Earnings Call: Q2 2019

Jul 22, 2019

Ladies and gentlemen, thank you for standing by. Welcome to the Lennox International Second Quarter 2019 Earnings Call. As a reminder, this call is being recorded. I would now like to turn the conference call over to Steve Harrison, Vice President of Investor Relations. Please go ahead. Good morning. Thank you for joining us for this review of Lennox International's financial performance for the Q2 of 2019. I'm here today with Chairman and CEO, Todd Bluedorn and CFO, Joe Reitmeier. Todd will review key points for the quarter and Joe will take you through the company's financial performance and outlook. To give everyone time to ask questions during the Q and A, please limit yourself to a couple of questions or follow ups and re queue for any additional questions. In the earnings release we issued this morning, we have included the necessary reconciliation of the non GAAP financial measures that will be discussed to GAAP measures. All comparisons mentioned today are against the prior year period. You can find a direct link to the webcast of today's conference call on our website at www.lennox international.com. The webcast will be archived on the site for replay. I would like to remind everyone that in the course of this call, to give you a better understanding of our operations, we will be making certain forward looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Lennox International's public available filings with the SEC. The company disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information, future events or otherwise. Now let me turn the call over to Chairman and CEO, Todd Bluedorn. Thanks, Steve. Good morning, everyone, and thank you for joining us. Let me start with an overview on the Q2, which was significantly impacted by the adverse weather conditions. I will cover the key points on each of our businesses, our current view on the tornado impact and insurance proceeds and our reduced outlook for commercial and refrigeration end markets and an update 2019 guidance. For the Q2, GAAP and adjusted revenue was $1,100,000,000 GAAP revenue was down 6%, including 8% of negative impact from the tornado, divestitures and foreign exchange. Excluding the impact from divestitures, adjusted revenue was down 1% or flat at constant currency, including a negative 3% impact from the tornado. GAAP operating income was $214,000,000 up 10%, and GAAP EPS from continuing operations was $2.81 down 17%, including a non cash pension settlement charge of $1.14 On an adjusted basis, total segment profit was $202,000,000 down 2%, The total segment margin was relatively flat at 18.4%. Adjusted EPS for continuing operations was up 2% to $3.74 Presidential revenue was down 3% at constant currency and down 4% on a reported basis, with volume down 6% and down 3% adjusted for the tornado impact. Residential profit was flat and segment margin expanded 80 basis points to 22.3%. Price performance was strong, a 3.6% yield. Our residential business in the 2nd quarter was negatively impacted by the significantly cooler temperatures and higher precipitation across the United States, especially in key central regions where cooling degree days were down more than 30% and precipitation was up more than 60%, areas that account for approximately 40% of our revenue. We said over the years that a hot summer could add 10% to residential growth and a cold summer could subtract 10%, which was the case in Q2 this year. Adjusted for the tornado, our residential volume is down 3%. If you add 10% to that, you get a more normalized number in line with the overall residential market conditions. Our residential business had negative tornado impact of $28,000,000 to revenue in the Q2 and $16,000,000 to segment profit, offset by $18,000,000 of insurance recovery. Adjusting for the net impact from the tornado and insurance proceeds, residential revenue was flat, profit was down 1% and margin was down 30 basis points to 21.1%. The adverse weather in the 2nd quarter led to slower moving shipments in the industry, which slowed us in regaining market share following the tornado, extends our recovery time line to include the 4th quarter. We remain confident we will resume gaining share in 2020. For 2019 overall, we now expect $99,000,000 of negative tornado impact to residential revenue, up from $70,000,000 previously. We expect a negative $54,000,000 impact to segment profit, up from $40,000,000 previously. We expect insurance recovery for lost profits of $94,000,000 up from $80,000,000 previously. The resulting $40,000,000 of net benefit to Residential segment profit in 2019 is unchanged. On the remaining negative tornado impact for 2019, we expect to have an impact of approximately $22,000,000 in revenue and $11,000,000 in segment profit in the Q3. For the Q4, we expect an impact of approximately $14,000,000 to revenue and $9,000,000 to segment profit. For the remaining $36,000,000 of Resurance and covering our core guidance, We expect that to be split evenly between the 3rd and 4th quarters. Taking a step back and looking at the big picture for both core and noncore related to the tornado. We now expect total insurance proceeds of approximately $372,000,000 up from $358,000,000 previously. We have received $252,000,000 of that as of the end of second quarter and expect the remainder by the end of 2019. The 2019 noncore gain expected for the difference in the book value and the replacement value of assets remains $91,000,000 or a benefit of approximately $1.73 per share to GAAP EPS. We have posted a tornado financial update chart on our website summarizing the guidance I just discussed. Turning to commercial in the 2nd quarter. Revenue was a 2nd quarter record 2 61,000,000 up 4%. Commercial profit was a record $54,000,000 up 6%, and the segment margin expanded 50 basis points to a record 20.6%. Commercial revenue in the 2nd quarter was led by high single digit growth in national account equipment business. Regional and local equipment revenue was up low single digits at constant currency. Breaking out the business another way, commercial new construction revenue was up low single digits at constant currency and replacement revenue was up high single digits. Planned replacement was up low double digits and emergency replacement, which also was negatively impacted by cooler weather in the quarter, was down low single digits at constant currency. Our BRF business was up high single digits in the 2nd quarter. On the service side, Lennox National Services revenue was up low single digits. In Refrigeration for the 2nd quarter, adjusted revenue was up 5% at constant currency. Adjusted revenue profit was down 19%, and adjusted segment margin was down 3 40 basis points to 12.8%. Profit was impacted by unfavorable mix as North America volume was down and Europe volume was up in the Q2. In addition, profitability was negatively impacted by the timing on the sale of refrigerant allocations in Europe compared to the prior year quarter. Before I turn it over to Joe, I'll review the latest