Q2 2020 Lennox International Inc Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Lennox International's second quarter conference call at the request of your host all lines are currently in the listen only mode. There will be a question and answer session at the end of the.
Presentation.
<unk> entered the Q to ask a question by pressing one zero on your phone.
Seen one in zero again exits the Q as a reminder, this call is being recorded I would now like turn the conference over to Steve Harrison Vice President Investor Relations. Please go ahead.
Good morning, Thank you for joining us for this review of Lennox Internationals financial performance for the second quarter of 2020.
I'm here today would chairman and CEO taught bluhdorn and CFO Joe Reitmeier.
Todd will review the point for the quarter and the outlook Joe will take you through the Companys financial performance and guidance.
To give everyone turned to ask questions. During the Q1, 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 mention 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 Dot Lennox International Dot com.
The webcast will be archived on the site and available 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.
Information concerning these risks and uncertainties see Lennox International's publicly available filings with the FCC. 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.
Let me turn the call over to chairman and CEO top Bluedoor. Thanks, Steve Good morning, everyone. Thanks for joining us.
Let me start with a quick overview on the second quarter that was significantly impacted by the covet 19 pandemic and then discuss the updated outlook for 2020, and which we are raising guidance for revenue and earnings for the year for the second quarter come the revenue was $941 million down 14% GAAP operating income was 136.
We ended up 36% GAAP EPS from continuing operations was $2, a 62 cents down 7%.
The second quarter last year included insurance benefit of 26 million pension settlement charge of 61 million.
Total segment profit was 153 million down 24% prior year quarter that included 18 million dollar insurance.
From an operational perspective, excluding the insurance benefit total segment profit was down 17%.
Total segment margin for the second quarter was 16.3% out to 110 basis points as reported another 50 basis points from an operational perspective.
Adjusted EPS from continuing operations was $2 97.
Don 21% as reported down 12% from an operational perspective.
And our residential segment in the second quarter revenue was down 6% revenue from replacement business high single digits revenue from new construction was down low single digits.
The dental segment profit was 127 million not 17% of supported.
6% on an operational basis, excluding the $18 million insurance benefit in the second quarter year.
Segment margin was 19.7% second quarter down 260 basis points as reported an up an up 10 basis points on an operational basis.
Residential business improved each month through the quarter was up 7% in June as economy continue to reopen whether heated up for the summer.
Going degree days for the second quarter overall were up 4% from the prior year quarter for the month of June cooling degree days were up 12% from last year. The hot weather as continued month to date of July we're seeing strong residential growth on excellent operational execution by the team to capitalize on market opportunities.
Turning to our commercial facing businesses. They are more heavily impacted on the pandemic as we expected to.
The commercial business segment revenue was down 28% segment profit was down 34% segment margin contracted 170 basis points, 18.9% National account revenue was down approximately 40% and regional local revenue was down approximately 20% breaking.
Down the revenue another wedding replacement.
Was down 35%, new construction was down nearly 20%.
On the service side Lennox National account service revenue was down about 20%.
Vrs, New re RF revenue was up low single digits.
Overall commercial equipment was down 30% instead second quarter, we're seeing signs up relative improvement in the business with commercial equipment backlog currently out 20% year over year.
Commercial continues to win new business and position for future growth commercial 115, new national account customers in the first half, including six in the second quarter.
Turning to our penetration business segment revenue was down broadly across our businesses in North American Europe declined 26% constant currency.
Segment profit was down 53%.
In March and contract to 460 basis 0.8, 0.2% North America revenue was down more than 20% on Europe revenue was down about 30%.
In our commercial business, we're seeing signs of relative improvement in refrigeration is well backlog is down approximately 20% year over year.
Overall for the company for the second half of the year, we continue to face highly uncertain market conditions, our stock repurchase program remains thoughtful currently given the high uncertainty.
Well, we continued to be encouraged by the performance on a residential business and relative improvement in the commercial in refrigeration businesses.
We continue to maintain strong balance sheet expect strong year of cash flow generation, we continue to target $340 million the free cash flow for 2020.
The company has actually Q did well on its $150 million.
She needs savings for 2020, and we manage decremental EBIT margin of 20% on an operational basis in the second quarter.
We are raising our financial guidance for 2020, and now expect adjusted revenue to be down 10% to 15% and adjusted EPS from continuing operations within a range of $7.90 to $8 in seven cents as I turn it over to Joe I'll, just mention Atlantic's has a seasoned team with experience managing through economic down.
