Q2 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Lennox International second quarter 2019 earnings call at the request of your host all lines are in a listen only mode. There will be a question and answer session. At the end of the presentation. As reminder, this call is being recorded I would now like 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 second quarter of 2019.
I'm here today, with chairman and CEO talk Blue Dornan, CFO , Joe Reitmeier.
Todd will review key points for the quarter and Joe will take you through the company's financial performance and outlook.
Give everyone time to ask questions during the Q and eight 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 Dot Lennox International Dot 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 publicly 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 , Tom Bluedoor. Thanks, Steve Good morning, everyone and thank you for joining US let me start with an overview on the second quarter, 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 in insurance proceeds and our reduced outlook for commercial and refrigeration end markets and then up and update 2019 guidance for the second quarter GAAP and adjusted revenue was $1.1 billion 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 to constant currency, including a negative 3% impact from the tornado GAAP operating income was 214 million up 10% and GAAP EPS from continuing operations was $2.81 down 17%, including a noncash pension settlement charge of $1.14 cents.
On an adjusted basis total segment profit was $202 million down 2%.
Total segment margin was relatively flat at 18.4%.
Adjusted EPS for continuing operations was up 2% to $3.74.
Residential 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.
Segment margin expanded 80 basis points to 22.3% price performance was strong at 3.6% yield.
Our residential business in the second quarter was negatively impacted by the significantly cooler temperatures and higher precipitation across the United States, especially in key central regions with cooling degree days were down more than 30% and precipitation was up more than 60% areas account for approximately 40% of our revenue.
We said over the years at a hot summer could add 10% to residential growth and a cold summer could subtract, 10%, which was the case in second quarter. This year adjusted for the tornado our residential volume was down 3%. If you add 10% today you get a more normalized number in line with the overall residential market conditions.
Our residential business had negative tornado impact of $28 million to revenue in the second quarter and $16 million to segment profit offset by $18 million 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 second quarter led to slower moving shipments in the industry.
Which slowed us in regaining market share following the tornado and extends our recovery time line to include the fourth quarter. We remain confident we will resume gaining share in 2020.
For 2019 overall, we now expect $99 million of negative tornado impact residential revenue up from $70 million previously, we expected negative $54 million impact to segment profit up from $40 million previously, we expect insurance recovery for lost profits of $94 million up from $80 million previously.
The resulting 40 million 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 million in revenue and $11 million segment profit in the third quarter for the fourth quarter, we expect.
An impact of approximately $14 million revenue and $9 million segment profit.
For the remaining 36 might emerged reinsurance recovery in our core guidance, we expect that we expect that to be split evenly between the third and fourth quarters.
Taking a step back and looking at the Big picture for both core and non core related to the tornado. We now expect total insurance proceeds of approximately $372 million up from $358 million. Previously we had received $252 million of that as of the end of second quarter and expect remainder by the end of 2019.
The 2019.
The 2099 core gain expected for the difference in the book value in the replacement value of assets remains approximately $91 million were a benefit of approximately a $1.73 cents per share to GAAP EPS.
We have posted a tornado financial update you on our web site summarizing the guidance I just discussed.
Turning to commercial in the second quarter revenue was a second quarter record of $261 million up 4%.
Commercial profit was a record $54 million up 6% in the segment margin expanded 50 basis points to a record 20.6%.
Commercial revenue in the second quarter was led by high single digit growth National account equipment business regional 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 in emergency replacement, which also was negatively impacted by cooler weather in the quarter was down low single digits at constant currency.
Our Vrs business was up high single digits in the second quarter on the service side Lennox National account services revenue was up low single digits.
In refrigeration for the second quarter adjusted revenue was up 5% at constant currency.
Adjusted revenue profit was down 19% and adjusted segment margin was down 340 basis points to 12.8%.
Profit was impacted by a favorable mix as North America volume was down and Europe volume was up in the second quarter. 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 fourth quarter.
Looking ahead and thinking about 2020.
We are we're still six months away, but the residential market continues to look robust setting aside the second quarter weather commodity costs continue to trail down and 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 second quarter revenue from residential heating and cooling was $689 million down 4%.
Foreign exchange had a negative 1% impact on revenue.
Volume was down 6% were down 3% adjusted for that NATO impact.
Price was up 4% and mix was down 1%.
Residential profit was flat at $153 million.
