使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Lennox International Q2 2011 earnings conference 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 a reminder this call is being recorded.
I would now like to turn the conference over to Steve Harrison, Vice President of Investor Relations.
Please go ahead.
Steve Harrison - VP, IR
Good morning, thank you for joining us for this review of Lennox International's financial performance for the second quarter of 2011.
I am here today with Todd Bluedorn, CEO, and Bob Hau, CFO.
Todd will review the key points on the quarter, and Bob will take you through the Company's financial performance.
In the earnings release we issued this morning we have included the necessary reconciliation of the financial metrics that will be discussed to GAAP measures.
You can find a direct link to the webcast of today's conference call on our corporate website at www.lennoxinternational.com.
We will archive the webcast on that site and make it 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 material from such statements.
For information concerning these risks and uncertainties, see Lennox International's publicly available filings with the SEC.
Lennox 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 CEO Todd Bluedorn.
Todd Bluedorn - CEO
Good morning, thank you all for joining us.
Let me take you through a few key points on the second quarter and our current view on market conditions and then Bob will discuss the financial results in detail and the outlook.
As you saw in our earnings release this morning, the second quarter was disappointing for our residential equipment and service businesses, while commercial and refrigeration had solid quarters.
Overall, total Company revenue in the quarter was up 7% from prior year quarter, including the Kysor/Warren acquisition.
Excluding the acquisition and in constant currency, revenue was down 2%.
EBIT margin was down 230 basis points for the Company overall, as reported with Kysor/Warren.
Margin was impacted by lower volume and mix, higher raw and component commodity costs, and a lower favorable annual warranty adjustment than last year.
Positive offsets included price, productivity initiatives, and lower SG&A.
Adjusted EPS from continuing operations was $0.84 versus $0.97 in the second quarter a year ago.
GAAP EPS from continuing operations was $0.83 versus $0.86 in the prior year quarter.
Looking at the quarter for each business, let me start with residential.
Revenue was down 5% at constant and currency, and segment margin was down 430 basis points to 8.4%.
Lots of dynamics in this market.
As you all know, the consumer environment was weak in the quarter with a lot of uncertainty as reflected in the economic data.
Jobs remained a major concern and consumer confidence dropped in both May and June.
Weather was unfavorable compared to last year, with cooling degree days down 8% in May and 9% in June.
For the quarter overall, cooling degree days were down in every region except one, the West South Central.
In key swing regions in North and East, cooling degree days were down more than 20% for the quarter.
In our residential new construction business, the homebuyer tax credit of as much as $8,000 not being in place this year had a negative impact.
Single family housing starts saw strong growth in the first half of 2010 driven by the homebuyer tax credit, were down about 15% in the second quarter this year.
New construction now only accounts for about one-fifth of our residential business.
In our residential replacement business, there were several factors negatively impacting our volume and mix that stem from the federal tax credit for high efficiency equipment no longer being available this year at the $1,500 level, as well as a shift to R22 dry charge units.
Let me spend a few minutes on these points.
In the second quarter this year, we saw far less HVAC system sales, especially as the selling season progressed in June.
One reason for this, to give you a simple example, is that last year consumers would buy a 14 SEER condensing unit, and then qualify for the tax credit, buy a premium high-efficiency furnace, and get the furnace at essentially half price.
This year without the $1,500 tax credit incentive, consumers are more often just replacing their cooling or condensing outdoor unit.
This is evident in the mid-teen drops in the industry furnace shipments year-over-year in second quarter.
Another reason is that there is a shift going to R22 dry charge units.
Although some consumers are buying an R22 condensing unit as an alternative to repairing the compressor, which is what we had hoped, oftentimes consumers are going the R22 route instead of buying the new R410A cooling equipment with the outdoor condensing unit, the indoor coil, and other parts and supplies necessary for the changeover to the new refrigerant equipment.
R22 was 17% of our cooling product shipments in the second quarter, up from 1% last year.
The last point is that there was a mix down in SEER due to more R22 shipments, as well as a mix down in SEER and the R410A equipment shipped.
Our Lennox brand of 14 SEER and higher was 47% of cooling product shipments in the second quarter, down 8 points from a year ago, and back to the same level we saw in the second quarter of 2009.
As we mentioned on the last earnings call and recent webcasts, the second quarter got off to a slow start in April and May for residential, in June, which makes up half of the shipment for the quarter, didn't see any traction given these dynamics in the market.
Although July has seen warm weather so far, given the other moving parts in the residential market, we are projecting dynamics I mentioned to impact the business the remainder of the year.
We still expect residential shipments for the industry to be down flat to low single digits for 2011, and price has been as expected, but we now expect mix to be down significantly, and have adjusted our outlook accordingly for the year.
We have also lost some share so far this year in our premium Lennox brand business, where our value Allied brands have grown faster and gained share in the market.
Allied shipments were up mid-teens in the second quarter, and Allied has grown to one-third of our residential unit shipment year-to-date, although much less that in revenue terms.
In total our residential HVAC unit market share is down about a half point on a rolling 12-month basis through June.