of our outlook for 2019 and provide a few early thoughts on 2020. For the industry overall, we still expect North America residential HVAC shipments to be up mid single digits. We are reducing the outlook for commercial and refrigeration end markets in North America. We now expect commercial shipments to be flat for the industry in 2019 and expect refrigeration shipments to be slightly down for the industry. That's for the market. We still expect our revenue to be up for both businesses in the second half of the year. We expect year over year commercial margin expansion to continue in the second half and Refrigeration margin expansion to resume in the Q4. Looking ahead and thinking about 2020, we're still 6 months away, but the residential market continues to look robust setting aside the 2nd quarter weather. Commodity costs continue to trail down and that is setting us up nicely for more positive price cost benefit in 2020 than we've had in 2019. And the investments we've made in equipment, controls and distribution set us up well in 2020 as do the easier comps post the tornado impact to get us back on the share gain path. Now let me turn it over to Joe. Thank you, Todd, and good morning, everyone. I'll provide some additional comments and financial details on the business segments for the quarter, starting with Residential Heating and Cooling. In the Q2, revenue from Residential Heating and Cooling was $689,000,000 down 4%. Foreign exchange had a negative 1% impact on revenue. Volume was down 6% or down 3% adjusted for the tornado impact. Price was up 4% and mix was down 1%. Residential profit was flat at $153,000,000 Segment margin expanded 80 basis points to 22.3%. Segment profit was favorably impacted by a net $2,000,000 of benefit from insurance proceeds relative to the tornado impact in the quarter as well as favorable price, sourcing and engineering led cost reductions and favorable warranty. Offsets included cooler and wet weather, tornado impact, factory productivity, unfavorable mix, higher commodity, freight tariff and other costs as well as distribution and SG and A investments and unfavorable foreign exchange. Turning to our Commercial Heating and Cooling Business. Commercial revenue was a 2nd quarter record $261,000,000 up 4%. Foreign exchange was neutral to revenue, volume was up 2%, price was up 2% and mix was up 4% on the strength of national account growth. Commercial segment profit was a record $54,000,000 up 6 percent. Segment margin was a record 20.6 percent, up 50 basis points. Segment profit was impacted by favorable price, favorable mix and sourcing and engineering led cost reductions. Partial offsets included lower volume, higher commodity and other product costs, tariffs, freight and distribution and SG and A investments. In the Refrigeration segment, adjusted revenue was $149,000,000 up 2% in the Q2. Foreign exchange had a negative 3% impact on revenue. Volume was up 1%, price was up 2% and mix was up 2%. Adjusted segment profit was $19,000,000 down 19%. Adjusted segment margin was 12.8%, down 3.40 basis points. Profit was impacted by lower mix and the timing on the sale of refrigerant allocations in Europe compared to the prior quarter, higher commodity, freight, distribution and tariffs and other product costs and unfavorable foreign exchange. Partial offsets include higher volume, favorable price, sourcing and engineering led cost reductions and lower SG and A expenses. Regarding special items in the Q2, the company had net after tax charges totaling $36,600,000 This included a charge of $45,500,000 for pension settlement, a net charge of $1,500,000 for various other items and a gain of $10,400,000 from insurance recoveries net of losses incurred. Corporate expenses were $24,000,000 in the 2nd quarter compared to $23,000,000 in the prior year quarter. Overall, SG and A on an adjusted basis was $152,000,000 compared to $151,000,000 in the prior year quarter. Net cash from operations in the 2nd quarter was 30 dollars 1,000,000 in the prior year quarter. Capital expenditures and purchases of short term investments were $18,000,000 compared to $21,000,000 in the Q2 a year ago. We had proceeds for tornado damage to property and proceeds from the disposal of property, plant and equipment of $6,000,000 in the Q2 this year. Free cash flow was $20,000,000 compared to $28,000,000 in the prior year quarter. The company repurchased $150,000,000 of stock and paid $25,000,000 in dividends in the quarter. Total debt was $1,470,000,000 at the end of June and we ended the quarter with a debt to EBITDA ratio of 2.3. Cash and cash equivalents were $36,000,000 ending the quarter. Now turning to our guidance for the company overall in 2019. We are updating guidance for adjusted revenue growth from a range of 3% to 7% to a new range of 2% to 5%. We are updating GAAP EPS from continuing operations from a range of $12.65 to $13.25 to a new range of $11.91 to $12.51 This incorporates special items in the first half of the year, including the $1.14 non interest pension settlement charge in the 2nd quarter. As previously discussed, the pension settlement charge relates to an agreement that we entered into with Pacific Life Insurance Company in April to annuitize $106,000,000 of our defined benefit pension obligation. As part of this transaction, we also transferred $100,000,000 in pension assets to Pacific Life. This event required a remeasurement of the pension plan and resulted in a non cash $45,500,000 after tax settlement charge in the 2nd quarter to write off the related accumulated actuarial losses. And as Todd mentioned, we continue to expect a total 2019 pretax gain of $91,000,000 related to factory construction costs and the associated gain from replacement value above book value. For adjusted EPS from continuing operations in 2019, we are updating guidance for a range of $12 to 12.6 $0 to a new range of $11.30 to $11.90 Let me now run through the other key points of our guidance assumptions and the puts and takes for 2019. First, the guidance elements we are updating. We are lowering the headwind expected from commodities for the full year from $30,000,000 to $20,000,000 We are lowering the guidance for factory residential factory productivity from a benefit of $8,000,000 to being flat year over year due to the weather impact on production and the corresponding lower fixed cost absorption. We're updating guidance for 2019 capital expenditures from approximately $195,000,000 to $155,000,000 as $40,000,000 of capital to fully reconstruct the Iowa manufacturing facility damaged by the tornado has moved from 2019 to 2020. We're updating 2019 guidance for free cash flow from approximately $420,000,000 to $390,000,000 for the full year. There are 3 moving pieces to the guidance. The 2 headwinds are lower earnings guidance and higher working capital and the benefit is a reduction in capital expenditures due to the project timing of the Iowa factory reconstruction between 2019 2020. For the guidance elements that remain the same, we still expect to capture $80,000,000 of price for the full year. We still expect a $25,000,000 benefit from sourcing and engineering led cost reductions. We still expect $15,000,000 of a headwind from freight and $10,000,000 from tariffs, and we continue to expect headwinds of $15,000,000 for distribution investments and $15,000,000 for SG and A. Corporate expenses are still targeted at $90,000,000 for 2019. Net interest expense is still expected to be approximately $45,000,000 and we still expect an effective tax rate in the range of 22% to 23% on an adjusted basis for the full year. And finally, we continue to expect the weighted average diluted share count for the full year to be between 39,000,000 to 40,000,000 shares, which incorporates our plans to repurchase $400,000,000 of stock this year. And with that, let's go to Q and A. 1st, the line of Julian Mitchell with Barclays. Please go ahead. Thanks. Good morning. Good morning. Good morning. Maybe just the first question around refrigeration demand. You had talked about the temporary pause back in Q1, entered Q2 with good backlog growth in both pieces. So just wondered kind of what changed as you went through the Q2, and maybe how you're seeing the start to Q3 across the three segments in terms of demand? As you can see, we had a nice second quarter revenue wise in both segments, especially in commercial. And we entered Q3 with solid backlog. Our commercial backlog is flattish from a year ago and our refrigeration backlog is up mid single digits. And again, we expect the revenue to grow in both those segments. But in some ways, we're just truing up what we're seeing. I mean, when you look at ARI data for commercial through May, markets up 0.5%, 1%. Percent. We think it was down in June in part because of weather. And so we think calling flat just sort of a more realistic assumption. What we're seeing in Refrigeration is some of our larger customers sort of deferring given some of the macroeconomic uncertainty. But again, it's on the margins. We're going from being up low single digits market call to sort of slightly down excuse me, flattish to slightly down. So it's sort of a toggle of a couple of points, if you will. But again, we still expect revenue in both those segments to be up second half of the year. Thanks. And then sort of tied to that, maybe just any thoughts on residential, how that's trended the last couple of months, if you've seen any improvement in sell through conditions recently? It's certainly warmed up in July from where it was in June, so that's helped. So we're off to a solid start. Although I'd remind everybody, Q3 last year was warm. If you recall, it was up, from memory, 25% above the normal and 15% above the prior year. So last Q3 was pretty warm. So the comps aren't so easy, but residential sort of chugging along and we're off to a nice start. Thanks. And then my last question on that point would just be in terms of the market share efforts at residential, maybe just walk through, where you think you're falling short, or if it's really the external conditions of weather that have sort of held you back on that market share retake? Again, we're gaining share back. We're just we didn't gain it back as fast as we had hoped in Q2. And I think it was largely driven by the weather. I think it's just an old business truism, which I've always found to be true. It's harder to get share in a down market than an up market. In some of our markets, the area that we're talking about, the sort of region in the center of the country, our revenue was down there even greater than it was overall in the business and it was just tough to gain back share when things are down. And so we think that's the majority vast majority of the impact. I think to be honest and straightforward about it, full transparency, there are some sort of smaller dealers who quite frankly were probably not going to get back, that we protected our most valuable customers and those we didn't protect when we get to the other side of it. If they had a good experience with their new vendor, some of them aren't coming back. But we're we've gotten back the majority of the share we think by and we've guided that as we go into 2020, we're confident we'll be back on the share gain track again. Great. Thank you. Thanks. Next, we'll go to Steve Tusa with JPMorgan. Please go ahead. Hey, guys. Good morning. Hey, Steve. Just on the commercial side, I mean, you had talked, I think, a bit about at a conference in early June about how you were seeing the order rates come back there at that stage. Did something kind of happen later in the quarter on this front to kind of tweak that lower for the year? Again, I think I'm reflecting a guide on the industry rather than our share. So what I said is we had a nice second quarter in revenue and we expect revenue to be up the second half of the year. Our backlog is flattish because we sort of delivered a lot in the second quarter. So we're still optimistic on segment overall, but we're halfway through the year and the industry is flat. And I think I don't think it's going I think the second half will sort of closer we get to election, the more these macroeconomic uncertainties hang, the less likely we're going to see growth in the end market second half of the year. Right. Okay. On the resi side, you guys started to disclose in your queues the difference between externally sold sales and sell through your own distribution. And I think that number was up. The external sales were up pretty nicely in the Q1. Your sell through was through your own stuff was kind of down moderately. I think the queue is going to come out today. Can you just talk about was that the similar trend here in the Q2? And then how should we read into that? Is that just you guys kind of restocking the channel from tornado impacts? Or what's kind of the framework with which to kind of look at that around? It's even more pronounced in Q2 maybe than it was in Q1. So our direct business, our Lennox business, which is 80% of what we do, revenue wise, is down 6%. And our Allied and ADP businesses, which are direct, was up 3%. I think it's a couple of things. I think it's weather exposure. Our Lennox historic well, our Lennox branded business is more in the center of the country than our Allied business. I think that's part of it. I also think it's this issue that the independent distributors were able to hang on to their dealers because they had multiple brands and so we're able to juggle brands and sort of keep dealers happy. And then as we're able to reload our independent distributors with our product and are able to sort of seamlessly move back the dealers to that product line. And so no one sort of was turned off by the had a relationship turn them off, they were able to sort of seamlessly move it back in. So I think that's part of it. So it's both weather and so the other issue I talked about, regaining share. Okay. And then one last one. Are you at all considering monetizing some of your distribution? Or is it still a very core part of who Lennox is having this