Segment margin expanded 80 basis points to 22.3%.
Segment profit was favorably impacted by a net $2 million 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 wetter weather tornado impact factory productivity unfavorable mix higher commodity freight tariff and other product costs as well as distribution and SGN investments and unfavorable foreign exchange.
Turning to our commercial heating and cooling business.
Commercial revenue was a second quarter record $261 million 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 the actual national account growth.
Commercial segment profit was a record $54 million up 6%.
Segment margin was a record 20.6% 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 SJT investments.
In the refrigeration segment adjusted revenue was $149 million up 2% in the second quarter.
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 million down 19%.
Adjusted segment margin was 12.8% down 340 basis points.
Profit was impacted by lower mix and the timing of the sale of refrigerant allocations in Europe compared to the prior year quarter higher commodity freight distribution and tariffs and other product costs and unfavorable foreign exchange.
Partial offsets included higher volume favorable price sourcing and engineering led cost reductions and lower ethylene expenses.
Regarding special items in the second quarter.
Excuse me the company had net after tax charges totaling $36.6 million.
This included a charge of $45.5 billion for pension settlement.
A net charge of $1.5 million for various other items at a gain.
Excuse me of $10.4 million from insurance recoveries net of losses incurred.
Corporate expenses were $24 million in the second quarter compared to $23 million the prior year quarter.
Overall, SGN eight on an adjusted basis $452 million compared to $151 million in the prior year quarter.
Net cash from operations in the second quarter was $30 million compared to $49 million in the prior year quarter.
Capital expenditures and purchases of short term investments were $18 million compared to $21 million in the second quarter a year ago.
We had proceeds for tornado damage to property and proceeds from the disposal of property plant equipment of $6 million in the second quarter. This year.
Free cash flow was $20 million compared to $28 million in the prior year quarter.
The company repurchased $150 million stock and paid $25 million in dividends in the quarter.
Total debt was 1.47 billion 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 million ended the quarter.
Now turning to our guidance for the company overall in 2019.
We are updating guidance for adjusted revenue from.
For adjusted revenue growth from a range of 3.3% 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 incorporate special items in the first half of the year, including the dollar 14 noncash pension settlement charge in the second 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 million of our defined benefit pension obligation.
As part of this transaction, we also transferred $100 million in pension assets to Pacific life.
This event required a remeasurement re measurement of the pension plan and resulted in a noncash $45.5 million after tax settlement charge in the second quarter to write off the related accumulated actuarial losses.
And as Todd mentioned, we continue to expect a total 2019 pre tax gain of $91 million related the 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 from a range of $12 to $12.60 to a new range of $11.30 to $11.90.
Let me now now run through the other key points of our guidance assumptions and the puts and takes for 2019.
First the guidance our guidance elements, we are updating.
We are lowering the headwind is expected from commodities for the full year from $30 million to $20 million.
We are lowering the guidance for factory residential factory productivity from a benefit of $8 million to being flat year over year due to the weather impact on production and the course and the corresponding lower fixed cost absorption.
We are updating guidance for 2019 capital expenditures from approximately $195 million to $155 million as $40 million of capital to fully reconstruct the Iowa manufacturing facility.
Damaged by the tornado has moved from 2019 two to 2020.
We are updating 2019 guidance for free cash flow from approximately $420 million to $390 million for the full year. There are moved three moving pieces to the guidance the two headwinds our lower earnings guidance and higher working capital.
And the benefit is a reduction in capital expenditures due to project timing of the Iowa factor reconstruction between 2019 and 2020.
For the guidance elements that remain the same we still expect to capture $80 million of price for the full year.
We still expect it to $25.5 million benefit from sourcing and engineering led cost reductions.
We still expect $15 million of a headwind from freight and $10 million from tariffs.
And we continue to expect headwinds $15 million for distribution investments and $15 million fresh DNA.
Corporate expenses are still targeted at $90 million for 2019.
Net interest expense is still expected to be approximately $45 million.
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 to 40 million shares which incorporates our plans to repurchase $400 million of stock this year.
And with that let's go to Cuba.
Ladies and gentlemen, if you would like to ask a question. Please press star one on your Touchtone phone, you'll hear a tone, indicating when placed in the queue. If your question gets to answer any wish to remove yourself from the queue. Please press the pound key.
Again star one we have a question.