Sure well continue to invest in advanced disposition, all that's our focus on capitalizing on market opportunities and share gains now over to John.
Thank you Todd and good morning, everyone I'll provide some additional comments and financial details on business segments for the quarter, starting with residential heating and cooling in the second quarter revenue from residential heating and cooling was $645 million down 6% volume was down 8% and price and mix combined was up 2% info.
Foreign exchange was neutral the revenue.
Residential profit was $127 million down 17% as reported segment margin was 19.7% down 260 basis points as reported.
Segment profit was negatively impacted by the year over year difference in the insurance benefit.
Our warranty expense and the Koeppen 19 pandemic that led to lower volumes factory inefficiencies.
Partial offsets included favorable price and mix lower material freight and distribution costs and lower SGN expense.
Turning to our commercial heating and cooling business commercial revenue was $188 million down 28% volume was down 27% price and mix combined was down 1% with price up and mix down.
Foreign exchange was neutral to revenue.
Commercial segment profit was $36 million down 34%.
Margin contracted 170 basis points to 18.9%.
Segment profit was negatively impacted by unfavorable mix higher warranty expense and the koeppen 19 pandemic that led to lower volume.
Partial offsets included lower material freight and distribution costs and lower SGN expense.
In refrigeration second quarter revenue was $108 million down, 27% volume was down 27% price and mix combined was up 1% and foreign exchange had a negative 1% impact on revenue.
Refrigeration segment profit was $9 million down 53%.
Segment margin was 8.2% down 460 basis points.
Segment profit was impacted by higher warranty expense and the cobot 19 pandemic that led to lower volume and factory inefficiencies.
Partial offsets included lower material freight and distribution costs, lower asking expense and favorable foreign exchange.
Regarding special items in the second quarter. The company had net after tax charges totaling $13.4 million.
This included $7.9 million for the restructuring activities $2.6 million for personal protective equipment and facility deep cleaning expense incurred due to the pandemic and that $2.9 million in charges for various other items.
Corporate expenses were $19 million in the second quarter down 22% from the prior year quarter.
Overall, SGN eight was $130 million down 15% from the prior year quarter.
And the second quarter, the company generated $105 million of cash from operations compared to $30 million in the prior year quarter.
Capital expenditures were $19 million compared to $16 million in the prior quarter that also had approximately $6 million or proceeds from insurance.
Free cash flow was approximately $87 million in the core.
In the quarter compared to $20 million in the prior quarter.
The company paid approximately $30 million in dividends in the quarter.
Total debt was 1.39 billion at the end of the second quarter and we ended the quarter with the debt to EBITDA ratio of 2.4.
Cash cash equivalents and short term investments were $49 million at the end of June.
Now before I turn it over to Q1 day, our view our current market assumptions thing guidance points for 2020.
For the industry overall, we expect north American residential HVAC shipments to be down mid teens.
We expect both commercial unitary shipments in refrigeration shipments to be down 25% for the industry.
Looking at the company's performance in the first half of the year and the outlook for the second half, we're raising 2020 revenue guidance from a range of down 11% to 17% to a new range of down 10% to 15%.
We are raising 2020 guidance for GAAP EPS from continuing operations from a range of $7, a seven cents to $8 in seven cents to a new range of $7 at 31 cents to $8.11 for the year.
We are raising 2020 guidance for adjusted EPS from continuing operations from a range of $7 in 50 cents to $8 to 50 cents to a new range of $7 in 90 cents to $8 in 70 cents for the year.
The various puts and takes in our financial guidance for 2020 remain unchanged.
We continue to expect a benefit of approximately $25 million in net price for the year.
We still expect to 20 million dollar benefit from sourcing and engineering led cost reductions.
Residential factory productivity is still expected to be a $10 million headwind.
Residential mix is still expected to be flat.
And we still expect tariffs to be neutral.
Commodities are expected to be a $20 million benefit this year and we continue to expect freight to be a $10 million benefit.
Now a few other points dimension in our financial outlook.
Corporate expenses are still targeted to be $75 million and as we talked about last quarter. We take we have taken $115 million best unit cost reduction actions in total to benefit the second third and fourth quarter. This year.
Net interest expense and other expense guidance remains approximately $40 million and we still expect an effective tax rate in the range of 21% to 22% on an adjusted basis for the full year.
