good to be exposed to the replacement market, more so than the more cyclical new construction. Our end customers, as I said earlier, are 60% residential, 40% commercial. A standard chart that on the left shows revenue and EBIT ROS, on the right shows free cash flow.
For 2019, we're also showing a pre-tornado ROS in 2019 to allow to a better comparison for our 2020 number, and you can see in the footnote, we just adjusted the revenue and the EBIT that we got from insurance proceeds. Joe will be discussing our 2020 guide in more detail later, but you can see on this page it is a core EPS of $11.30-$11.90. You can see a revenue number of $4 billion on this page. Later, Joe will talk about a revenue guide of 4%-8%. If you do all the math on the midpoint of all these numbers for 2020, it will be revenue up 6%, ROS up 60 basis points, and an incremental drop-through of 20%, which is short of our normal incremental drop-through of 30%.
The reasons we are guiding for a 20% drop-through in 2020 are three derivative effects of the tornado. First, as we had discussed numerous times, including two minutes ago, we're only reacquiring 80% of the lost share in 2020. We got an insurance check for 100% in 2019. We're only, in real life, if you will, capturing 80% of it back in 2020, a very high- margin business. Second, again, as we have discussed before, the one-time cost reacquisition of lost share lowers the margins. Again, these are one-time rebates, refunds we put in place to win back business. Third, a $5 million of increased depreciation at Marshalltown due to the rebuilding. Again, if you do all the math, what you'll see is the difference between a 20% drop-through and a 30% drop-through is about $20 million of EBIT attributed to those three items.
I gave you $5 million for depreciation. The other two items are roughly split. It's those three items account for $20 million delta in earnings. While all these items affect incremental drop-through in 2020, they roll off in 2020. As you'll see on the next chart, we are still guiding for our traditional 30% incrementals in our three-year guide, which luckily was here. This chart lays out our 2022 three-year targets. We made nice progress over the five years prior to the tornado. Adjusting for the impact of divestitures in Refrigeration, our revenue up nearly 6% at actual FX, margins up nearly 500 basis points. I would suggest you think about the tornado setting back our progress by 18 months as we have worked through those headwinds that it has caused.
Our traditional targets of 6% revenue with a 30% incremental margin are what we are setting for our new three-year guide. 6% revenue, $4.5 billion. Broadly speaking, you can think of the 6% revenue growth as we've talked about it in the past, half market, half share gain. Again, we're high teens share in our two largest businesses, our North America HVAC business. If you gain 0.5 points of share, that's roughly up to 3 points of revenue. 30% incremental margins and an 18% operating margin in 2022. Finally, under the topic of long range targets, here are our 2022 segment profit margin targets. Residential 19%-21%. Tornado adjusted, the Residential business will be at about 17.5% operating margin in 2019. Commercial 19%-21%. Commercial will be roughly 17% at the end of the year.
Refrigeration 15%-17%, and we'll end the year somewhere between 11%-12%. A big part of our margin expansion story over the last decade, and continues to be for the future, has been our continued focus on material cost reduction. We continue to reap significant benefits from our global sourcing initiatives. Our material cost reduction strategy is driven by two broad initiatives, continued leverage of the Asian supply base. Approximately half our components are sourced out of the U.S. and Canada, and expanding the global supply chain into Asia and increasingly South Asia. Obviously, the Trump tariffs were a proximate cause of why we've moved to Southeast Asia and India. As I mentioned before, we found that due to the significant rise in Chinese labor rates over the past decade, that suppliers in Thailand, Malaysian industry are extremely competitive.
Even if the tariffs were to go away, and I haven't checked my Twitter account this morning, we will continue to grow our sourcing in Southeast Asia with these countries because landed costs in U.S., even ex-tariffs, are lower for us. Second, we continue to focus on designing costs out of our products. The key enabler that is the significant investment we have made and continue to make in computational analytics and accelerated life qualification testing that allows us to dramatically reduce the time to implement cost savings. You can see on the right some examples of that as we optimize key components. Here we're looking at a heat exchanger, and that has to do with the material we use plus the design. On the bottom, you see we've moved in-house our own IP and our capability of designing it for low cost for our control systems.
As Joe will talk about later, we are targeting $25 million of savings from material cost reduction in 2020, and we expect our progress to continue in this initiative in the years ahead. We talked quite a bit over the years about leveraging our digital investments. That continues unabated, even with the tornado impact. We haven't taken our foot off the accelerator here. Three broad areas of investment that we've talked about over the years, e-commerce, controls, and factory productivity. These investments are driving both market share gains and margin expansions. I don't want to steal the segment presidents' thunder. Each of them will talk a bit more about one or two of these initiatives and how it impacts their segments. Third is factory productivity.
I just want to spend a moment of talking about in 2020, we are targeting $10 million incremental EBIT from factory productivity initiatives across Lennox International. Three big buckets of focus area. Number 1, labor management. We put in systems and processes that better allow us to more effectively manage absenteeism and attrition in a labor market with sub- 4% unemployment rate. Again, we've called out on several of the earnings call the negative impact that's had on us in 2019. We're in a much better position as we go into 2020. Second, automation. We continue to accelerate automation investments both in the fabrication and assembly portions of our factories to drive down conversion costs. Third, information flow. Investing in IT to ensure information flow on the factory floor allows for optimal synchronization. The industry jargon on this is Industry 4.0.
Again, I don't like IT jargon, but investments in this IT in the factory floor allows us to have the right information at the right place at the right time on the factory floor and in the supply chain for optimization. These are all important factory productivity initiatives for us in 2020 and beyond. Okay. That's it for me on the upfront part. I'll be back up at the end for Q&A. With that, I'll turn it over to Doug, and he'll walk us through Residential. Doug?
All right. Thank you, Todd, and good morning, everyone. On the left-hand side of the chart, you see our revenue and ROS. Over the last four years, our revenue has grown at a 7.5% CAGR. Our ROS, on a pre-tornado basis, as Todd said, would stand at about 17.6%, growing 270 basis points in that same four-year time period. Our mix of business has remained relatively consistent, with replacement sales comprising about 80% of our sales and new construction, the balance. Lennox makes up about 80% of our equipment sales, selling directly to contractors, while Allied sells through intermediate distribution exclusively, and it makes up about 20% of our sales. Next is an overview of the North American residential market. The left-hand side shows the industry information on a year-over-year change in units.
We are forecasting the overall market to be up approximately 3% this year, down slightly from our original forecast, but no one anticipated as cool a summer as we actually experienced. However, for 2020, we're calling for the market to be up mid-single digits. We expect to see continued growth in both the new construction and replacement markets. The underlying market conditions remain favorable, and we continue to see a strong consumer. In 2020, we expect to have a more normal weather pattern as well as positive mix. We've announced a price increase of up to 6% in all of our businesses, which will be effective in the first quarter of 2020. As always, with consumer-based businesses like Residential, the macroeconomic political uncertainty remains a risk.