First from the line of Julian Mitchell with Barclays. Please go ahead.
Thanks, Good morning.
Good morning, maybe just a first question around commercial and refrigeration demand.
You had talked about the 10 pre pulls back in Q1.
Entered Q2 with good backlog growth in both pieces, so just wonder kind of what changed.
As he went through the second quarter.
And maybe how you're seeing the start to Q3 across the three segments and noted in a moment.
As you can see and we had a nice second quarter revenue wise in both segments, especially in commercial and we and our third quarter 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 A.R.R.I. data for commercial.
Through may markets up half a percent, 1% we take them.
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 in some of our larger customers sort of deferring given some of the macroeconomic uncertainty, but again, it's on the margins were going from being up low single digits market call. It a sort of slightly down.
To be flattish to slightly down to sort of.
A toggle up a couple points, if you will but again, we still expect revenue both those segments to be up second half of the year.
Thanks, and then sort of tied to that and 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 thats helped so we're off to a solid start although I'd remind everybody.
Third quarter last year was warm if you recall it was up.
From memory.
25% above the normal at 15% above the prior year, So last third quarter was pretty warm.
So the comps aren't so easy that but residential so the 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 and fits that residential maybe just walk through.
Where you think you have falling short.
Or if it's really the external conditions of weather.
That is sort of held you back on that market share retake I mean again, we're gaining share back. We're just we didn't gain it back as fast as we had hoped in second quarter 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 this sort of a region.
In the center of the country.
Our revenue was was down there even greater than it was overall.
In the business and as Tom said to gain back share when when things are down.
So we think thats. The majority vast majority of the impact I think to be to be honest and straightforward about it full transparency. There are some sort of smaller dealers, who quite frankly, we're probably not going to get back.
That we protected our most valuable customers and those we did 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 work invent we've gotten back to 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.
Statements.
Just on the commercial side I mean, you had 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 it did something kind of happened later in the quarter on this front to kind of tweak that lower for the year I again, I think I'm, reflecting a guide on the industry rather than our share. So what I've said is is we had a nice second quarter in revenue and we expect revenue to be second half of the year. Our backlog chart is flattish.
Because the suited delivered a lot in second quarter.
So so we're still optimistic on upon segment overall, but we're halfway through the year and the industry is flat.
And I think I don't think its going I think the second half will sort of closer we get to election. The more these macro economic uncertainty Zhang.
The less likely we're going to see growth in the end market second half of the year right. Okay on on the resi side you guys.
Started to disclose in your Q is 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 first quarter. Your sell through is through your own stuff was kind of down moderately.
I think it is going to come out today can you just talk about.
Was that the similar trend here in the second quarter and then how should we read into that is that just you guys.
Kind of a restocking the channel from tornado index or what's the what's kind of the.
The framework with which to kind of look at that around.
It was even more pronounced in the second quarter, maybe than it was in first quarter. So our direct business, our atlantic's business, which is 80% of what we do.
Revenue was down, 6% and our allied and ATP businesses, which in which our direct was up 3%.
I think it's a couple of things I think it's weather exposure.
Our our Lennox historic or while our Lennox branded business is one the center of the country than than our Allied business I think thats part of it.
I also think it's this issue that.
The independent distributors were able to hang onto their dealers because they had multiple brands and so we're able to juggle brands and so the key dealers happy and then as were able to reload our independent distributors with our product and are able to seamlessly move back the dealers that product line and so no one sort of was turned off by the header relationship turn them off they were able to seamlessly move it back and so I think thats 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.
So a very core part of you know.
Oh Lennox is having this much.
Captive distribution.
Did alloy sheet assets of me.
[laughter] well he is very very high is very quick to compliment you guys on the on the comp side, which is they did warranted I mean, you guys have done a great job but.
Just curious.
On top of that and I thought it was the last night I get my head up for the right time.
[laughter].
Absolutely no desire to get out distribution as you've heard me say multiple times I think it's a differentiator today that 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, we want to be able to leverage investments and then again, if I learned anything at business School I want to have thousands tens of thousands of small customers rather than one large customer. So we have no desire to get out.
Got it one last one for Ford for Resi what was the actual was there any major difference in kind of.
Parts versus equipment, where parts up in the quarter like what what any difference there.
No I mean, it sort of the part of the business that was up the most was residential new construction, okay less less impacted by the weather, but the parts and the add on and replacement trend at the same direction that the cool weather impacting them both.