much captive distribution? Did Al ask you to ask that of me? Well, he was just very, very positive. He's very quick to compliment you guys on the conference call, is it's warranted. I mean, you guys have done a great job, but just curious. That compliment, I thought it was a left. I kept my head up for the right. We have absolutely no desire to get out of distribution, as you've heard me say multiple times. I think it's a differentiator today, but it will increasingly be a differentiator. All the investments we've made in digitization, it's gone from a business where you needed local knowledge and sort of moving boxes to this business where you want to be able to leverage investments. And then again, if I learned anything at business school, I want to have 1,000 tens of 1,000 small customers rather than 1 large customer. So we have no desire to get out of it. Got it. One last one for Resi. What was actual was there any major difference in kind of parts versus equipment? Were parts up in the quarter? Like what any difference there? No. I mean, sort of the part of the business that was up the most was residential through construction, less impacted by the weather. But parts and the add on or replacement trended the same direction that the cool weather impacting them both and parts and supplies maybe even a little bit more than equipment. Okay, awesome. Thanks guys. Thanks. Next question is from Jeff Hammond with KeyBanc. Please go ahead. Hey, good morning guys. Hey Jeff. Good morning Jeff. I already knew the answer to that distribution question. I was just going to joke and say I'd be shocked if I'll ask you to ask the question. Go ahead. All right. Just going through the $0.70 cut, I mean, I know you made adjustments to the commercial piece, but can you maybe break out how much of the how you break out that 70% cut? How much is it this kind of 2Q residential versus how much is it is the commercial piece being softer? And then it looks like the refrigeration margins seem to be coming in lighter as well. I think order of magnitude, the way I think about it, Jeff, is we passed on the 2nd quarter miss to the full year guide. And then we had sort of lowered the second half of the year because of the push out of the share gain, but that's offset by insurance. And then the third piece would be sort of a lowering of the end markets and corresponding revenue of the commercial and refrigeration businesses. Okay. That's helpful. And then can you just explain this Refrigeration allocation dynamic and how big it was? And I think you said Refrigeration, the margins, you'll get expansion in the 4th quarter, which would suggest that maybe margins are down in the Q3. And so what's going on there? Dheesh, I'll do the reversal. This issue in Q3 is the mix. I refer to it as mix. It's just this dynamic that our business in Europe is growing quicker than our business in North America. I think part of that's market, part of it is we're sort of flattish share in North America refrigeration and organic share in Europe and that hurts it. The refrigerant issue was Q2 a year ago, we had about a $3,000,000 gain on refrigerant. I'll come back to that in a second. In Q2 this year, we had about $1,000,000 So net net, a $2,000,000 difference year over year. And as you may recall, it's a simplified, it's a cap and trade program in Europe for F gases, fluorine based gases, and we had an allocation. You're able to resell the allocate parts of the allocation you don't use, and we're able to sell those again to a $3,000,000 gain last year Q2 and a $1,000,000 gain this year. So year over year $2,000,000 swing. Okay. So the 3rd quarter margin comment on Refrigeration is that this mix dynamic continues and then it normalizes in 4Q? Correct. Okay. And then I would broaden the answer. Also self help will kick in, in Q4. Okay. And then last one on this distribution growth versus direct decline in the first half of the year. How should we think about that impacting the second half of the year just with kind of the pre buy dynamic? Which pre buy dynamic? You're talking about the furnaces? Yes. I haven't the reason I'm positive because I haven't quantified it yet in my own mind. So I'm going to real time think. I think obviously the way you asked the question, you're right, it will on the direct side, we'll have more of a sell we'll be selling furnaces where indirect we've sort of stocked it already. Although I would tell you because of the tornado impact, we didn't do as much pre stocking of our distributors as our competitors have done. I also think there'll be normalization as we get away from the weather impacts, especially in Q2. Okay. Thanks a lot. Our next question is from Ryan Merkel with William Blair. Please go ahead. Hey, thanks. So first question for me. I'm guessing you don't want to give numbers by geography, but I'd just like to get a better sense of how weak the Midwest was in the quarter. I won't give the exact numbers as you suggested, but it's about 40% of our revenue. And it was maybe 2 or 3 points down in revenue in the add on and replacement versus the overall market. I would contrast that. I will give you exact numbers for something I want to say, which is in a market like Florida where we had warm weather, our Lennox replacement revenue was up 12%. And so a market we had good weather, we did well. In large parts of the country where we didn't have good weather, we didn't do well. Okay. That's helpful. And then just a follow-up to a prior question. So it sounds like you didn't assume that you would make up some of the 2Q resi shortfall in the second half. Am I hearing that right? I think that's what the guide says, yes. Okay. And so the short answer is yes, and that's what's in the guide. Now again, we I often don't like talk about weather, but I almost have to now given everything we've said so far. But sort of the conventional wisdom that I also believe true is sort of the weather that you want now is hot, cool, hot, cool. So they sort of sell out and then it cools down. They can better say it gets hot. Our dealers get really busy, sometimes a week or 2 weeks planned out. And then you want to cool so they can catch their breath, get caught up and ready to take on new business. And then it gets hot again, they get the business they order from you. And then as we get into September, we want the weather to break and sort of stay cool, so we'll start loading up for furnaces. So it's not just record heat now for now for the balance of the quarter. We're going to have to sort of have some things move. It's hard to make up the miss we had in Q2 due to weather. Got it. Okay. Just lastly, residential price yield up 3.6%. That's a little better than I was thinking. Is this just a function of a double price increase still helping and maybe you didn't discount equipment to try to sell through just given the lower shipments this quarter? It's primarily the first point, it's just the double price increase. So second quarter was the sweet spot where we're sort of getting carryover of both of them, if you