We continue to expect the weighted average diluted share count for the full year can be between 38 to 39 million shares.
We repurchased $100 million stock in the first quarter and the 400 million dollar plan going into this year, our stock repurchase plans currently remain on hold.
We continue to target capital expenditures of $120 million this year and our guidance for free cash flow remains approximately $340 million for the year.
And with that let's go to queuing it.
And ladies and gentlemen, just as a brief remind you may enter the Q to ask a question by pressing one in zero on your phone pressing one in zero again exits the Q.
And first over the line of Julian Mitchell with Barclays. Please go ahead.
Hi, good morning.
Hi, maybe just the first question on the revenue outlook.
So it looks like your guidance on revenue implies second half is down mid teens year on year, So similar to Q2 decline.
But you seem to have better momentum in residential.
Even talked about stabilization in the other two divisions. So maybe just help us understand that second half revenue outlook.
I'll be very clear settles danced around the question.
The market environment remains like it is today, we're going to do better than the midpoint of our GAAP.
The concern that we have is that there's a lot of moving pieces, both medically, but the pandemic and the impact of that as an end markets and so.
We've baked that into into our guidance, but weve.
You did ask the question I'll answer your question in July our residential business is up mid teens.
So we have strengthened July and.
Thanks data it is going to do better than the guide, but the concern is a changing world and changing marketplace not reflective.
Thanks, and then just secondly.
On the profit margins.
Maybe.
If you can how much about 115 million of SGN a cost out is still left to be.
Booked in the PNM.
In the second half.
And also clarify the decremental margin.
I realize there's different categories of it but I think if you take the adjusted number of 20% in Q2.
Right in thinking that the second half year, assuming thats around the mid teens number at the midpoint of guidance.
I'll answer the last part first yes, you're right to assume that second half of the year. It's mid to high teens is the adjusted number up of the Decrementals at the current guide.
On the first part of the question.
How does 100 I would think about 115 this way we implemented may one.
The vast vast or all the cost reductions were implemented by May one.
Salary reductions were implemented effective may one.
And so I would think about May and June sort of full run rate savings for the 150, and then third third fourth quarter will be all three months would be full run rate of the said.
That's helpful. Thank you.
Our next question from the line of Jeff Hammond with Keybanc capital markets. Please go ahead.
Hey, good morning, gentlemen.
Jeff.
I want to start with your headline in your note on whether beach co that was the best headlines.
Yes.
Good my associate credit for that.
So just.
And our checks we picked up a lot about supply chain I know some.
Facilities not years were shut down in Mexico and.
I think your inventories on your balance sheet or low can you just speak to it seems like certainly residential coming in better and just your ability to kind of manage.
Inventory managed demand get the right product to your dealers.
If we did a really good job in second quarter.
There's a continual tree us going on.
Think across corporate America, certainly within our industry certainly within our company almost a lateral is another analogy, but our team in suppliers has done a great job through this our supply chain is slowing in our manufacturing plants are all up and running and we're focused on meeting the demand in the market.
I think we're seeing good or better positioned than anyone in the industry is we flow through the balances.
Okay.
Then.
Just on commercial yes, I think you said some signs of stabilization whats.
What's getting better is that just work stoppages abating or are you seeing you know kind of better.
Where are you seeing better trends ultimately.
Let me go little bit into detail on the question, Jeff when it when we think about the commercial unitary business North America really think about a three parts about 40% of the market is planned replacement.
Primarily for National accounts, we expected a quick decline in that and we saw that in April may orders were down 40, 50%.
But they picked up in our stronger in June sort of the declines maybe half of that at this point.
20% of the market is new construction.
And commercial new construction.
Did drop as quickly as what we saw the planned replacement splinter places discretionary people can make the decision right way new construction projects are ongoing so we didn't see that drop early but we're now starting to see backdrop and 40% emergency replacement our flow business sort of like the residential business.
It's slowed down but not at all at national accounts and more than 50 down 15, 20%.
During the process so.
Thats a lot of words I think the answer to your question is where we've seen improvement has been planned replacement national accounts, we have an outsized position.
As I mentioned in the script, while revenue was down 30% of Q2, our backlog is down.
About 20%.
Okay. Thanks, guys.
Our next questions from Galton Connor with Cowen. Please go ahead.
Yes, thanks, guys.
Couple of questions first I was wondering any any discernible trend on.