And parts and supplies, maybe in a little bit more than equipment.
Okay awesome, thanks, guys. Thanks.
Next question from Jeff Hammond with Keybanc. Please go ahead.
Hey, good morning, guys, Hey, Jeff merger.
I already knew the answer to that distribution question I was just going to jochen to add be shocked of altitude ask questions go ahead [laughter].
All right.
Just going through the 70 cents cod.
I mean, I know you made adjustments to the the commercial piece, but can you can you maybe break out.
How much of the.
How you break out that 70% cut how much is this kind of soft through Q residential versus.
How much is it is the is the.
Commercial piece being softer and then it looks like you know the refrigeration margins.
Seem to be coming in later as well.
I think order magnitude do I think about a chat as we passed on the second quarter Miss.
For the full year guide.
Than we had.
Sort of lowered the second half of the year because of.
Push out of the share gain but thats 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 how big it was.
I think you said.
Refrigeration the margin Bill good expansion in the fourth quarter, which would suggest that maybe margins are down in the third quarter and into what's going on there.
Yes, I'll do it in reverse order. This third quarter is the mix and I referred to it as mix. It just this dynamic that our business in Europe is growing quicker than our business in North America.
I think part of that market part of it is sort of flattish share in North America refrigeration, and we're gaining share in Europe and that hurts it.
The refrigerant issue as was second quarter a year ago.
We had about a 3 million dollar gain on on refrigerant I come back to that in Soc in second quarter. This year, we had about a million. So net net a $2 million difference year over year and as you may recall, it's a simplified its 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 are able to sell those again two of the $3 million gains last year second quarter, and a 1 million dollar gain this year, so year over year $2 million.
Okay. So that the third quarter margin comment on refrigeration is that this mix dynamic continues and then it normalizes in Fourq you correct.
Okay and then.
I would broaden answer also self help will kick in fourth quarter.
Okay, and then last one on this.
<unk> distribution growth versus direct.
The 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 Prebuy dynamic.
Uh huh.
Which prebuy dynamic you're talking about the furnaces yeah.
I haven't quantified the reason pause because I haven't quantified it yet in my own mind, So I am going to real time. Thank I I think obviously the way you asked the question you're right it will.
On the direct side, we'll we'll have more of a cell will be selling furnaces, where indirect weve sort of stock that 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 second quarter.
Okay. Thanks, a lot.
Our next question 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 just like to get a better sense of how weak Midwest was in the quarter.
I won't give the exact numbers as you suggested that but it was it's about 40% of our revenue.
And you know it was maybe two or three points down in revenue in the add on and replacement versus the overall market.
I would contrast data I will give you 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 Lenox replacement revenue was up 12%.
And so a market we had good weather, we did well in large parts of the country, where we didnt 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 would make up some of the Twoq you read the shortfall in the second half my hearing that right.
I think thats what would the guide says yes, okay. So the short answer is yes, and that's what's in the guide now again we.
You know I I, often don't like to talk about weather, but I I almost half to now given everything you've said, so far but that sort of the conventional wisdom that I. Also believe is true is sort of the weather that you won now is hot cool Hot cool.
So they sort of sell out and then they cools down they can better said it gets hot our dealers get really busy sometimes a week or two 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 I think its hard again to 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 for now for the balance of the quarter, we're going to have to sort of have some things move, but it's hard to make up us the Miss we had in second quarter 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 that the double price increase since the second quarter was the sweet spot, where we were sort of getting Pete carryover of both of them. If you will.
And the year we.
Here, we're going to get two points might be slightly better than that given the performance in second quarter, but second quarter sort of the high watermark of year over year price increases and look we we were competitive in the marketplace and so.
It's not like we said look we're not going to do any any pricing to protect to regain share just it's at some point you realize that's not de lever to pull so we tried to pull a lot of other levers and stuff.
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.
And doing well, thank you, hey, just coming around to kind of cash flow and absorption.
So I'm kind of those three pieces, Joe mentioned clearly working capital is got to be a chunk of inventory look hi, I guess I really have kind of two questions.
Well there is some kind of absorption benefit in the quarter actually from building inventory.
And then there was a Jeff there was some inventory build but theres also some raw material that are at higher levels given the increased production between marshalltown its LTL.