Our service experts business saw the same dynamics I discussed for our residential equipment business, with a regional weighting to the North and East where the weather was cooler than last year, revenue was down 14% at constant currency, and segment margin was down 540 basis points to 2.2%.
Turning to our commercial segment, revenue was up at 9% at constant currency.
We saw broad based growth across our business in North America, lead by strong replacement business in national accounts.
Europe also saw good broad based growth, and we saw significant traction as we expanded our geographical reach in the region.
Commercial segment margin was down 210 basis points, primarily on commodity headwinds slightly above price realized so far, as well as a lower favorable annual warranty adjustment than in the prior year quarter.
Year-to-date we have signed up 9 more new national accounts, bringing our total to 84 new national accounts since the start of 2007.
In our refrigeration business for the second quarter, revenue was up 56%, including the Kysor/Warren acquisition.
Organic revenue at constant currency was up 8%, after adjusting for the strategic exit of the third party coil business in Australia.
Except for Australia where the refrigeration market was soft, revenue was up in all regions lead by 30% in growth in Europe, North America was up mid single-digits.
Backlog continues to look strong in refrigeration.
We are seeing momentum for replacement business driven by energy efficiency.
Cold storage infrastructure pent-up demand is clearly out there, and financing is becoming easier for customers.
Refrigeration segment margin was up 260 basis points, excluding the impact of the Kysor/Warren acquisition.
Refrigeration price increases covered commodity headwinds in the quarter.
Let me shift gears and talk about what we are seeing on the commodity and component front overall.
We now expect raw and component commodity headwinds of $60 million to $65 million in 2011, up from the previous expectations of $45 million to $50 million.
While the pressure from raw commodities has eased somewhat, commodity related cost increases on a broad basis from our component suppliers hit us in the second quarter, and will have an impact on our full year.
We have announced and pushed through price increases this year in the commercial and refrigeration markets, and now a second round of price increases in the residential market.
While we will continue to capture as much price in the market where competitively possible, our current expectation is $50 million of price realization for the year.
Regarding our global sourcing initiatives to save an incremental $25 million to $30 million this year, our programs are still on track, and progressing as planned.
Before I turn it over to Bob, I will just wrap up by saying it is clear that several of the headwinds we were looking at in residential for the year have turned out to been significant this selling season.
Given this, we are taking further measures to adjust our cost structure, as well as engaging in new growth and productivity initiatives, but looking beyond the near term market distortions from the year-over-year comparisons against federal tax credits, and the reemergence of the R22 equipment, residential HVAC remains a market with strong fundamentals.
Real and significant pent-up demand has been created over the last five years.
There will continue to be demand for premium, high efficiency products that lower consumer energy bills each month.
There is also significant demand at the value end of the market, where we have seen good traction with our Allied brands, and increasingly with our entry level Lennox brands.
There are opportunities here for us to focus on, and we are doing so.
Turning to our refrigeration and commercial markets.
We still expect refrigeration to be up mid single-digits.
We are raising our expectations for the commercial market to be up high single-digits, based on market performance for the first half of the year, and the outlook for the second half.
Backlogs continue to look strong in these businesses, with broad-based strength in North America as well as internationally.
Now I will turn it over to Bob.
Bob Hau - CFO
Thank you, Todd.
Good morning, everyone.
Let me provide some additional commentary on the business segments for the quarter starting with residential heating and cooling.
In the second quarter, revenue from residential heating and cooling was $395 million, down 4%.
Currency had a 1% positive impact, volume was down 5%, and price and mix collectively were flat.
Price was 2 points favorable in the quarter from our price increases earlier this year.
Product mix was 2 points unfavorable, and volume was lower against last year for the reasons Todd discussed earlier.
Residential segment profit was $33 million compared to $53 million in the prior year quarter.
Segment profit margin was 8.4% compared to 12.7% in the same quarter last year.
Results were primarily impacted by lower volume and mix and higher commodity costs.
The annual warranty adjustment was favorable, but was $2 million lower in residential than the prior year quarter.
Residential benefited from ongoing productivity initiatives, lower SG&A, and price realization.
Turning to our commercial heating and cooling business.
In the second quarter, commercial revenue was $198 million, up 13%.
Volume was up 6%, and pricing and mix were up 3%.
Currency had a 4% positive impact to revenue growth.
North America commercial HVAC revenue was up low double-digits and Europe commercial HVAC revenue was up high teens.
Commercial segment profit was $27 million compared to $28 million in the prior year quarter.
Segment profit margin was 13.7% compared to 15.8% in the same quarter last year.
Results were primarily impacted by higher volume and favorable price and mix, with offsets from higher commodity costs, and a $1 million lower favorable annual warranty adjustment than the prior year quarter.
Moving to our service experts business.
In the second quarter, revenue was $145 million, down 13%.
Volume was down 14%, and price and mix were flat.
Currency had a 1% positive impact.
Volume was down for the reasons Todd discussed earlier.
Segment profit was $3 million compared to $13 million in the prior year quarter.
Segment profit margin was 2.2% compared to 7.6% in the second quarter a year ago.