Mix in resi are you seeing a mix down or 'cause mix held up pretty well.
In July.
Yes, I mean, the mentioned the residential business was up slightly in the second quarter, we're still guiding for it to be flat year over year.
Theres lots of moving pieces on mix in any given quarter, but I think one strength is our less branded product performed better than our allies branded product and at the gross margin level what has higher margins.
Okay. So you're not say and then secondly, just competitive we have you seen any.
Change in behavior from you from your principal competitors in the us.
On the resi side.
No change behaviors that Thats a specific question about training carrier that Thats, often asked I mean I.
I don't think secret is certainly not seat in the industry Goodman's have some production issues.
Thats opened up some opportunities for us and others in the industry to sort of pick up some of the business that Goodman hasn't been able to me.
And lastly, just pricing I mean, obviously, you're getting a little bit of price mix isn't been worse. So.
Any potential to actually raise prices in this environment or.
Not supportive.
With that type of dynamic.
Pricing.
Is more as you go into the season, you put a price in place.
And we have the price in place and again, we have long standing relationships with these customers which dealers.
Sort of hot summer to raise prices.
You really on do that so I think we've we're going to get the price that we committed to.
And the markets helped support that with the man.
Thank you nice results.
Our next questions from the line of Deepa Raghavan with Wells Fargo Securities. Please go ahead.
Hey, good morning.
[music].
Hey.
New construction pretty.
And then strong just given the results.
Especially in residential curious, how you're thinking about new construction trends progressed, the our residential question and would that be would that pace better than be placement.
Our best guesses that won't say better than replacement I think new construction, although it's been very resilient low interest rates are helping.
Our best guess, a second half the year that tails off and on a replacement, which is which was.
Increasing sequentially stronger April may and June.
Continues to hang in there.
So we expect new construction to tail off but another thing that I just want to weave into the conversation around some of our confidence about add on or placement is as you remember deep and others on the call during the during the great financial crisis.
The Canary in the coal mine just in our industry was.
Parts sales starting to grow very quickly and that was an indicator that people were.
Repairing rather than replacing we haven't seen that yet so what we saw on second quarter.
Yeah.
For our Lennox business.
Our residential replacement was down low single digits.
Well parts were down high single digits is for just for the month of June analytics business.
Our residential replacement was up mid teens.
Parts and supplies were only up 1%. So we're not seeing anything like we saw other financial crisis to me that's an indication that out of replacement is hanging in there.
And I would expect new construction slowdown.
Yes, thanks for the color my follow up is on cost action.
At the last time, we spoke about cost actions to some of them a temporary mostly in the salary of slot.
Just given how residential trends that outpaced expectations in Q2, and how july's planning stronger I understand inside maybe ahead, but how are you thinking about the timeline of rolling back some of those temporary measures and does your guide range, assuming you have all back at least at the better end of it.
Our guide range assumes ours assumes our perspective on how the balance of the year is going to play out and I understand that sounds like.
Of political answers. So yes. It encompasses our best guess things coming back in terms of the 150 115 million coming back.
About 40%.
15 million for what we call pay temporary salary reductions.
Or short term incentive.
That's sort of thing and.
We do better in 2020, especially second half the year I can imagine some of them come back, but that's all to comps by our guide so there won't be bad news. We give you later, because we have sizable some of that.
Got it thanks, so much.
And next we'll go to line of Joe Ritchie with Goldman Sachs. Please go ahead.
Hi, Thanks, Good morning, guys.
Furniture.
Hey, Todd just my first question, there's a lot there's been a lot of commentary around the length of the red the replacement cycle and how far we are into into that specific cycle. Do you think that the kind of changes this working from home dynamic potentially taxing HVAC systems.
Actually changes the trajectory of that cycle, just would love any color around that.
I think it could.
I don't want to see answers I don't know, but when you think about it.
I think about people working at home.
Becomes their island that becomes or life, perhaps if you will.
Our to sort of investing to protect it now I think thats in a world where unemployment does go back up to 20% and people have money spent.
But certainly the repair versus replacement in and I talked about earlier support study answer that things have changed I also think as we've said for a while it's an inexact science and some not not you Joe any work Goldman does the spot on but but but other cell site models tested sort of guess how this is going to work.
There's a there's some false precision I'm not sure everyone would have guessed that what degree cooling days up 4%.
That we would see this kind of performance in the face of coated.
And.