Okay, and then Conversely, I guess your guidance would assume some under absorption in the back half is you're you're burning inventory down can you give me any context on the margin impact there if the reason.
Once again I I think the margin impact is de Minimis and we're going to continue to level load production to optimize the impact on absorption.
And then just back to the price.
Todd or Joe I mean.
Do you see any indication anywhere that there is some pushback.
That in some industrial channels watsco kind of mentioned that around.
Parts pricing.
Obviously raw mats are coming down volumes, maybe not as good as people thought.
No.
Work, we've seen price stick in marketplace, obviously from the results we've had and we we as always plan on passing on an annual price increase in commodities have trailed down a bit.
But labor is extremely tight in North America, and we've had to raise wages in our factories are suppliers of half the raise wages in their factories the tariff situation still not settled.
Freight and transportation is still well down a little bit from last year still high versus last couple of years, so they're still inflation in the system.
And the need for us to pass on price and our competitors are doing the same thing.
No it will be fair to assume the double dip was obviously a bit unusual but kind of normal.
Year end beginning of year list price increases kind of over that again in the Twond again.
Yes, I mean, what we'll do going into 2000, Twentys just I'll repeat what you just said, we'll be announcing a price increase at the end of 2019 and set us up for for realizing in the 2020 and Thats historically, how the industry did it then.
No not to Bash watsco, but.
In Moscow's talking about price they may be talking to their supplier and letting them know what would they want to hit with what they want them here, but from our perspective, we're still getting price in the marketplace.
Great. Thank you.
Our next question from Robert Mccarthy with Stephens. Please go ahead.
Good morning, everyone. How are you today throughout how are you.
Good.
Maybe since you broke hard so 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.
[noise] chinks in the armor the cycle and how do you think about 20 into 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.
The discovery say something worse than than just bad weather.
No I think it's bad weather I think it's two things it's.
Bad weather in terms of cool and wet weather and bad weather in terms of a tornado, but but but those are the dynamics I mean from a residential viewpoint. The market's still robust use consumer still strong you as consumers are still spending I think you sort of see that in all all the surveys and economic macroeconomic data and as we go into 2020, we expect that to continue we sort of.
Toggle down.
Just just a bit the commercial 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 2000 twentys.
End markets are going to be good.
2021.
My Crystal ball is a little less clear.
But that are our three year target still stand up even with this second quarter drop because of weather.
And then in terms of the Red residential excuse me in terms of refrigeration and commercial lowering I mean, you did answer. The fact that you do expect to grow and that there should be sharing fees. I mean do you think this is some conservatism that you're baking into.
Into the into the guide or.
Do you think as you just on the market as you see it.
Yeah, I mean, I mean, they got to the guide.
His way I sort of think about and I I hope, we're wrong and I hope it does better, but but thats sort of our best call right now.
I'll spare you a question on your distribution, whether you want to sell.
[laughter] no matter what happens you can write that down as we do not want to sell distribution.
Thanks for your time.
Next we'll go to Gautam Khanna with Cowen and company. Please go ahead.
Yeah. Thanks, Good morning, guys got him how are you.
Doing well thanks.
Couple of questions first I was wondering any change that you would expect in the competitive environment. Given you know the Ccs spin or anything else that climate.
Ingersoll breakup.
It doesn't sound like you've seen anything, but what might you expect to them environment.
That's going to be unfolding over the next year.
Oh, I don't think I'd expect any change and and.
Train co or whatever the the new business is going to be called I mean, the management is I understand that Lamar and the management team at the pack. The parent company are going to go with train co right and so I assume they're going to compete the same way that competed now.
It it carrier CFO .
It's unclear exactly I I think one way it.
One thing I think about is sort of distractions aren't going to stop.
Because carrier co in of itself, 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 that will continue to be a distraction and I think thats good for us.
Okay. That's helpful. And also just what are you what are your latest thoughts on North American HVAC consolidation.
You think it happens do you think there is.
If it happens when does it happen.
Yeah, Hi, My answer got them, you've heard me say a thousand times I'll say it for people who.
Listening to.
We don't need to do anything worth scale.
But I think value could be created and if something would happen we'd love to participate and we think we'd be a good player to help drive the value.
I think over the long term if there is value to be created market's fine 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 debts that questions better asked to somebody else rather than me.
Fair.
And then.
You mentioned you know.