Taking a slightly longer view of the market, the new housing bubble of the early and mid-2000s will drive our replacement business over the next several years. Through this growing installed base, we believe our end markets will grow at a multiple of GDP, making us very confident that we will see the North American residential market grow at a mid-single- digit CAGR. Today, we've seen it growing at that rate for the next several years. The analysis on this slide that I showed you last year still holds true today. The units put in new construction homes in the early 2000s will flow into the replacement market. First point I want to make is the replacement market is almost exclusively driven by catastrophic failures. Very little is done from a planned replacement perspective in the residential market.
By catastrophic failure, I mean talking about having to replace a major ticket item such as a compressor, a heat exchanger or a coil. Our analysis of the units that were sold during the early to mid-2000s looked at all the warranty data, then used the statistical analysis, Weibull, to predict how long the units would last before they had a catastrophic failure. The curve on this page plots the analysis for one production year, 2002, with the Y-axis being the expected failure rate percent and the X-axis being years to catastrophic failure. We found two interesting conclusions from our analysis. While we've always talked about the average life of a residential system being around 12 years, when we did the analysis, we found out the actual life is actually closer to 16 years. That's the first one.
The second is, and as you might expect, this is only the average or the mean. There's actually a pretty wide bell-shaped curve around the average based on the geographical location of the equipment, the type of the equipment, how it was maintained, how many man or how many run hours it had on it. This analysis supports our theory that the echo effect of the housing boom will support our markets growing at a multiple of the GDP for the next several years. I'd like to talk about Lennox Stores, as Todd mentioned, previously referred to as PartsPlus. As we've talked about over the years, our Lennox Store strategy is an important driver of our share growth. From 2010, our physical distribution footprint has grown by around 300%.
At the end of this year, we'll have 226 locations across North America where our contractors have access to our parts and supplies and equipment. In 2019, we slowed the opening of our stores, given our product availability, as well as we focused on store performance. For this reason, we've trimmed our overall locations largely due to underperforming stores that were put in the wrong locations, or in some cases, specific customers who no longer needed that store nearby. An average store is around 10,000 sq ft. About 80% of that is warehouse, and the balance of that is the front-end wholesale store. About 80% of the sales are equipment and accessories, with 20% being sales of parts and supplies. These wholesale distribution points allow us to sign up new dealers and more effectively serve our existing dealers. The same story holds today as last year.
We're at a point with our distribution footprint that we'll be focusing on leveraging the access points we have for our dealers, giving them more reasons to give us a higher share wallet. When we were growing from 60 to 90 stores, the incremental 30 stores were the greatest points of leverage. When you're at 226 stores, driving same-store sales is the greatest point of leverage, and we want to maximize our opportunity with our existing stores. Now, the most important takeaway is what Todd said earlier. From this chart, we are going to open 20 new stores beginning in 2020. Our goal is to fill out the North American market with store locations within a 30-minute drive time of our dealers in the markets that can support a store. Right now, our goal is to have 350 stores in place by 2024.
When you do the math, we see the ability to go well beyond 350. Most importantly, this strategy works. This is a great growth vehicle for us. Our one-step model allows us to be selective where we open stores and have a scalable backroom to support our network. With a focus on same-store sales growth, we're going to drive parts and supplies to a higher percentage of our overall revenue. Now that we have the network infrastructure in place and growing, there's a real opportunity to grow our parts and supply sales. As you can see on this chart, our focus on driving parts and supplies revenue in 2019 is working as we eclipsed the 20% mark, reaching $393 million. We set a target to get that number up to 23% by 2023, growing our parts and supplies revenue at a 15% CAGR.
When we do that, it will be worth $300 million of incremental revenue. That is revenue that is similar in profitability to our equipment business. To accomplish that, there are a handful of initiatives that we'll be driving, but three rise to the top. First is our product assortment in our stores. We've revamped our assortment to stock the parts and supplies contractors use on a daily basis. Second, we've completed the development of a rigorous training program for all employees working in the store. Having knowledgeable associates behind our counters greatly aids our customers. If necessary, our robust online tools available at every store make it just a few clicks away to get in-depth knowledge on parts and supplies. The third initiative is to enhance our merchandising in the store and online.
Through our analytics, we've been able to determine what items are frequently purchased together, now we merchandise bundles throughout the year. This speeds the selection process as well as improves our penetration of parts and supplies by store. Our overall strategy of Lennox Stores and driving a higher percentage of parts and supplies is exciting and the results are clear. The strategy is working. Arguably, we are one of the leaders in this industry when it comes to digitizing our business. Today, we generate about 40% of our revenue from online orders. Our aspirational goal is to eclipse 50%, this brings a 24/7 capability to our dealers and scalability and productivity to us. Our e-commerce LennoxPROs platform has been completely revamped, simplifying online purchasing.
The digital space will always be in development, and we will continue to invest in order to make doing business with us easier. Strategically, we want to make doing business with us so easy, dealers will continue to leverage our capability and make their business more seamless with ours. With sales tools, today we have about 4 million visits a year and growing. That's up 20% from the prior year. These tools allow dealers to not only improve the professionalism of the salespeople in the home, but also provide them productivity. We've created a widget for our dealers to enable homeowners visiting their website to generate warm leads. We also rolled out an enhanced proposal tool for our dealers, so when they're in the home, they can integrate all of the product information, the reviews, the warranty information, and all the marketing information into their proposals.
As we go forward, we see the opportunity to enhance their productivity even more through seamless integration with field scanners, which can integrate all the equipment information and history into one address. Technical tools are our investment to assist our dealers with installations and service of our products. We have tools for contractors to look up warranty information, their history, any data, look up repair parts, either what is needed today or what is available, as well as a dashboard for our customers to continuously monitor the status of their customer equipment who have Dave Lennox Signature Collection products, as well as the entire suite of technical documents. These tools make our customers more productive, better able to satisfy their customers' needs, and provide us the ability to have scalability. The adoption and usage of these tools has been dramatic.
From the startup in 2015, we now have 4 million site visits in 2019 and growing, and that is up 10% over the prior year. We see digitization as a necessity as well as an important growth vehicle and a differentiator that we will continue to invest in. Part of our introduction package for the two new leadership products available this spring. Lennox has always been an innovation leader in our industry, and it continues with the introduction of these two new products. With the introduction of the Dave Lennox Signature Collection 28 SEER air conditioner and the 99% furnace, Lennox will have raised the bar on the ultimate home comfort system. These products will be the most advanced, efficient, and precise products available. They will set a new level in the industry for the best that money can buy.
As the video highlighted, our pursuit for perfect air is becoming a reality. With that, I'd like to introduce Elliot Zimmer, the President of Commercial.