will. And the year we think full year we're going to get 2 points, might be slightly better than that given the performance in Q2, but second quarter sort of the high watermark of year over year price increases. And look, we were competitive in the marketplace. And so it's not like we said, look, we're not going to do any pricing to protect to regain share. Just at some point, you realize that's not the lever to pull, so we tried to pull a lot of other levers instead. Got it. Okay. Thanks. I'll pass it on. And we'll go to Jeffrey Sprague with Vertical Research Partners. Please go ahead. Thank you. Good morning, guys. Hey, Jeff. How are you? Hey, doing well. Thank you. Just coming around to kind of cash flow and absorption. So kind of those three pieces Joe mentioned, clearly working capital has got to be a chunk. Inventory looks high. I guess I really have kind of 2 questions. Was there some kind of absorption benefit in the quarter actually from building inventory? There was Jeff, there was some inventory build, but there's also some raw material that are at higher levels given the increased production between Marshalltown and Salt Yield. And then conversely, I guess your guide would assume some under absorption in the back half as you're burning inventory down. Can you give me any context on the margin impact there, if there is any? Once again, I think the margin impact is de minimis and we're going to continue to level our production to optimize the impact on absorption. And then just back to price, Todd or Joe. I mean, do you see any indication anywhere that there is some pushback? We've heard that in some industrial channels, Watsco kind of mentioned it around some parts pricing. Obviously, raw mats are coming down, volumes maybe not as good as people thought. No. We've seen price stick in marketplace, obviously, from the results we've had. And we, as always, plan on passing on an annual price increase. And commodities have trailed down a bit, but labor is extremely tight in North America, and we've had to raise wages in our factories. Our suppliers have had to raise wages in their factories. The tariff situation is still not settled. Freight and transportation is still, while down a little bit from last year, still high versus the last couple of years. So there's still inflation in the system and the need for us to pass on price and our competitors are doing the same thing. So would it be fair to assume the double dip was obviously a bit unusual, but kind of normal year end, beginning of year list price increases should kind of rule the day again into 2020? Yes. I mean what we'll do going into 2020 is just I'll repeat what you just said, we'll be announcing a increase at the end of 2019 to set us up for realizing it in 2020. And that's historically how the industry did it. Not to bash Wasco, but when Wasco is talking about price, they may be talking to their supplier and letting them know what they want to hit what they want them to hear. But from our perspective, we're still getting price in the marketplace. Great. Thank you. Our next question is from Robert McCarthy with Stephens. Please go ahead. Good morning, everyone. How are you today? Good, Rob. How are you? Good. Maybe since you broke hearts a little bit on 2020 for your outlook, Todd, I mean, could you talk a little bit about just maybe the current environment? Are you seeing any shakes in the armor of the cycle? And how do you think about 2020? And how do you think about your long term targets from where you sit now, just so we get some comfort? Because obviously some investors think that this could precede something worse than just bad weather. No, I think it's bad weather. I think it's 2 things. It's bad weather in terms of cool and wet weather and bad weather in terms of a tornado. But those are the dynamics. I mean from a residential viewpoint, the market is still robust. U. S. Consumer is still strong. U. S. Consumer is still spending. I think you sort of see that in all the surveys and macroeconomic data. And as we go into 2020, we expect that to continue. We sort of toggled down just a bit the commercial and refrigeration end markets. And I think that just reflects reality. But we continue to gain share and expect our revenue to be up in those end markets. So we think 2020's end markets are going to be good. 2021, my crystal ball is a little less clear, but our 3 year targets still stand up even with this second quarter drop because of weather. And then in terms of the residential excuse me, in terms of the refrigeration and commercial lowering, I mean, you did answer the fact that you do expect to grow and that there should be share increase. I mean, do you think this is some conservatism that you're baking into the guide? Or do you think you're just calling the market as you see it? Yes. I mean the guide is the guide, is the way I sort of think about it. And I hope we're wrong and I hope it does better, but that's sort of our best call right now. I'll spare you a question on your distribution and whether you want to sell it. No matter what happens, can write that down as we do not want to sell distribution. Thanks. Thanks for your time. Next, we'll go to Gautam Khanna with Cowen and Company. Please go ahead. A couple of questions. First, I was wondering any change that you would expect in the competitive environment given the CCS spin or anything else that climate the Ingersoll breakup? It doesn't sound like you've seen anything, but what might you expect in an environment that's going to be unfolding over the next year? I don't think I'd expect any change in TrainCo or whatever the new business is going to be called. I mean, the management as I understand that Lamaque and the management team at the parent company are going to go with TrainCo, right? And so I assume they're going to compete the same way they've competed now. At CarrierCo, it's unclear exactly. I think one way one thing I think about is sort of the distractions aren't going to stop because CarrierCo in and of itself is a multi industrial conglomerate that probably needs to be broken up. And so I think there will be continued internal discussions about what do they do with refrigeration, what do they do with some of their lower profit international businesses, what do they do with security business. And so I think all of that will continue to be a distraction, and I think that's good for us. Okay. That's helpful. And also just what are your latest thoughts on North American HVAC consolidation? Do you think it happens? Do you think there's if it happens, when does it happen? Yes. My answer, Gautam, you've heard me say it 1,000 times. I'll say it for people who are listening new. We don't need to do anything more at scale, but I think value could be created. And if something would happen, we'd love to participate. We think we'd be a good player to help drive the value. I think over the long term, if there's value to be created, markets find the financial markets find a way to have assets be combined. But right now, it's only a