You're not going to retain 100% of the.
Of the customers that you lost and the related to the tornado.
Can you quantify that what sort of the net.
Of the dealers here of the customers who had previously what.
What percentage do you think.
Don't come back is there any way to quantify so we can understand you now.
The hurdle, you're overcoming as you up.
As you do recover.
You know again why.
With with some degree of uncertainty sort of the order of magnitude is we keep 90, we get back 90% will lose 10%.
And if you do some of the backward math on that that implies.
You know a point and a half two points of resi revenue maybe went away at the end of the tornado.
Versus closer to the 10 points of resi revenue that was totally impacted by it.
And I think that kind of revenue changes.
A quarter of a point or so a share.
Maybe three fess up our yep 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 putting out this.
Piece that we still haven't gotten to more broadly talking about our market share gains that we've gained half a point or more market share and Reggie up to the tornado during the prior five or six years as we go into 2020, we'll we'll do the same thing and and this will be behind us.
And last one sorry, Marshalltown is it fully operational fully up to speed Theres no lingering.
Production interruption there.
No lingering production interruption fluff the speed I mean that the push out of the capital no one's asked a 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 in the admin wing of the of the factory, adding in parking lots and sort of lesser priority things of what we needed to do to make it an up a full time factory again.
But production wise, we're where we need to be.
Thanks, a lot guys appreciate it.
Next we'll go to Deepa Raghavan 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 renzi weather played out next few months because it looks like you've already factored in some weakness in commercial lender duration.
Oh, you know it's.
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 there's a range around.
Some of our execution in the factories and so I think it's sort of a stacking of the operational bell shaped curve the range of outcomes around lots of initiatives that we have in place I think the most important thing is is maybe the weather impact or more broadly stable overall residential market.
But there's other things that got.
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 and last year.
Oh, no I mean as you know we don't give quarterly guidance. Some luck 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 and commercial up mid single digits in refrigeration.
I've talked about residential you can read a weather map, but you also got to read of a weather map from last year to sort of understand as hot last year. It's hot this year.
And operationally we're executing.
So I think thats sort of the color commentary on mix.
Okay.
Lastly from me can you give us some color on what you're seeing in non res spending some recent data points not very favorable.
You gave us pretty good color on you know Mark I mean, you talked about markets. You, obviously talked about your growth, but generally is there any anything else on a broad basis that you would like to talk about in terms of office versus retail versus institutional and is that concerning to you or just any viewpoints. There I appreciate it. Thank you.
No no no macro views that I would share that you couldn't get elsewhere, I mean again, it's sort of overall call and unitary markets flat.
So to no additional color.
Thanks.
All right. Thanks.
Our next question from Joe Ritchie with Goldman Sachs. Please go ahead.
Hey, good morning, guys, Hey, Gerry.
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 you know your production is back and running in Fourq you. It seemed 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 talking it up to whether and where you guys are based regionally or is there is there more to it than that.
Well I I think it's the more to it is what we called out for.
The revenue tornado impact.
For the tornado revenue impact in the quarter, which is 28 million. So theres 28 million revenue impacted second quarter associated with the tornado.
And and part of that was.
Being at full production or 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 thats tied to the $28 million.
The larger number in the quarters weather and Thats.
By definition, it's whether it's 100% weather.
Got it Okay, and then so I guess as I'm kind of thinking about you know the portion yes, you've discussed that with the smaller deere dealers. There's a portion that you are not going to get back.
I'm trying to understand I guess this is so the increase in expenses related to the tornado is it related to the portion that you are not going to recapture.
In terms of your share is that fair.
I'm not sure I understand the question you got to mediate the additional gain of insurance proceeds yeah. The gain on the insurance proceeds and the impact of the insurance proceeds this quarter. So with expected. It's expected to go up by $14 million for the year I guess, what is that related to that lost revenue associated with the tornado.
Okay, and then I guess as we think through 2020 and just this concept that the whole business center interruption insurance and how thats calculated it.
Is there an expectation that there's going to be additional recovery in 2020 or do we get to a clean slate in 2020, and we can just look 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 God expects that to be in all happen in that 2019, but it may bleed over into 2020, but I understand the need to have clean numbers and talent 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.
Yeah. Thanks, good morning, guys and.
I'm, sorry, I just want to start on Europe , I think during the first quarter, you talked about loaded, but the low double digit growth ex FX.