Thank you, Doug. Good morning. I'm excited to spend a few minutes walking you through the Commercial business. Starting on the right side of the page, the Commercial segment is comprised of two businesses, HVAC Equipment, which is 80% of our revenue, and National Account Services, or NAS, which is 20% of our revenue. We're in a replacement cycle with 70% of our revenue coming from planned or emergency replacement jobs. This is good and brings stability to end market demand. Now shifting over to the left side of the page. The green bars are revenue and the blue line is EBIT ROS. Top line has grown at a 5% CAGR over the last five years, and we've held ROS relatively flat in the face of inflationary headwinds that kicked in 2017. The left side of this chart shows industry shipment information.
After steadily growing for seven years, the market was flat in 2018, and we expect 2019 to end flat as well. We assume 2020 will follow suit, although we're still 10% below industry shipment peak of 2007. A very large installed base of rooftop units dating back to the 1990s and early 2000s continues to drive healthy replacement demand. We in the industry expect price leverage to continue, and customers continue to mix up to more premium products. On the downside, macroeconomic and political uncertainty continue to bring volatility to the market. Building owners, general contractors, and national accounts are all quick to slow down activity when they see storm clouds on the horizon. This means the demand can change very quickly, as we saw in the first quarter of 2019.
That said, things are much more stable than they were six months ago, and the beginning of 2020 looks solid. National account customers continue to fight for capital dollars for rooftop replacements versus spending initiatives pointed at e-commerce. We watch retailers closely, and there are certainly risks. The retail apocalypse has been slow to matriculate as customers like Walmart and Best Buy are finding ways to win. In the meantime, we continue to focus our new business efforts on diversifying our portfolio to have less exposure to retail. Over time, Lennox has been the recognized leader in national accounts with hundreds of accounts in our portfolio. National account HVAC equipment sales is roughly 50% of our equipment revenue, and we keep adding to the list of customers with over 25 new accounts this year on top of the 25 we added last year.
Lennox has the most efficient rooftops available, which provide the lowest operating cost for the building owner, which is extremely important for the national account customer. Our configure-to-order factory with the shortest lead times in the industry is also a part of our success in national accounts. We build it any way they want it and deliver it direct to customer job sites with short lead times. Increasingly, our national account customers want the units installed, commissioned, and maintained. In these cases, we're able to provide national account services, which I'll get into on the next page. On the right side of the chart, we're experiencing a lot of success by extending our national accounts program into non-retail verticals. Distribution centers, restaurants, entertainment, and convenience are a few of the target verticals.
In fact, over 80% of our new national account wins over the last three years have been in non-retail verticals. We continue to win with retailers who are successful in the marketplace, such as supermarkets and DIY. We're excited that we continue to win in national accounts, and our diversification efforts are paving a path for continued success in this channel. National Account Services, or NAS. This is a gem of a business that continues to generate double-digit ROS and strong growth. I'll start by saying that NAS only services national accounts. This is important because there's no channel conflict with our local contractor customers, whom we sell directly to and we have a tremendous relationship with. We have over 100 service branches across North America. We have the footprint to provide self-performing services to more than 80% of North America.
By not having to subcontract the work, we are able to provide a consistent quality experience that national accounts facilities teams require. We perform planned maintenance, planned replacements, and provide asset management services, providing national accounts with the benefits of HVAC performance certainty and budget certainty. Because of what we offer, we have tremendous relationships with many well-known brands, some of which you can see on the left. We have strong customer retention, and we are successfully acquiring new customers as we scale operations. Roll all this together, and we're excited about how this business fits into our portfolio and its potential for the future. We've had strong revenue growth over the last several years and expect this to continue moving forward. Shifting gears to local contractors.
Local contractors for non-national accounts serve roughly 75% of the North American unitary market and make up the other 50% of our commercial equipment business revenue. You can do the math and see that we have opportunity to grow. Starting on the right side of the page. Local contractors service business verticals like schools, office buildings, and mixed-use development, to name a few. Local contractors also perform the majority of emergency replacement work as building owners reach out to the contractors they trust to take care of their urgent needs. Moving to the left. Our investments in products, parts availability, distribution, training, and field technical support have all been part of our growth in the local and regional markets. Having the right products and having them available locally is critical for our contractors.
We consistently add products to our portfolio that fill regional or specific application needs, and we continue to invest in regional and local distribution centers, ensuring that products are available when customers need them. This goes beyond emergency replacement. Having the right distribution footprint is also important for winning new construction and planned replacement contracts. We also utilize the Lennox Stores footprint. We stock small commercial emergency replacement products at these stores, and we provide local access to commercial parts at all of our store locations. The number one issue that local contractors face today is a shortage of qualified technicians. We are providing local technical training and technical support to enhance the capability of contractors to install, start up, and maintain products. This increases loyalty with contractors and their technicians when making discretionary purchase decisions.
In order to win locally in our industry, you need to have feet on the street with local knowledge and relationships with local contractors. The frontline team that is the most responsive to help the local contractor grow their business wins, period. We are complementing our focus on growing local contractor share with an upgraded suite of sales and customer service tools. These are off-the-shelf customer relationship management, business intelligence, and AI platforms that allow us to scale on our one-step distribution model advantages. We have three main goals. First, improve quoting efficiency and effectiveness. Local contractors are constantly competing to win jobs that are being bid by general contractors or building owners. Quoting efficiency and quoting accuracy plays a key role in helping contractors win jobs and push Lennox.
In 2020, we will make the end-to-end quoting process faster and less error-prone as we launch a new Lennox Configure-Price-Quote tool. Second, improve quote- close ratios. A 1% improvement in close ratios represents a $17 million of increased revenue for the commercial business. From guided or suggested pricing tools to enhancing quote follow-up tools, our field sales force walks into 2020 with much more at their disposal to close more of the jobs that they quote. Third, improve the customer service experience. Again, the number one issue our customers face is a shortage of qualified and skilled technical labor.
We're focused on providing faster and better responses to questions coming out of the field. CRM enhancements focus on cutting down the number of screens a customer service rep needs to look at by 5x while providing each member of our sales and customer support teams with a complete picture of customer preferences, history, and prior concerns. All of this provides our customers with more solutions when they need them so that they can be more profitable. None of these enhancements, by themselves, change the game. Collectively, we're upgrading to a powerful suite of tools that strengthens our value proposition and allows us to scale efficiently. With that, I'll now turn it over to Gary, who will cover Refrigeration.
Thanks, Elliot, good morning, everyone. Over the last two years, we've made adjustments to our Refrigeration portfolio. If you look on the right-hand side of the slide, you can see the makeup of the new segment. Our new portfolio has just over half of its sales in the North American commercial refrigeration market, while the remaining portion is in Europe, to include exports to the Middle East and Africa. About two-thirds of our sales in Europe are in the commercial HVAC space while the balance is in refrigeration. From an end market standpoint, you can see that we've got a pretty balanced portfolio of solid and stable applications with good long-term potential. Moving to the left-hand portion of the slide, you can see that the performance of the business within the Refrigeration segment today, plus the divested companies over time.