handful of assets and someone who's in the business would have to decide they want to get out of the business and I can't really control that. That question is better asked to somebody else rather than me. Fair. And then you mentioned you're not going to retain 100% of the customers that you lost related to the tornado. Can you quantify that? What sort of the net of the dealers or of the customers you had previously? What percentage do you think don't come back? Is there any way to quantify it so we can understand the hurdle you're overcoming as you do recover? Again, with some degree of uncertainty, sort of the order of magnitude is we keep 90 we give back 90%, we lose 10%. And if you do some of the backward math on that, that implies 1.5 points, 2 points of resi revenue maybe 1 away at the end of the tornado versus closer to 10 points of resi revenue that was totally impacted by it. And I think of that kind of revenue change is a quarter of a point or so of share, maybe 3five or yes, 0.3 points of market share. And that's why I'm comfortable as we go into 2020, it's now we'll sort of pivot away from just footing out this piece that still haven't gotten to more broadly talking about our market share gains. So we've gained 0.5 point or more of market share in resi up to the tornado during the prior 5 or 6 years. And as we go into 2020, we'll do the same thing, and this will be behind us. And last one, sorry. Marshalltown, is it fully operational, fully up to speed? There's no lingering production interruption there? No lingering production interruption for up to speed. I mean the push out of the capital, no one's asked the question, but I'll anticipate it. Push out of the capital has nothing to do with sort of being up to speed on production. It's building sort of the admin wing of the factory, adding in parking lots and sort of lesser priority things of what we needed to do to make it a full time factory again. But production wise, we're where we need to be. Thanks a lot guys. Appreciate it. Thanks. Next, we'll go to Deepa Rajaivan with Wells Fargo Securities. Please go ahead. Good morning. Can you talk about what's embedded in the high end and low end of your revenue or EPS guide? Is that now all just resi weather playing out next few months because it looks like you've already factored in some weakness in commercial and refrigeration? It's that. It's also just sort of there's always a range around commodities. There's a range around freight and transportation. There's a range around some of our execution in the factories. And so I think it's sort of stacking of the operational bell shaped curve or the range of outcomes around lots of initiatives that we have in place. I think the most important thing is maybe the weather impact or more broadly state the overall residential market. But there's other things in that guide. Okay, got it. Can you comment on a few puts and takes to Q3? I mean, how should we think about your EPS contribution versus prior years? Anything you think it's worthy of being called out just given all the noise this quarter last year? No. I mean, as you know, we don't give quarterly guidance. So I know I don't want to give you a number and you know that. I think, as I said earlier, we're off to a solid start. I gave the backlog outlook sort of flat in commercial, up mid single digits in refrigeration. I've talked about residential. You can read a weather map, but you also got to read a weather map from last year to sort of understand it was hot last year, it's hot this year. And operationally, we're executing. So I think that's sort of the color commentary I'd make. Okay. Lastly for me, can you give us some color on what you're seeing in non res? I mean some recent data points not very favorable. You gave us pretty good color on Mark I mean, you talked about market, you obviously talked about your growth. But generally, is there anything else on a broad basis that you'd like to talk about in terms of office versus retail versus institutional? And is that concerning to you? Just any viewpoints there, appreciate it. Thank you. No macro views that I would share that you couldn't get elsewhere. I mean, again, it's sort of overall call in the unitary market is flat. So no additional color. Thanks. All right. Thanks. Our next question is from Joe Ritchie with Goldman Sachs. Please go ahead. Hey, good morning guys. Hey, Joe. Can we just kind of dive a little bit deeper into this market share dynamic? So I just want to make sure I understand it. Your production was back and running in 4Q. It seems like the recovery was getting better than expected last quarter. I mean is the way to think about your resi growth rate right now just chalking it up to weather and where you guys are based regionally? Or is there more to it than that? Well, I think it's the more to it is what we called out for the revenue tornado impact or the tornado revenue impact in the quarter, which is $28,000,000 So there's $28,000,000 revenue impact in the 2nd quarter associated with the tornado. And part of that was being at full production early in the quarter. And then part of it was, as I said earlier, that there's a portion of the share that left us that we haven't regained it all back yet. And so that's tied to the $28,000,000 The larger number in the quarter is weather and that's by definition, it's weather. It's 100% weather. Got it. Okay. And then so I guess as I'm kind of thinking about the portion you've discussed with the smaller dealers, there's a portion that you're not going to get back. I'm trying to understand, I guess, just is so the increase in the expenses related to the tornado is related to the portion that you're not going to recapture in terms of your share. Is that fair? I'm not sure I understand the question. You mean the additional gain of insurance proceeds? Yes. The gain on the insurance proceeds and the impact of the insurance proceeds this quarter. So it's expected to go up by $14,000,000 for the year. I guess, what is that related to? That's lost revenue associated with the tornado. Okay. And then I guess as we think through 2020 and just this concept, the whole business interruption insurance and how that's calculated, Is there an expectation that there is going to be additional recovery in 2020? Or do we get a clean slate in 2020 and we can just at the core business and how the core business is doing in 2020? That's a fair question. We're in the process of negotiating with all the insurance companies. And they've worked very closely with us and have been fair, and we continue to sort of get back the money we expect to get back. Our current expectation now would be that we would wrap things up by the end of the year with some forward look maybe into 2020, but that will be a negotiation. But at some point, we're just going to collect the money and move on. And right now, the guide expects that to be all happen in 2019, but it may lead over into 2020. But I understand the need to have clean numbers or the desire to have clean numbers in 2020. Got it. That