Including us and so I think market's pretty resilient.
Okay, good good to hear and I get.
The second question just thinking about the commercial business appreciated the breakdown that you guys gave us.
So we cannot think about you know that fit.
Opportunity for like that.
Potential service tail to come back quicker and I know that were and where it had.
Bit of a difficult time right now with the with the surgeon continuing and you asked but how are you thinking about the just like the service failed to that business, specifically for you guys and your ability to to get onsite access to do.
Repairs and service on on your commercial equipment.
We have access we have access today, our north American and US on North America service business were up and running we never shutdown essential business on a on the product that we sell through our district or through our dealers. They are essential businesses are on site. They are working and so the service revenue well down and second quarter, we expect.
To be flat, maybe even up second half of the year and then on.
Talk a little bit about planned replacement.
He's down steep and then it comes back to when it comes back it comes back quickly.
I think you have to have a bit more of a green light than what we have now although as I mentioned, it's gone the order rates gone from being down 40, 50% in April may time to half of that now.
So it's not healthy, but certainly better than it was a couple months ago.
Great I'll get back in queue. Thank you.
Our next questions from John Walsh, Chris Credit Suisse. Please go ahead.
Hi, good morning.
I guess just a question about the great.
Exit rate your school and.
Trying to understand any of that or if you can quantify how much of that is kind of raw contractors, maybe not getting into our house you know as we were kind of more at the peak of Covidien those kind of April amendments that some of this.
Our catch up of that or do you think.
We're at.
Greg that rates are something we can kind of roll forward.
Yes, you broke up little bit on the beginning the question. So can you restate it for me John.
Oh, sorry.
Thinking about if some of the strength in the exit rates, you're seeing is kind of a catch up.
From when contractors couldn't get into People's homes do kind of replaced regular me.
No I don't think so I don't I think we talk.
We talked to our contractors me that they've had access the entire Tom I think it has to do with with the Hot June.
And so degree cooling days loans up 4% or.
The quarter.
We're up I'm looking at my notes make sure I have 12% were up 12% in June so that warm weather helped us in June.
I think the other thing.
That we're going to have to see is it. We think we gained share in second quarter. In fact, I know we gained share in second quarter, such an industry data.
And we had mentioned exiting 2019 that we had we gain business with 80% of our contractors that are dealers that have been impacted by the tornado. We're now seeing a flow through in our volumes.
We also can as I mentioned.
First quarter call in the last fourth quarter call that we focused on new business and we had significant backlog additional new business coming into the year and we're seeing benefits from that and as I mentioned earlier some of the issues is that our competitor.
Hazards produced product so I think it's a combination of.
Repair versus replace versus repair staying in place some hot weather, but actually the shared is one of the largest reasons, we have such a strong June and quite frankly very strong July.
Great. Thanks for that and then.
Curious if you're seeing your customers on the resi or the commercial side do more add ons around indoor air quality.
I don't know that rolls into the mix, Pete, but just trying to see if there.
They might not go higher on this year, but theyre doing other add on.
You might be able to benefit on as you capture that.
Indoor air quality scenario that we focused on for years, both in residential commercial and when you think about in the sort of a bit of a baseline for folks online John when we think about January well I think when industry thinks about indoor air quality, it's about air purification, which is filters have a filters you the lights developed ventilation circulation.
And then third is about humidity control.
And it's always about balancing bringing an outside there and that's part of ventilation and then humidity control and also the capacity units issued as you bring out outside here that's on treated.
We're definitely seeing increased interest and I think you indoor air quality, both residential commercial or residential carrier equipment is the best in industry, not just let us say not as consumer reports.
Commercial similar to residential we work with our customers to address their solutions. So I think it's important I think it's about you have the capability to when the customer.
Service customer, but it's not a big enough dollar item, even if people added to the mix of the equipment. This would have an outsized impact on on sales and margin I think it's about a binary item that you have to have this capability to be able to top tier customers and customers, who your dealer contractor customers the wind business.
Yes, and we're well positioned to do.
Great. Thank you.
Next we got a line of a Nicole Deblase with Deutsche Bank. Please go ahead.
Yeah. Thanks, good morning, guys.
During the cold.
Just maybe starting with the free cash flow guidance just curious.
Right, that's not often moving higher as effort is higher and maybe same topic any thoughts around working capital part to potentially flipping to an inflow in the second half of the year.
I think we'll still continue to generate cash from working capital or from working capital second half of the year.