After the announced portfolio review in 2017, we sold our Australia, China, and Brazil operations, while earlier this year, we completed the sale of our Kysor Warren division. Our remaining businesses in North America and Europe have great long-term potential for profitable growth. As the graph indicates, the portfolio moves of the last two years have resulted in lower sales but higher EBIT ROS. For 2019, our profit performance was negatively impacted by the factory issues which Todd had mentioned earlier, along with the mix of underlying business growth rates and the non-repeat of a 2018 sale of European refrigerant rights. Moving into 2020, we're emphasizing a few key priorities. The first among these is factory productivity, and we have detailed plans to reverse headwinds experienced in 2019.
Starting in 2020, commercial refrigeration products will have a minimum efficiency prescribed by the Department of Energy for the first time ever, a development with significant implications and opportunities. The refrigeration sector, in general, is a few years behind others when it comes to digitization, and the technology tools we've used elsewhere have unique applications in refrigeration to help us drive back- office efficiency. Finally, key market areas in North America and Europe give us growth opportunities in 2020 and beyond. Now, I'd like to talk for a few moments about the Department of Energy's upcoming efficiency regulation. As I mentioned, the commercial refrigeration market has never had a minimum efficiency standard. The new regulations impact around 80% of our revenue, split between two different compliance dates next year. These compliance dates regulate date of manufacture, not shipment.
Now, because there was no previous standard, there's not a common jumping-off point. The new designs are anywhere from 10%- 40% more efficient, with the average being about 20%. While this is certainly a significant change and has kept us quite busy over the last 30 months, we're ready for the transition and actually see this as a great opportunity. First, Heatcraft holds a dominant market share in North America, and we are a part of a much larger company with significant heat transfer capabilities. Our competitors are smaller and fragmented. As such, we have the scale and capability that others do not. Our market position over the years is due in no small part to our ability to offer mass customization of our products on an engineer-to-order basis to fit regional customer or application needs.
Our offerings can translate into literally millions of potential combinations, which we select, quote, and completely engineer, and then release to the factory floor. Now, as you might imagine, this is a pretty time and resource-intensive process, but it is the heart of our competitive advantage. The DOE redesign, due to its sweeping nature, gave us a once-in-a-generation opportunity to redesign this process along with the underlying product. We've introduced a web-based interface for customers to help them speed through sizing, selection, and quotation. At the same time, we streamlined the back end through robotic process automation on newly structured product lines, compressing the entire process from order to factory release. Now, what used to take two to three days with many people can be compressed to roughly 90 seconds. This drives several benefits while taking our competitive advantage to a new level.
Now I'd like to share a video that covers the DOE change in more detail.
Heatcraft is the leading player in the North American commercial refrigeration market, where we help our customers keep products safe, food, telecom, pharmaceuticals. We really are focused on mass customization to suit our customers' needs. The Department of Energy put forth new regulations covering our industry and our equipment. What they're looking for is minimum efficiency, meaning they want to lower energy consumption. Historically, Heatcraft has mass customized our solutions, and because of that, there's a lot of complexity. We offer a lot of different products. With this DOE change, it requires us to go back and touch thousands and thousands of SKUs.
This mattered a great deal to our company just because it meant that we had a lot of work to do, but it also presented a lot of opportunities. While we had to redesign our equipment to meet these minimum efficiency standards, it also gave us the opportunity to look at our processes, at how we designed equipment, at how we could even become better at what was our core strength before. A lot of the changes that we had to implement required some very significant investments in the company, both in capital resources of facility assets and in human resources. The company has grown from this beyond what was specifically required for DOE.
In terms of how we had to go about resolving it, we brought together the considerable resource of both Heatcraft and Lennox International to come up with solutions that I believe are going to be the best in the industry. It gave us the opportunity to look at our facilities, to improve our ability to test, our capacity to test. We revisited our tools that we use in engineering to simulate systems, to predict performance, and even to go deeper into looking at our product data and the way that data is structured in our systems so that we could automate the work that we do. What used to take us before one two three days in engineering activity to produce product documentation now takes 90 seconds or less.
As a design-build contractor, we have to draw the projects. We have to do load calculations. We have to select equipment ourselves, customize it ourselves. We utilize Heatcraft's THE HUB that allows us to be on-site, utilize THE HUB, run load calculations, select equipment, do spec sheets from THE HUB. It's really a good tool and a resource for us. Our customer base relies on us to keep them in compliant. We have a long relationship with Heatcraft, and one of the things we originally started off doing in business was we pride ourself on selling the best products, and Heatcraft, we felt like, had the best products.
At Heatcraft, we didn't come to this regulatory challenge just to compete. We came to win and win big.
DOE presented a significant challenge for our industry, and I'm proud of the way we responded here at Heatcraft. We invested in technology, people, facilities, and I'm excited to be a part of a company that's going to lead our industry into the future.
While our digital strategy is an exciting development for our flagship North American business, we're applying the same approach to Europe. New efficiency regulations together with rapid refrigerant transitions are causing us to touch many of our design platforms there as well. In Europe, we compete with similar customized manufacturing models with the added complexity of nations and languages. Applying similar lessons will have an outsized impact upon our back-office productivity in Europe as well. Beyond the DOE transition and the underlying digitization, we have solid growth initiatives for our business. Last year, I discussed a $300 million untapped market opportunity in North America. Beefing up some of our commercial refrigeration designs allows us to compete in the light industrial refrigeration market. We've spent the last year completing designs, establishing a new brand with a dedicated channel, and we look to begin shipments sometime in Q3 of 2020.
At this fall's RETA refrigeration trade show, we introduced our MAGNA brand alongside prototype product and received great reviews from both contractors and channel partners alike. Our European refrigeration team enters 2020 with a significantly expanded product portfolio, allowing us to secure new distribution and expand our share of wallet in existing customers. On the HVAC side, we are introducing new lines of very efficient smaller chillers alongside new air handling units that allow us to tap into a portion of the much larger European chiller market. Essentially, we're going to use our market position and customer relationships from our leading share in the rooftop market alongside these great new chiller products to help drive growth amidst a broader European market slowdown. Finally, we're underrepresented in certain attractive markets, most notably the Middle East, which has a rooftop market approaching the size of Europe's.
In the Middle East, Lennox has a great name, and we export products there today through existing distribution. To execute even faster growth, we're using a similar model that we proved in Turkey earlier this year, where we have a partner building units under license. We anticipate seeing growth in the Middle East by the second half of next year. 2020 promises to be an exciting year for Refrigeration. I'll be followed by our CFO, Joe Reitmeier.