makes sense. Okay. Thanks, guys. Next we'll go to Nicole DeBlase with Deutsche Bank. Please go ahead. Yes. Thanks. Good morning guys. Good morning. So I just want to start on Europe. I think during the Q1, you talked about low double digit growth ex FX. A lot of that was driven by commercial HVAC and it sounded like Europe was kind of strong again this quarter. So if you could just give us a little bit of update on what you're seeing in the region? In Europe, we were up mid single digits. Our HVAC was sort of low end of that and our commercial refrigeration was the high end, but sort of on average mid single digits in Europe. And we're primarily in France, in Spain and in Germany. Those are our major end markets, and that's where we've seen our strength. Okay, got it. And then commercial HVAC margins, I think when we got the last update in the Q1, you had guided for flat to down in the Q2, but we saw some improvement there. What was better? Was it the top line was a little bit better than you expected? Or was it that the operational improvement was the driver of the upside? It was both. I'd say it's equally split between the 2. We did better in the factory and then we did a little bit better on revenue and mix than we had hoped. Or had not. Understood. Okay. And then last one for me, just pricecost, impact on margins in the quarter and then if you still expect to see improvement there in the second half? I'll turn into folks to see if we have that in front of us. I got too many numbers in my head right now. Let me get back. I mean, the answer is we were positive. See, I'm turning and I've got it right in front of me. For the quarter, we had $32,000,000 in price and $15,000,000 headwind of commodity spread and tariffs. So we are positive $17,000,000 for the quarter, and that's obviously the high watermark for the year. Got it. Thank you. I'll pass it on. Thanks. And we'll go to Robert Barry with Buckingham Research. Please go ahead. Hey, guys. Good morning. Hey, Robert. Good morning. Lots of ground covered. I guess just a few things to follow-up on. So Todd, I think earlier in the quarter or late in the quarter in June, you had alluded to at a conference potentially price and also material costs tracking better, but saw that you kind of kept the guide for those 2 components the same. Any kind of reason for that? I think we lowered commodities. So it went from a $30,000,000 headwind to a $20,000,000 headwind. Sorry, the material costs. It was price, commodity and material costs. I think maybe I tried to lump all those together just by saying that the total of 3 would be better. I didn't mean to say each element would be better. And so all 3 of them, I think, used to be 55 and are now 45, if I have the math right. Got it. Got it. And then, that number you gave for the replacement volume in Florida, that up 12, is that like how same store is that? Is that a same store number? Are you adding stores in Florida contributing to that growth? I don't know if we had I don't think we added any Parts Plus stores, if that's the question, because I don't think we added any Florida. But I don't really think about it for our business quite that way, Robert. I mean, it's I think we had more dealers than we did last year because that's how we gained market share. And so I just I don't view it as sort of same store sales. I view it as did we gain share or not, we did. Got it. Got it. And the market was up. Right. I guess just lastly following up, I think it was Joe's question about the way the share recapture is included in the numbers. So that $28,000,000 of revenue in this quarter is not just volume lost, it's net of what you've estimated is recaptured share. Is that right? Correct. And I guess 2, same thing with the at the EBIT line? Correct. So the fact that the EBIT tracked a little bit better on insurance recoveries even though the revenue was or the share recapture was lower, it's just kind of out of period items? Correct. In some way, we gave rough guides last time, but the $18,000,000 of insurance proceeds in Q2, I would tie to the $18,000,000 loss profits we had in Q1. So it sort of lagged it sort of lagged it by a quarter. All right. Thanks for clarifying all that. Thanks. Next, we go to Josh Pokrzywinski with Morgan Stanley. Please go ahead. Hi, good morning guys. Hey, Josh. Todd, I wonder if you could calibrate something for me. We've kind of touched around a few of these elements with the pre buy around the furnace standard and some of the growth differential between the independents and the company owned. I guess, how should we think about that into the second half to then the independents go the other direction? Like can you size up the magnitude of what you thought was maybe pre bought there versus underlying? I don't have the math in front of me, Josh. I'll we'll put it together. The pre buy versus our competitors was dramatically less just because we didn't have the factory capacity to be building the pre regulatory furnaces like others may have done. And so I think that's part of it. But I think Allied doing better, our independent distribution doing better during Q2 and was, I think, more driven by the ability not to be impacted by the tornado to the same degree that the independent distributors were able to hang on to dealers with other brands, which our Lennox distribution by definition wasn't able to. Got it. So that's kind of where I was going with this is, obviously, your competitors who don't have substantial company distribution are able to fill the channel a little bit more. I think Carrier was still taking pre buy orders through May. So does that mean then it's not just a timing flip where they've already made the sale in the first half, they can't in the second half. Through company owned, you can make that in the second half. I guess in the absence of a big pre buy or the notion of that maybe not as big of a flip into the second half is how I should read that? I'm not sure I followed the question. I think if you're a company like Carrier who's selling to independent distribution, their revenue first half of the year will be over inflated and the revenue second half of the year will be deflated by that fact. If your company owned distribution like we are in Lennox Brands, our revenue would have been versus competitors would have been understated during the first half of the year and overstated during the second half of the year. The reason I haven't spent a lot of time talking about that is that's like a third order equation after the tornado, after the weather that I think that's a rounding issue of a couple of points here there. And I think on Allied, again, there was a we got some tailwind from selling furnaces first half of the year and that will be a headwind second half of the year. But I think the amplitude of that was less than our competitors because we didn't build as pre build as much. And that the greater driver of the disparity between our Lennox brands and our Allied brands during Q2 was driven more by this issue of regaining the lost share