The.
Given the caution that I identified around Dps, even a greater caution around cash flow just historically, our ability to forecast and so I mean 340 is our best guess right now, but similar to what I've said.
On on earnings at the world's stays where it is we'll do better than Threeforty.
Okay got it thanks, Todd and then second question just around the potential for dealer inventory restocking I know that was something that has really happened obviously because of covert as it normally does seasonally are you starting to see dealers restock inventory at its Scott is that in does that create potential for more uplift and.
Thank you if that does start to happen.
We've seen dealers.
Restock in second quarter, and hopefully if the weather continues to be hot and it's a strong July and August we'll see some more sort of loading on the distributor level, which is our allied business, our which does 20% or so what we do.
It's more of an impact when distributors decide to reload and they put off and broad degree April and May we started to see them reload and sort of do some buying in June significant buying in June and so I think thats, where theres more momentum and sort of replenishing the channel for us.
On our Allied channel on the left side dealer started buying managing.
Got it thanks I'll pass it on.
And next we'll go to Jeff Sprague with vertical research. Please go ahead.
Thank you good morning, everyone.
Our agenda.
Todd on the surface.
The comps start looking tougher in the back half.
I'm just wondering if you could give us a little color as we try to think about Q3 and this really strong result here in July.
How that how the comps for the remainder of the quarter kind of play out and was July particularly.
Easy this year.
No I'm doing a little bit from memory I'll be honest feature but still level not exact question I I don't July wasn't necessarily easy last years I Recollect, we had a cool beginning to the summer last year and so I think may and June maybe.
Might have been easier, but we saw the degree cooling days and and I think July was sort of the normal July for us.
And then as I remember fourth quarter we.
Pitched about warm weather in the impacted ahead on our furnaces and so I think I don't think the comps are that dramatically harder I think that when you look into reported numbers.
The tornado impact was much more pronounced during the first half second half during the year, but when you sort of just with a tornado.
Packs.
The comps were down much different.
And on the factory inefficiencies side.
Can you give us.
Some sense of what we're talking about is that the just the $10 million that that Joe mentioned or others, just kind of other.
Perhaps harder the measure kind of noise sufficient inefficiencies going on in the factors.
Inefficiencies are driven by both traditional absorption right, which is we don't have the volume so the fixed cost them get absorbed and then there's absenteeism is up a bit you could expect our factories are in places like Georgia, and Iowa in South Carolina, whether where there has been.
Because of it and that has impact I broadly think about it as we entered the year, saying, we were going to get 10 million a factory productivity.
And now we're saying we're going to of 10 million of efficiencies so $20 million swings as what I would think about driven both by volume.
By the absenteeism right.
Then finally.
What do you need to see to restart the share repurchase everything you said here today sounds pretty constructive obviously, the futures cloudy, but.
Anything in particular.
To see just another quarter under your belt, how you're thinking about that.
And we.
The world's still changing quickly. So I think we certainly need another quarter under our belt, which yell third quarter goes and I think I've been.
I don't know vested it's on an earnings call that certainly have said publicly before I think the other issue that we continue to ensure up as we've asked for shared sacrifice for employees.
Around pay cuts.
Zero bonuses I think we have start making some of some of that whole.
Well, we aggressively to make investments share buyback I think weve Esa balance our benefits flow.
Great. Thank you.
Our next question from Nigel Coe with Wolfe Research. Please go ahead.
Thanks, Good morning.
Weve.
Below ground already talked so.
Going to just take a step back and going back to two Q and I'm looking at the kind of the cadence month by month I'm not looking for a blip up low count here, but the the plus seven in June do we need to do any adjustments on on.
Sales Sundays, because I think all companies had two facilities in June any distortions that will was up plus seven a good exit rate for a for Threeq junior and you'll be.
I think the plus sevens good that's it.
Okay, Great and then on the inventory side, obviously you inventories.
Yes, I'd say I'd say to that.
Mid teens in July I know that for back to stay for debt.
Right exactly.
And then inventory down 10% from from full cute, which is obviously very unusual these unusual times.
What needs to happen given seem in residential continues with this mid teens cadence through three Q.
Do you actually need to raise production levels to the kind of restock I mean, and then any color you have on where that inventory.
How about looks by business what would be helpful. I'm. Just wondering you know you.
Your free cash flow guns, I wonder how much of that embed some level of inventory kind of rebuild cu.