Thank you, Gary. Good morning, everyone. I want to thank you for joining us this morning. I'll start by taking you through some of our 2019 guidance points. They were included in the press release that we sent out this morning. Todd and the presidents provided you some insight on our top line and market dynamics by segment as they spoke about the businesses. Here are some specifics on our guidance for 2019. Collectively, revenue is projected to be up 2%-4%. GAAP EPS within a range of $10.65- $10.95. Adjusted EPS within a range of $11.15- $11.45. However, we do expect to finish the year in the lower end of that range. Corporate expenses will be approximately $85 million. We expect our full- year tax rate to be approximately 21.5%.
Capital spending will be approximately $129 million, and this includes $29 million for the reconstruction of Marshalltown, which will be funded by the insurance settlement that we completed in the fourth quarter. Let's turn to 2020 and an overview of what we have planned. Todd gave you a view of our 2020 plan, these are some of the dynamics driving the plan, which will result in a record year for Lennox. Starting with residential market growth, we expect to see continued growth in the residential end markets for 2020 and really for the next two to three years, as Doug shared with you. Steady growth that we expect that will remain a multiple of GDP or mid-single- digit growth. Commodities and freight are collectively expected to be a $30 million benefit.
Commodity costs will deliver approximately $20 million, and freight costs, through a combination of lower market rates and internal strategic initiatives, will contribute an additional $10 million in savings year-over-year. Announced price increases will provide a $30 million benefit in 2020, a year in which, as mentioned, will be a deflationary commodity cost environment. Productivity is always a focus and a priority and is increasing on several fronts. We anticipate sourcing and engineering-led cost reduction efforts to generate $25 million in savings in 2020. In addition, productivity gains from manufacturing initiatives across the businesses will deliver $10 million in benefit. SG&A leverage will further contribute to margin expansion as we will increase SG&A at half the pace of sales growth. Now let's turn to the headwinds that we anticipate. Depreciation for our new facility in Marshalltown will carry a $5 million incremental depreciation charge next year.
As Todd mentioned earlier, we will have headwinds due to only reacquiring 80% of the Residential share lost to the tornado, and quite frankly, also due to one-time costs of rebates, incentives, and refunds that we put in place to win that business back. Tariffs will be an incremental $5 million in 2020. Strategic investments and initiatives remain focused on driving profitable growth. The initiative to expand our share in parts and supplies is projected to continue to grow at a mid-teens pace with very attractive margins. We will be investing approximately $15 million in our residential distribution network next year and add new stores to support our share gain initiatives. Over the years, we have demonstrated success with our continued investment in distribution, industry-leading product innovation, and superior customer support capabilities as we continue to digitize the businesses.
This momentum will continue in 2020 and complements end market growth. Boiling it all down to our 2020 guidance points. Top-line growth we expect to be between 4%-8%. Top-line growth is in the form of both market growth and share gains, as we've discussed. Price yield will contribute approximately 75 basis points to the top line, and foreign exchange is expected to be neutral. GAAP and adjusted earnings per share are planned within a range of $11.30-$11.90. Corporate expenses are expected to be approximately $90 million. Our effective tax rate will be between 21%-22%. Capital expenditures are planned to be approximately $153 million. We continue with our investments of high- return- on- investment projects that are focused on fueling profitable growth.
Driving innovation with leading industry technology and capabilities that enhance the value proposition to our customers, and increasing profitability with continued investment in cost reduction initiatives. It also includes $53 million of the final Marshalltown reconstruction costs to be funded with the insurance proceeds from our 2019 settlement. Share repurchases are targeted at $400 million, as Todd mentioned, in 2020. Now I'll touch on our philosophy on cash deployment. Our philosophy on cash deployment remains consistent. We plan to deliver free cash flow that approximates net income. We have a targeted debt-EBITDA ratio of 2.0. Moderating interest rates offset with additional leverage will result in interest and other expenses of approximately $50 million in 2020. We will continue to drive investments in our businesses focused on growth and profit enhancement.
Organically, we continue to identify growth opportunities that enable us to seize market share, continue to support distribution expansion, and innovative new products and solutions that enable us to outpace the competition.
Along with continued investments to lower our product costs. Inorganically, we will consider acquisitions where they make sense, and we'll maintain flexibility in our capital structure to invest efficiently. Lennox remains shareholder-friendly, and we look for efficient ways to return cash to shareholders. We will continue to grow our dividend steady with earnings. We've returned more than $1.4 billion to shareholders in the form of share purchases over the last five years, and we will continue to return cash to shareholders in the most efficient way, supplementing a competitive dividend with share repurchases. I'll wrap up what Todd started. Todd said we've been showing this slide for the last decade, and it does remain consistent.
Our momentum continues with the effective execution of our core strategies that deliver value centered on innovation on multiple fronts, enabling Lennox to continue to outpace our competitors, enhance profitability, and deliver superior returns for our shareholders. With that ends the formal part of the presentation. I'll invite Todd back up for Q&A.
Thanks, Joe. Let's open it up. Why don't we go with Jeff Sprague over here on this side first? Yep. Right here.
Hey, thanks. Actually, a question on the replacement analysis. I know it's not as precise as kind of these echoes might look. We've all tried to do the math, if the mode is 12, that's 2017, if the median is 15, that's 2020. It seems like replacement should be a healthy support of volumes, your confidence that it's actually a growth driver here is really my question. Aren't we kind of already at a really robust kind of echo replacement dynamic?
Well, I think we're clearly involved in a healthy replacement dynamic when we do the model and sort of lay it out, and those are simplified curves of the details that we have. We've been consistent. We said three to five two years ago, now we're saying two to three, and the reason it's not one to three is a cool summer last year sort of has a boomerang effect into the future. We still think there's a couple of years left in the mid-single digits. Then in our models, when we go out beyond that, sort of the natural question is there a cliff that happens? The answer is there's no cliff because you get this moderation because of bell-shaped curves.
Get into the details of the model, it shows a year out later next decade where the market may be down 2% or 3%, but I'm humble enough to realize that's within the range of error of our models. There'll be a year where the model's flat, and if it's a warm summer, it'll be up, if it's a cool summer, down. Direct answer to your question is we remain confident that the market's going to be up in the single digits for next few years. Right behind you. Yep.
I guess you gave a number about price in the guidance of 75 basis points. Maybe you could expand across Residential and also Refrigeration and Commercial about the drivers there. I guess Heatcraft you would expect probably price increases consistent with the efficiency increases largely. Then talk about your price realization you expect in Residential.