And a lot of that was driven by commercial HVAC and it sounded like you're up with kind of strong again. This quarter is that if you could just give us a little bit of updated on what you're seeing in the region.
You know and in Europe , we were up mid single digits our.
H. back was what was it.
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 were primarily in France.
In Spain and in Germany, those are our major end markets and that's what we've seen our strength.
Okay got it and then commercial it's Jack margins I think when we got the last update in the first quarter you had guided for a flat to down in the second quarter, but we saw some improvement there what was better was it the topline 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 is equally split between the two that we did better in the factory and then we did a little bit better on on revenue and mix than we had hoped right. There said, okay. And then last one for me just price cost impact on margins in the second quarter and then if you still expect to see improvement there in the second half.
Turning to folks to see if we have that in front of us.
I got too many numbers in my head right now [laughter] lumpy. It back I mean that the answer is we were we were positive.
See I'm turn it I got it right in front of me.
For the quarter, we had a $32 million in price and fifth and 15 million dollar headwind of commodity Sprague and tariffs. So we are positive 17 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.
Robert.
Off the ground covered I guess, just a few things to follow up on so Todd I think earlier in the quarter were a late in the quarter. In June you had alluded to or at a conference potentially price and also material cost tracking better.
But saw that you kind of kept the guide for those two components the same.
Any.
And the reason for that.
I'd say I think we I think we lowered commodities. So it went from a $30 million headwind to a $20 million 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 the three would be better I didn't mean to say each element would be better and so that all three of them I think used to be 55 and are now 45 I have the math right.
Got it got it and then that number you gave for the replacement volume in Florida that up well yet.
Like how same store is that sort of same store number are you, adding stores in Florida contributing to that growth.
No I.
I don't know if we add I don't think we added any parts plus stores. If thats. The question because I don't think we added and in Florida, but I know 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 thats, how we gain market share and so I just I don't view it as sort of same store sales I viewed as did we gain share or not we did.
Got it got it and the Mark in the market was up.
Right I guess, just lastly, following up I think it was Joes question about the.
The way that share recapture is.
Included in the numbers, so that 28 million of revenue in this quarter and if not just volume lost its net of.
What you've estimated is recaptured chair is that right.
Correct.
And I guess to a same thing with the at the EBIT line.
Correct.
So the fact that the EBIT track, a little bit better on insurance recoveries, even though the revenue with where the share recapture was lower is just kind of out of period.
Item breast in some way in the you know we gave rough guide last time, but the 18 million.
Of insurance proceeds in Q2, I would tie to the 18 million lost profits. We had in Q1, so its a lag not sort of had lagged by a quarter.
Alright, thanks for clarifying all that.
Thanks.
Next we'll go to adjustables Winski with Morgan Stanley . Please go ahead.
Hi, good morning, guys.
Todd I Wonder if you could calibrate something for me I was kinda touched around you know a few of these elements with the prebuy around the front of standard and you know 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 can you size up the magnitude of what you thought was.
Maybe pre bought there versus versus underlying.
I don't have the math and fun and Josh out we'll put it together I know that the pre buy.
Versus our competitors is dramatically less just because we didn't have the factory capacity to be building.
The pre regulatory furnaces like others may have done it so I think thats part of it, but but I think allied doing better our independent distribution doing better during second quarter, and what 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 onto dealers with other brands, which are atlantic's distribution by definition wasn't able to.
Got it so thats kind of where I was going with this is you know obviously your competitors, who don't have substantial company distribution are able to fill the channel, but more I think you know carrier was still taking pretty by orders from 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 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 you know the notion of that maybe not as big of a flip into the second half is.
Just how I should read that.
I'm not I'm not sure I follow the question I I think if you yeah. So the.
Lastly, like if you are a company like carrier who sell into independent distribution.
The revenue first half the year will be over inflated there in a revenue second half of the year will be deflated by that fact.
If your company owned distribution like we are atlantic's brands arc, our revenue would have been versus competitors would have been understated during the first half of the year and overstated during the second half.
The reason I haven't spent a lot of time talking a lot that is that's like a third order equation. After the tornado after the weather that I think that's sort of a rounding issue a couple of points here or there and I think on Allied again.