And then any color on income taxes in Threeq, we've seen some deferrals of income tax payments as well.
On on the inventory build.
We started.
I don't know for six weeks ago, several weeks ago eight weeks ago. Soon as we started to see the markets and how they were behaving we ramped up production. So we've already ramped up production.
The stay ahead of the demand curve and as I said earlier.
We're all through the summer when it's hot do you have to work through both the supply chain inventory levels lay on top of that co Ed.
So our teams are working hard, but we feel were great position and certainly as good as anyone in the industry to meet demand.
I'm not sure I understood a question on taxes.
Yeah with the Kazakh.
I think there was a bump down in a cash tax payments into July.
Yes, yes, it's a bit of a cap off for us on the timing of the cash but honestly, it's de Minimis for US you had some modest benefit for quarter four two but once again, it's a timing issue.
Issue.
Okay, great. Thanks, guys.
And our next question from on Josh Pokrzywinski with Morgan Stanley. Please go ahead.
Hi, This is Brian Bianco Josh.
Okay.
I wanted to ask about how that target customer reaction was going in this current environment and.
In terms of the incentives and rebates that.
How that was trending versus the $10 million range that weve given implied in December.
Hi, it's tracking as we had hoped and expected and guided that would as I mentioned earlier, we think.
Since I know, we gained share in second quarter ceded numbers and a big piece of that is as we talked about that we had 80% or so all the tornado impact we had gained back with our customers would see it flow through 2020, and we're seeing in terms of incentives and benefits that we gave to dealers that lines up what we commit.
To do were fall through even.
With a strong market, we're not going back office of sense, we're committed to doing that and so that's all in line also.
Okay, Great I'll leave it there thanks.
Yes.
And our next questions from a Steve Tusa with Jpmorgan. Please go ahead.
Hi, guys.
I see.
Got that that shot at the sell side really really hard it's just slow sensitive. These days. So I thought was on the watsco called effort for a second.
But.
I don't I thought I comment, Jeff Hammond [laughter], Yes, you did but talking about how you know our theres some false precision in our models, which I would just factually correct, but I guess there was also some false position in your models as well because things are playing out better than you had kind of expected.
When we talked in April and you did say that if consumer confidence rolls down.
You would it youre youre concerned about what it would due to the consumer it obviously unprecedented situation that.
It's very hard to call for I think everybody.
What what stacked or do you think is driving this obviously this is very different than a way to nine when they were negative savings rates and housing was imploding.
Is it the fact that you know.
Hey that people are saving a lot more is it the fact that people are running their systems harder.
Because they're just sitting at home and so you know if you have a little bit of savings from stimulus checks or whatever it maybe I mean, what what is kind of the feedback you're getting on why unemployment and why consumer confidence.
It's not it not rolling through these numbers to a more significant degree.
Hi, I think I think is several factors.
The humble and that we're in the throws of this so it's good news for not 100% sure what's driving it but were damn happy that is and that.
The oil too so the point, it's about we're not seeing repair versus replaced by segment and the combination I think its combination I think Steve I think it's one just psychologically people are in their homes are working in their homes and it's all the son, it's more important for them to invest in their nest.
And that where people could differ things just put it off because they're not at home I think we knew there all the time you want to lend dealt with I don't think this because people are running the units that much harder.
Because when we do studies and have done research even.
Always shocking what percentage of people don't have programmable thermostats and even those who have programmable thermostats never set them.
So units tens sort of run steady state to a large degree plus or minus a few degrees. So I don't think is that I also think is.
So we're not all in agreement with this I continue to yell at this is the reason and our team says they're not sure. This is the reason, but but I continue to believe that.
People will not invested depreciating assets and so at the height of financial crisis. When all you read was that your homes, where 30 40, 50% less the thought of putting a new unit something that was less worth that much less it's hard to swallow.
I think and we so far has been that have some indications back to sort of in the opposite at homes continued appreciate your construction.
Strong demand is high for homes.
I think people are willing to invest so I think those are sort of the things that are happening I also think theres, maybe a psychological viewpoint debt with co that people can tend to see finish line of when this may and where the financial crisis, having lived through it I thought was more nebulous about even what the cost us were disappointment.
And one that would also its way out we're here we can understand it can see a finish line. We can debate when that finish line right is outside of kind of the the whole in in April and May I mean, we look out to kind of next year in a more normalized environment, but one where maybe unemployment is sustainably higher.