Yeah, the price realization is sort of ex the DOE impact. Quite frankly, we'll sort of roll that in the mix or handle that differently because it's sort of cheating to do it that way, that cost. The $30 million of price increase all drops to the bottom line at 75 basis points. That's both in residential and commercial HVAC. We announced, as did all our competitors, depending on the competitor, up to 6% price increase. In prior years, the story has been around commodity inflation when we're talking to our dealer contractors. If some of our dealers are listening on the phone, what I would tell them right now would be the reason we're raising prices is because of significant wage increases that we've had to pass on to the direct labor in our factories.
When you have a sub- 4% unemployment in places like Arkansas and places like Tifton, Georgia, the requirement in Orangeburg, South Carolina, that you can no longer have temporary workers, you have to have full-time employees. We moved to a model that, well, in the past, our typical model in our residential and commercial factories were 60% full-time employees, 40% temps. In this low unemployment rate, it's very difficult to find temporary employees. We've moved to a model that's 80% full-time, 20% temp, and that's added wage cost to the business, and we're going to need to offset that with price. We're confident we'll be able to, again, because our competitors are facing the same challenges. Let's bring the mic to Steve. We'll do Tim next over here.
Thanks for all the detail on the tornado stuff for this year. No, I mean, like—
Anybody's more cynical about all this stuff, Steve, but me too. I appreciate it
What I meant was explaining the lower EBIT upfront.
Okay.
Disclosing that as opposed to us having to kind of—
Oh, I appreciate it. Oh, I thought you were teasing me about the tornado.
I'm not. Genuinely thanking you.
Thank you. That's the left. Now I'm waiting for the right. Go ahead.
What is the resi margin for this year, for 2020 that you expect, the Residential segment margin?
We haven't guided. We don't give segment guide. That's traditionally we don't do it for 2020.
Okay.
It'll be up. I mean, the guide is for it to be up less than 50 basis points.
Okay. As far as the store build-out is concerned, you're kind of holding your guidance on the parts revenues flat relative to last year, you're kind of pushing it forward a year. I think you're still growing the store base on a straight line by an extra 10 stores a year or something like that. You're not too far off on that trajectory relative to last year. Is there anything going on with kind of like saturation or dollars per store or anything like that?
No.
That changed there where the curve's a bit flattened?
No. All the metrics remain good. The thing that slowed us down obviously was the tornado impact. People weren't visiting our stores for a period of time, and we didn't have the full product lineup. So that impacted the parts and supplies growth. The build-out of the stores, we took 14 offline this year. Doug mentioned in his comments, about half of them or two-thirds of them, we just made mistakes. We put them in the wrong part of town. Like all wholesalers, you pick the wrong location, you're in trouble. We closed them. Then there were a handful of stores where we followed a customer. A customer said, "We'll convert you if you put a store in place." We put it in place. They're either now taking it direct or have taken business away from us.
Made no sense to have it in place. The economics remain constant, which I've said over the years, which is about $350,000 to put a store in place. Operational break- even within a year. Three years, we start to peak at revenue of $3 million-$4 million. About half of that's incremental, half of that's existing sales that we did to another channel. Other than the 14 stores we closed, the other stores have all met those economics or close to those economics and no deterioration. Doug talked about our serving radius of these stores is about a 25, 30-minute drive. At 225 stores, when we did the analysis, which is a little bit below where we are now, we cover about 1/3 of the market. Not geographical market. Where the dealers are at, where the business is at.
At 225, we cover about 1/3 of the market. The targets that Doug have thrown up are intermediate targets. Great strategy. We continue to drive it.
Lastly, just on the guidance for fourth quarter. I'm having a little bit of trouble with kind of the EBIT given, getting to even kind of the low end of the range. When you mean the low end of the range, is it below the low end of the range? What's kind of changed since you gave the guidance in October till now to kind of have, looks to me like a $10 million-$15 million kind of EBIT difference relative to at least our model. What's going on here in the fourth quarter?
I want to make sure I understood the question. You asked are we at the low end of the range or the low low end of the range?
Below. Are you below? Like lower end of the range.
No, we're not trying to guide below the low end of the range.
Okay.
I mean, just so you know, technically if we were below the low end of range, we'd give a new guide, right? We'd say, here's a new range.
I withdraw my question.
Yeah. I just wanted to make sure. No, to be serious, we're sort of, we're not the midpoint, we're saying it's lower. The reasons are some slower growth in Europe, but primarily residential North America. I have read some of your notes from the HARDI Conference. I don't know if you wrote one, Steve. Some of your competitors have, that it's been a warmer winter than last year, and that's impacted some of the market. Also, while we like cold weather, we don't like snow where business gets shut down. While October started well, November had sort of a mid-month slump where we weren't doing business because of all the snow in many parts of the country. December is a big part of fourth quarter, and we still have a lot of work in front of us. Let's go over here to the right.
Tim, did you have your hand up? No. Okay. Then next to you when you're done. Yeah.
Great. Yeah. Can you just maybe talk about raw materials and the visibility you have? Because just based on some of our math, I can get to commodities that are much higher than $20 million. I'm just kind of thinking through how much you have going into next year, kind of, that you have visible to, and how much is related to the spot market.
On copper, we're hedged about 60% on, correct?
That's correct.
On aluminum, we're hedged about 30%. On steel, as you know, that's contractual and it's tied to CRU pricing. If your model, my guess would be your model may have significant differences on steel than we have. Because we're trying to project, we're not taking current pricing and projecting it forward. We're sort of looking at what we think the pricing may be in the future. The other one, maybe less impact, is what curve you're using for aluminum. Yeah, go ahead.
Great. What's your growth expectations for Commercial and Refrigeration? I didn't see that. I saw that for Resi, but not for Commercial, Refrigeration. Secondarily, can you talk about any competition in rooftop markets within Commercial? Seems like that's picked up. Carrier's trying to push back on your curb adapter plug- and- play offering.
The call for the end market in Commercial is flat, the call for the Refrigeration market is flat also. Both are flat markets. Carrier's been very strong in commercial for a long time. I don't think there's sort of any change in what they're doing. Again, what we've done, Elliot talked about our focus. Historically we've been very good at national accounts. We've been less good at the local regional business, which includes emergency replacement. We continue to focus on broadening our product lines, all the local sales tools and quoting tools to compete. The honest answer is you have an attacker's advantage in emergency replacement market or more broadly, the local contractor market versus a Carrier. They've dominated that market for many years.
Contractors, quite frankly, want options, and if we're able to provide a high-quality product, we have a great brand name, but we're able to get it to the right cost point. With all the support that they need locally, including the parts with our parts stores, they're going to take business from Carrier and give it to others. It's so far been us, and we're focused on attacking to get it back. Again, you have the attacker's advantage. It's hard for them to defend across the board when they have such a large share in that segment. In front. Hi, Tim.
Thanks. Two questions.
We'll go to you next, then.