more seamlessly through independent distribution and company owned distribution because independent distributors were able to avoid losing dealers by using alternative brands. Got it. And then just one more point on this. I don't mean to belabor it. But thinking about the I'm trying to pull it out. You know what, we'll follow-up on it. It's a little over complicated. I'll leave it there. Thanks for the color. Thanks. And we'll go to John Walsh with Credit Suisse. Please go ahead. Hi, good morning. Hey, John. Hey, just a question around the strong price realization. I mean, obviously, a lot of different things are going into price right now, whether it's general inflation, tariffs, right? But you mentioned earlier about consumer confidence, wanting to kind of understand how much of that price is driven by maybe people mixing up to a higher SEER or going kind of beyond that opening price point, anyway you kind of want to articulate it would be helpful. I think most of it's just straight price. I mean there's a little bit of mix in the quarter, but given the tornado impact, given the weather, the mix sort of wasn't on its normal trajectory. I mean that's just 2 price increases being passed on. Got you. And then I guess, I think in Refrigeration you made this comment you're seeing the customers defer some spending, just kind of given the macro. Any more color around that? Is it which kind of vertical you're seeing that in? And if it's kind of we're pushing it 1 to 2 quarters or if it's kind of they're actually waiting to see if the capital project moves forward? I think it's just on the margins and I think it's we're primarily exposed to grocery and cold storage. And the question is, do you build new not so much on stores, but on cold storage facilities? Do you build new cold storage facilities? Do you invest the capital? I think it's sort of the macro investment decisions we're seeing across sort of corporate or industrial America. All right. Well, thank you. Thanks. The next question is Nigel Coe with Wolfe Research. Please go ahead. Thanks, guys. Good morning. Good morning, Nigel. Good, thanks. Obviously, covered a lot of ground here. Can we just I mean, I hate to maybe betray my stupidity here, but just want to understand the market share dynamics in 2Q because you didn't actually lose any share in 2Q 2018. So therefore, to be talking about regaining share seems like illogical. So I'm just wondering, are we talking here about dealers that went away in the second half of the year that haven't come back? Is that how you're measuring the market share loss in 2Q? Yes, exactly. So the 28% is in that number. And so dealers who we lost in 4th quarter, if we hadn't have gained them back, the impact in 2nd quarter would have been significantly greater than $28,000,000 Okay. That's great. And then I think you caught up 40% exposure to the central states, Midwest states. Would that include the central Southwest as well? So we're talking here about Texas, Oklahoma, those are not just the classic Midwest? Yes. I mean the swing regions, I'll call it out, is the traditional Midwest, which is for you football fans out there, the Big 10. So it's Illinois, Indiana, Michigan, Ohio, Wisconsin, the Central Plains, which is really Missouri, Iowa, Minnesota, Nebraska and obviously to much lesser degree the Dakotas. And then South Central to your direct Texas, Louisiana, Arkansas, Oklahoma. Okay. That makes total sense. And then just 2 more quick ones to tick off here. Just you talked about the insurance negotiations FY 2020. I mean, just I mean, I understand this is a somewhat sensitive topic, but conceptually, do you get compensated for 1 full year of lost profits? So is it not that simple? It's not that simple. So we're in detailed negotiations where we're justifying everything, both sort of impact to the factory plus lost revenue and in some ways I would call speculative lost revenue. And it all gets done up in a mixer and at the end of the day we'll work on a number. And we've guided sort of the best of our ability publicly of what that number is and how much we've said how much we gained so far and what we expect that number to be. I'm looking around because I got so many numbers. I think it's 472, right? 372. 372, not a 4.70 2. Yes. And we've received 2 $52,000,000 to date, so we still have $120,000,000 to negotiate, correct? And that's our best estimate. Okay, great. And then just a quick one on pricing. We covered pricing in a fair amount of detail. There's been a little bit of chatter about dealer incentives picking up during 2Q towards the end of 2Q. Have you seen that? And is that a risk in any dimension for the back half of the year? It's not a risk for the back half of the year. It's when the weather is that cool and the volumes that soft and people start spiffing to try and move volume. And quite frankly, we did the same thing. Okay. Thanks guys. Good luck. Thanks. Our final question will be from Damian Harris with UBS. Please go ahead. Hey, good morning guys. Hey Damian. Appreciate you fitting us in here. Just a clarification on plant capacity. So you had shifted some additional production down to Mexico as a result of the tornado. Where exactly do things stand now with respect to the production split across your split across your 3 facilities comparing to before the tornado in Marshalltown? And is there still some shifting that you'll be looking to do in the future? We're always looking to shift in the future. So that's still out there and that continues to be out there and we'll continue to look at our footprint to try and drive the lowest cost. In terms of the shift of the volume for the tornado, we moved capability both to South Carolina and to Mexico. That capability still remains there. But we're up and running all the products in Marshalltown that we were producing prior to the tornado also. Got it. And just curious, have you felt any pushback from customers on having some of that Dave Wennick Signature branded product coming out of Mexico now? 0 pushback. I mean, we've been building in the Mexican facility for almost a decade now and many of our largest dealers have visited the facility. They know how the quality is and they don't care where whether it's made in Mexico or whether it's made in the U. S, it's exact same quality. Very helpful. Thanks. Thanks. And with that, I'll turn it back to the company for any closing comments. Thanks a lot, operator. To wrap up, we've reset guidance after significantly adverse weather in the second quarter and have reduced the outlook on commercial and refrigeration end markets in North America for the year. Looking ahead, weather aside, the residential market continues to look robust. Commodity costs are trending down for more price cost benefit moving forward and investments we have made in products and distribution set us up well for 2020 and for the second half of twenty nineteen. Thank you all for joining us today. Ladies and gentlemen, that does conclude your conference. Thank you for your participation. You may now disconnect.