You know what do we kind of look to next year and say or this wasn't kind of the reset of the cycle. Perhaps we were expecting that this is kinda back to you know more kind of normalize fundamentals as people kind of go on living their lives.
I don't know, Steve I mean that again, that's sort of the humble nature of my answer.
I think we're going to see how this plays out for example, I mean, if everyone goes back to traveling at work a 100% and everything is exactly as it was back.
The 19 than some of the factors that I talked about are no longer play I can imagine a world that might be different right [laughter] or more and so so im not exactly sure. How receptive 2021, I think I think we're happy and I wasn't taken a shot in the model I would just making deploy.
That that we issue and others.
Maybe had thought the cycle. It ended ended indicates maybe.
No I'm I'm not taking the personally I am I speak for all the the sell side or is with with false precision that our models.
The just the second question just remind us on the 115.
Any update is too.
How just remind us of what is temporary and what's what structural kind of you know as we as we look to next year.
About 20% of 115 million comes from salaried headcount reductions about 40% comes from discretionary spending like travel marketing incentive trips of sort of things and about 40% comes from pay actions, including executive incentives and salary reductions for.
6% for the salaried employees, 12% for executives in that 50% for me.
The way I think about it it is the pay actions.
It's back.
The other 60% will depend on top of the end market and how we want to respond right a little more kind of variable with with what's going on with the volumes.
Correct.
Okay. All right. Thanks, a lot. Thanks for the have gone color as always.
Okay.
Our next questions from Chris Dankert with Longbow Research. Please go ahead.
Hi, Good morning, guys. Thanks for taking my question.
I guess first off any color or additional details far as kind of how labor markets are impacting growth whether it's in terms of the actual construction market or just the are we seeing good access to to customer sites. What are you hearing from from contractors on the ground in terms of both labor and being able to access customer sites today.
Almost no barrier that I'm aware of on customer sites, both commercial and residential essential industry.
The us.
We're going in.
Personalize I, just headline air conditioner repair issue.
Technician arrive.
Hello.
Yes.
The kids two bedrooms.
Work left and I think we're seeing that across the industry.
In terms of labor availability.
I think it's I think stall I better than it was.
Eric.
I think the only issue that we're seeing.
When you're running a factory service business, if you have covance drug.
Then you have to deal with that in the appropriate way.
Morning.
So that causes absenteeism, so we and our channel partners work those issues, but I think we're all focused on safety taken all direct measures are working to call.
Got it got that that's helpful. Thanks.
And then my apologies I fully appreciate the difficulty of trying to be precise to moment as we've kind of gone through but I just have to ask again thinking about the cadence. So just volumes in a typical year for things to kind of fall apart is as maybe the guidance assuming that things would have to really ticked down in August otherwise, we're kind of through the bulk of the cell.
No. There is there any visibility as to why things might slow in August or was it just conservatism and just taking a cautious view.
Well I mean August is the end of the selling season for Gracie.
Obviously fourth quarter.
[music].
Whatever.
20.
Percent of our volumes fourth quarter since a furnace season.
Yes.
On a massive fourth quarter still matters to us.
So yes, it's tied to.
All right.
Frankly about coated app.
Thanks.
It's been surprising to me humbling to use that word again about how quickly things went down quickly. They bounced up I think Steve was right the sort of call me on it.
Hi, My Bell shaped distribution curve I had no bell shaped distribution. It said three weeks into July in residential we'd be up mid teens. So.
Yes, we surprised we never have guessed it.
I'll.
Go back the other way and so we're quite as of quarter to Tom.
Yeah, Yeah, absolutely appreciate that and just as I was thinking about it may again.
You can deal with some flooding, but I think when when it's cold outside of 32 degrees or you're going to replace that furnace rights I just think it's a matter of.
Flexibility there, but thank you very much the color appreciate it.
Although the my House, My Dad would make us freeze [laughter], okay, but.
Enough about me, let let me wrap up market conditions remain highly uncertain as we just sort of talking about here, but we're executing well very well and market opportunities and share gains third quarters off their strong start residential and commercial refrigeration business has continued to see relative improvement we've raised our guidance for 2020 and look forward to the remain.
During the summer in second half year, thank everyone for joining us have good day.
Ladies and gentlemen that does conclude your conference. Thank you for your participation you may now disconnect.
Yeah.
[music].
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