First, why is $10 million the right number for incentives for next year to make sure that you get to 80% share regain? What's sort of the math and logic there? Secondly, on Commercial margins, they've trended lower, yet you raised the outlook today. My question is, do you need the end market to improve in order to hit that, or is it under control?
I was stumbling on the first part of your question, so I'm going to ask you to ask it again. Ask the first part of your question one more time.
I think it was $10 million was the number for incentives, to make sure that you recapture the share.
I'm not sure I gave the number, but I think you could back into roughly that number.
Why is that the right number? Why is that the math and logic?
It's our best understanding of the special incentives and rebates that we had to get to back the 80% share this year. We're ending the year with the share already reacquired. We're not rolling into next year where we have to win it, and we're guessing or speculating. We're ending the year at a number of customers that we've won back. We're then able to look at that book of business as we've won it back and understand the special deals that we've put in place to be able to win it back. As I talked about, or at least tried to convey in my comments, these are very much one-time rebates.
The example that I've given publicly before would have been one of our competitors have gone in, competitor distributor tied to an OEM, would've gone in right at the throes when the tornado hit, which would be sort of early this year or mid this year, and converted over business by saying, "We'll give you a one-year rebate on every dollar you spend with us. We'll only give it to you at the end of the year." They put that in place so when we come back in to try and get it, that they're locked in. You go in, when we're ready in third, fourth quarter to get the business back, they would've said two things to us.
They'd have said, "You have to match that for the balance of the year or going into next year," because it would've been an annual plan. By the way, you need to go back to dollar one. Even though we didn't buy the product from you, we bought it from somebody else, we need the rebate from you because if we stay with the other guy, we're going to get the rebate. We say, "Fine, we'll give it to you, but it's a one-year event." All that gets anniversaried off, I talked about it as a headwind, and it is for 2020, why the decrementals are 20%, but in the three-year guide, all that goes away, and the Street price goes back to where it was. The second part of your question?
Commercial margins. Do you need the end market to improve in order to get to that new range that you set today?
No.
Is that largely in your control?
I think, the next year guide's 2020, and the out years, the market's up 1% or 2%, it's still low single digits. It's very much under our control. We had factory inefficiencies in 2019 and 2018, it's getting healthy in the factory. It's mixing up with new high efficient product that Elliot hasn't talked about, but there's a DOE regulation change in 2023, we're refreshing all our product lines. We think it's a lot of it, if not all of it's under our control. Up here in front, [Michael]. We'll go to Josh when you're done.
The 20% of customers you've lost that haven't come back to the fold, can you just maybe characterize those in terms of margin? Would these be sort of lower- volume but higher- margin customers and therefore that's having an impact as well? Then in terms of the discounts and rebates that you're giving these customers, my understanding was that those are covered by insurance. Were those covered by insurance in 2019, but in 2020, it drops off. Is that what's going on?
They weren't all covered by insurance. The rebates weren't all covered by insurance. A lot of that's just impacted on the EBIT. The other point around, what was it?
The margin on the loss.
Yeah. The margin on the loss, 20%'s higher than our average drop-through.
Okay.
Yeah.
Just in 2021, obviously looking forward to here, does that $10 million, if that is the number, does that then become a tailwind to 2021?
All being equal, yes. Then Josh.
Thanks. Todd, on kind of the mix within the portfolio, I think Allied has had a better year than the Lennox brand. Do you count Allied growth or outgrowth in the share recapture? I guess from a channel perspective, it's not quite fungible, and my guess on mix, you'd also prefer the Lennox brand. How do you think about that equation?
Let me more broadly talk about Allied. When we talk about share growth, we include Allied. All that's underneath, number one. Number two is on our prior earnings call, I misstated when I talked about Allied. I talked about Allied having lower margins. Those of you who are listening, I did quotes, so "lower margins." What I should have said is lower gross margins. They sell through independent distribution, and so they obviously have a lower gross margin because the distributor picks up a lot of the cost. At the EBIT margin or operating margin, they're very similar. They've doubled their operating margins over the last six or seven years, so very similar to what we do in Lennox Residential. Great business.
I think the other thing that, not that I read all your notes, but I do, one other thing that came up in the notes was sort of this concern that we were stuffing the channel in Allied because there's independent distribution. Absolutely not. Our revenue in our Allied business is going to be up high teens for the full year. You don't stuff a channel for the full year, number one. Number two is the way you win share in an independent distribution game when you're on attack like we are, is you convert distributors. We had some big distributors who converted over from our competitors, used to carry competitor products, now carry our products. We traded up where we canceled a lower-p erforming dealer, distributor, picked up a higher- performing distributor in territory and won share. That's why we're winning at Allied.
Good story for us on Allied.
Just to ask the replacement question a little differently. I think this year we'll have something just under 7 million of replacement units in the market. I think the best two years of the last cycle on shipments, because you had a pre-buy in there that kind of throws off the math, is probably 7.5 million. Can we get past that 7.5 million of replacement this cycle? What gets us beyond that?
I think I understand the question. I'm going to answer it sort of in a roundabout way, not directly. Unless I have a spreadsheet in front of me, I always get nervous about saying.
I am seeing a little bit of that math in my head.
Right. The way I think about it is until the financial crisis, the replacement market in North America, or the HVAC market in North American residential. Never was down more than two years in a row. What you have is this market that just grows steady over time, and that has to do with housing being put in. That has to do with people adding air conditioners to their home, sort of household formation. All that remains consistent. We're not adjusting for, as you said, the pre-buy. We're still not to the peak of the pre-replacement market, and I just think it continues to grow with the models we have. Yes, over here. Coming up to you, [Ansha].
Hi, thank you. I have two questions in regards to CapEx. If I back out the insurance proceeds both 2019, this year, and next year are running around $100 million. I'm wondering, first of all, if the insurance proceeds, after actually replacing Marshalltown, where you focus those? Second, longer term, should I think about $100 million as being the kind of run rate base, or should I think about the actual number as being the run rate base?
You should think of $90 million-$ 100 million being the actual run rate basis. Probably closer to $100 million now. In investments we make in CapEx, ex the tornado, have been consistent the last five or six years. It includes any time we launch a new product or significant capital that we have to strike significant. There's capital we have to invest into the factories to develop new product lines. A lot of the investments that we're making in IT, on all the IT initiatives, are actually capitalized investments around controls, around digitization. Those are the two major drivers. Then there's this third piece that you always just have a maintenance, and that's the third piece. The order of magnitude of the maintenance number, I think, is $30 million, $40 million.
Yeah, it's about $15 million. Quite frankly, it's lower than that.
Okay, $15 million.
[crosstalk] our CapEx spend is maintenance CapEx in factories and distribution. As Todd mentioned, the two big buckets where we've been investing is in product development, productivity on the factory floor, and then in IT investments to digitize the businesses.
Okay. Yeah.