There was Oh, we got some tailwind from 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 is pre build as much and that the the greater dot driver up the disparity between our Lenox brands and our Allied brands. During the second quarter was driven more by this issue of regaining lost share more seamlessly through independent distribution. The company owned distribution because independent distributors were you able to try 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.
Pulling out you know what we'll follow up on it it's a little it's a little overly complicated I'll leave it there thanks for the color.
And we'll go to John Walsh with Credit Suisse. Please go ahead.
Hi, good morning.
Hey, John .
The just a question around the 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 going kind of beyond that opening price point anyway, you kind of want to articulate it would be it would be helpful.
I think most of it's just straight straight price I mean, there is a little bit of mix in the quarter, but given a tornado impact given the weather you know the mix sort of wasn't on its normal trajectory I mean, that's just two price increases being passed on.
Got you and then I guess you know 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 its kind a.
We're pushing it one to two quarters or if it's kind of they are actually.
Waiting to see if the capital project moves forward.
I think it's just on the margins and I think as you know our primary exposed to grocery in cold storage and and.
The question is do you build new not so much on stores, but cold storage facilities to build new cold storage facilities to invest the capital.
I think it sort of the macro investment decisions were seeing across corporate or industrial America.
All right well thank you.
Thanks.
Your next question Nigel Coe with Wolfe Research. Please go ahead.
Thanks, guys good morning.
How are you hopefully a good thanks.
I think a lot of ground here.
Can we just I mean I too.
You know, maybe betray must be busier, but.
I just wanted to spend you know the market share dynamics into keeping you didn't actually lose any share into Q1 8, So therefore to be talking about regaining share seems like.
Illogical from I'm, just wondering are we talking here about the loose that went away in the second half of the year that haven't come back is that how you are measuring the remote you're looking to get.
Yeah exactly so so.
The 20 Eightth in that number and so dealers, who we lost in fourth quarter.
If we hadnt have gained them back the impact in second quarter would have been significantly greater than 28 million.
Okay, that's great.
And then the I think you could have 40 cents exposure to the Central States Midwest States would that include the central southwest as well. So we're talking here about Texas, Oklahoma, both isn't on not just the classic Midwest.
Yeah, I mean, the swing rages I'll call it out as to traditional Midwest, which is.
We have football fans out there the big 10, such Illinois, Indiana, Michigan, Ohio, Wisconsin.
The Central Plains, which is really Missouri, Iowa, Minnesota, and Nebraska, and obviously too much lesser degree the Dakotas, and then south central to your direct question, Texas, Louisiana, Arkansas, Oklahoma.
Okay that makes sense and then just two more quick ones to tick off here.
Just you talked about the insurance negotiations. Therefore every 20 minutes difference I mean I understand this is somewhat sensitive topic, but.
You know conceptually do you get comfort of AFFO for one full year of lost profits. So is it not that simple.
It's not that simple.
So 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 mixture and at the end of the day will cool.
Work on a number and we've got it so to the best of our ability publicly of what that number is and how much. We you know we set how much we gained so far and what we expect that number to be looking around so I got so many numbers I think that it's 472 right through century 72.
Not a free 70, Autochem and we've received 252 dates we still have 120 to negotiate craft and that's our best estimate okay. Great and then just a quick one on pricing what kind of pricing that might be so there's been a little bit of chatter about.
Dealer incentive picking up doing two Q2 going into Q have you have you seen that and is that a risk in any dimension for the back half of the u.
Hi, it's not a risk for the back half of the year. It's it's when the weather's 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 DBS. Please go ahead.
Hey, good morning, guys.
Hey, David.
I appreciate your fitness in here.
Hi, just a clarification on the 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 three facilities.
Comparing to that before the tornado 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 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 shifted volume for the tornado we move capability, both to South Carolina and to Mexico that capability still remains there.
But but we're up and running all the products and and Marshalltown that that we were producing prior to the tornado also.
Got it.
And just curious have you have you felt any.
No pushback from customers on having some of that.
Dave Lennox signature branded product coming out of Mexico now.
Zero zero pushback in any way.
You know weve been building in the Mexican facility for almost a decade now and many of our largest dealers have visited facility. They know how the quality is in and.
They don't care, where whether it's made in Mexico or whether it's made in the U.S. its exact same quality.
Very helpful. 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 2019. Thank you all for joining us today.
Ladies and gentlemen that does conclude your conference. Thank you for your participation you may now disconnect.
[laughter].