Two questions around Refrigeration, Todd. The first is you gave us a sense of your out-year expectations for Commercial. If you could do that for Refrigeration, too, if that business can return to growth anytime soon. Secondly, the level of confidence in the 15%-17% medium-term margin target, given where you are today.
Yeah. We expect our Refrigeration business to grow margins next year. It's a bit of a bounce-back year. They had a tough 2019 with some factory issues and some one-time comparisons on refrigerant. We expect margins to be back up. We expect the market to be flat. We expect to gain share. The numbers, again, the revenue numbers may even be a little bit more than normally inflated, because as we talked about with the Department of Energy minimum efficiency change, the cost will go up, price will go up, we even have more revenue. We expect the business to grow in 2020. Right here. I'm sorry. In the back row.
Okay.
Yeah. We'll do Rob next. We'll do you next, Rob. Sorry, I didn't see you back there.
Yeah, no worries. Thank you. Just a question on the Lennox Store strategy.
Yeah.
If you look at the past decade, over the first four-year period, you increased the store count by 100. Following four-year period, it was closer to 80, and now you're looking to do over 125 over the next five years. My first question is really around your capacity internally to do it and line of sight on those facilities. The second question is around the productivity of those stores, because it seems like your embedded assumption that we get above $2 million per store, and how do we actually get there?
Well, there's a lot there in the question. We have line of sight to get to the target that Doug showed. Again, we have a rolling 12-month analysis where we decide the stores that we're going to open over the next 12 months. We just recently stacked hands on the 20 that we're going to open. Again, as I've talked about before, it's both analytically driven and then bottoms up. We have profiles. There's roughly 100,000 dealer/ contractors in residential in North America. We have profiles of all of them, and we understand the profile of people who buy from us, and so then we're able to rate these dealers on likelihood of being able to convert them.
We understand the dealers that are likely for us to convert and sort of the one key linchpin of stopping them from converting if they need local support and local parts and supplies, and they want to pick up the inventory. We know what our market share is in each of the markets, and how strong our teams are. We put all that together, and it spits out where we should put the facilities. We sit down with the sales force, and then it becomes a bit of a bidding contest, where if on the margins, we're not sure which place to put the store, it'll be the salespeople who are willing to sign up for higher quotas if we invest a store in their location, which is a good way to shake out the bullshit from a salesperson.
We put the stores in place. In terms of the economics, they remain consistent, as I mentioned earlier to Steve's question. When you think about our trend line of building stores, in the beginning, it was get them in quickly to get the scale, to be able to leverage the back- end investments that you have to make in inventory management, distribution management systems. If you didn't get to scale quickly, you'd sort of bleed red until you got there. It's get to scale quickly, which we did as quick as we could. Once we had the stores in place, we continued to open up stores, but as we talked three or four years ago, it became a story of let's grow same- store sales.
Let's not take our eye off the ball there and wake up where we put in a whole bunch of stores where we don't have internal productivity. We focused on that. The tornado set us back by a year and a half. As we go forward, our internal capabilities are 20- 30 stores a year. We'll do 20 next year as we sort of get back into the flow, the years out, that will be somewhere between 20 and 30 a year.
Okay. Robert in the back.
Hey, thanks, Todd.
Yep.
I wanted to clarify a comment made about normal weather in the Resi forecast. Is there an implication that is a tailwind year-over-year in 2020?
Yeah.
A return to normal, so 2019 was below normal?
Better stated. Year-over-year, we would not necessarily expect it to be a tailwind. We just wouldn't expect it to be a headwind. Sort of roughly the same next year as this year.
Got it. Makes sense, because I think we've been above normal benefit.
I don't want to get into the whole global warming, but the last decade, almost every year has been above normal. At some point, you have to sort of step up what the new normal is.
Got it. If you recapture 80% of the lost share due to the tornado, how much does that contribute to growth in the Resi segment in 2020?
Order of magnitude, the guide we had on lost revenue was $110 million. It's 80% of $110 million is what we would be getting back.
All in 2020?
Correct.
Yeah.
No, not all in 2020. Fair enough. There's some overlap that doesn't take place.
Do you know approximately how much?
About a half of that order of magnitude.
Okay. Got it. That plus the mid-single, plus price is kind of how we get to—
Correct.
Your Resi segment revenue.
I would think about the way I would model our revenue would be the share recapture, additional share gains above and beyond that, price.
The underlying mid-single would be—
Yeah, underlying loss. Yep.
It could be high single, even low double- digit—
Correct.
Resi segment growth for you guys.
Correct.
In 2020. Okay.
Obviously, I'll be completely transparent. On our guide, we hedged some of that out just to make sure we make numbers, right? Yes, if things happen the way they could happen or the way you suggest, then Resi revenue would be as it has been up until the tornado, up high single, low double.
Got it. Then just quickly on the cash flow, I might have missed it. Did you say what the CapEx is going to be in 2020?
Yes. $153 million.
Is there anything kind of funky going on with working capital, just given
Yeah, I mean—
The factory changes, et cetera? What is that contribution to cash flow?
Yeah, we made a conscious decision in 2019 to invest in inventory, given the tight labor markets, rather than flex the labor force. That's about a $70 million working capital investment in 2019 that we'll monetize in 2020. That'll be offset by the timing of the CapEx. We received $53 million in insurance proceeds for the final portion of the Marshalltown reconstruction in 2019 that we'll actually write the checks for in 2020.
Got it. Just maybe to simplify it, if you kind of exclude the tornado-related spending, is working capital a material headwind or tailwind to just normalized cash flow?
In 2020, it'll be a tailwind.
Got it. All right. Thank you.
Yep.
Any other questions? Okay, good. One more question up front.
Sorry about that.
Sure.
Last one.
I was running for the door on that.
I was impressed with your labor productivity that you mentioned you've been able to improve absenteeism and do some other things to help turn that around, which is hard to do in an ongoing tight labor market. If you wouldn't mind just elaborating a little bit more, I'd be grateful.
I think two broad things. One is straightforward, which is if the absenteeism of full-time employees is dramatically less than temporary workers, for multiple reasons you can imagine. Changing the model from 40% temp to 20% temp lowers absenteeism just because you're able to do that. The other is all the things you do in a factory when you're really concerned about this. Additional training, additional mentoring, sort of touching base with people literally on a daily basis to make sure they're okay. Even something as simple, and it sounds insulting, I don't mean it to, is working with people and coaching people on how to make it to work on time. Because people have reasons, communications, family issues, and just working with them to avoid absenteeism and bending over backwards to make that happen.
In a more normal environment, you bring people in the workforce who just have those skills, and you don't have to spend time doing it. Any other questions? Okay. I want to, as always, thank you for your interest. Thank you for attending. We have some food set up across the hallway here. I would encourage you to join us. The team will spread out and answer any other additional questions you have. Thanks.