Segment profit was down in lower volume with some offset from lower SG&A expenses.
In our refrigeration segment, revenue in the second quarter was $218 million, up 56% including the impact to the Kysor/Warren acquisition.
Organic revenue was up 13%, volume was up 1%, price and mix were up 3%, and currency had a positive 9% impact.
When adjusted for the strategic exit of the third party coil business in Australia last year, organic refrigeration revenue at constant currency was up 8%.
Segment profit was $21 million compared to $15 million in the prior year quarter.
Segment profit margin was 9.8% including the effect of the Kysor/Warren acquisition, versus 10.9% in the second quarter last year.
Excluding the acquisition, refrigeration profit margin was up 260 basis points.
Overall, refrigeration results were primarily impacted by higher volume and favorable price and mix, with offsets from higher commodity costs and selling expenses.
Looking at special items in the second quarter, the Company had after tax charges of $1.5 million for the restructuring projects announced in the prior quarters.
In total, special items netted to an after tax charge of $600,000.
Corporate expenses were $12 million in the second quarter, down 40% from $20 million in the prior year quarter, primarily on a reduction in variable incentive compensation and costs controls.
We are reducing our corporate expense guidance for the full year from $70 million to $60 million.
Overall, SG&A was $175 million in the second quarter, down 3% from the same quarter last year.
For the second quarter, cash from operations was $6 million compared to $14 million in the prior year quarter.
Capital spending was $10 million in the second quarter compared to $9 million in the same quarter last year.
Free cash flow was a negative $5 million in the second quarter compared to a positive $5 million a year ago.
Due to the seasonality of our business, it is common to use cash in the first half of the year and generate cash in the second half of the year.
Excluding the impact of the Kysor/Warren acquisition, working capital as a percent of trailing 12-month sales for the Company was up 18.3%, up from 16.7% in the year ago period.
Also the quarter end working capital ratio was 20.7%, up from 19% at the end of the second quarter a year ago.
Working capital ratios are up on higher inventory levels, due primarily to the softer residential market conditions than expected, and will be worked down in the second half of the year.
Looking at liquidity, cash and cash equivalents were $77 million at the end of the quarter.
Our debt to EBITDA ratio was 2.3 ending the second quarter, and we expect this to be below 2 by the end of the year.
Our total debt was $578 million at the end of the quarter, and for 2011 we expect interest expense of approximately $18 million.
Before I turn it over to Q&A, I will briefly talk about our market assumptions for 2011.
In residential, we still expect industry shipments to be up low single digits for the year, but as Todd discussed earlier, the impact of R22 and the lower tax incentive is driving a negative mix, putting pressure on our revenue.
We still expect the refrigeration market to be up mid single digits, and we now expect the North American commercial unitary market to be up high single digits versus mid single digits previously.
Based on these assumptions, we have reduced our guidance for organic revenue growth for the Company overall to a range of 1% to 4%, including 2 points of positive foreign exchange impact.
Including the impact of the Kysor/Warren acquisition, our revenue growth guidance range is 8% to 11% on an as-reported basis.
The 5 point change in guidance range to organic revenue growth at constant currency, equates to approximately $150 million of revenue.
Our guidance includes an impact to EBIT at a 50% decremental rate due to the mix impact within residential or $75 million.
As Todd mentioned, our commodity impact to both raw and component material is now $60 million to $65 million, partially offset by $50 million of price.
We are also taking actions to save $25 million from lower SG&A and other productivity initiatives versus our previous EPS guidance range.
We are therefore lowering the guidance range for adjusted EPS from continuing operations to a range of $2.00 to $2.30.
Our GAAP EPS guidance moves to a range of $1.93 to $2.23 including the impact of announced restructuring activities.
Our weighted average share count for the full year is approximately 54 million shares, we are planning more than $65 million of share repurchases in the second half, and for 2011 tax rate we now expect approximately 34%.
We now expect capital spending of approximately $60 million in 2011.
With that, let's go to Q&A.
Operator
Certainly.
(Operator Instructions).
Our first question comes from the line of Jeff Hammond, KeyBanc Capital Markets.
Please go ahead.
Jeff Hammond - Analyst
Hi, good morning, guys.
Todd Bluedorn - CEO
Good morning, Jeff.
Bob Hau - CFO
Hi, Jeff.
Jeff Hammond - Analyst
Just on the commodity dynamic, what has really changed there, because it doesn't seem like commodity pressures have gotten incrementally worse?
Then, can you go through first half versus second half, how much of that $60 million to $65 million of headwind hit first half/second half, and how does price hit first half/second half?
Bob Hau - CFO
Yes, Jeff, this is Bob.
Overall, commodities in terms of the raw from copper, steel, and aluminum haven't changed significantly.
What is impacting us now in the second quarter and the balance of the year is the second level implication to our component purchases, so the product that we buy from our vendors we are seeing a price pressure, cost pressure from them, as they deal with those same component or commodity prices that we are suffering with also.
In terms of first half to second half.
The $60 million to $65 million is roughly split 50/50, about half of it behind us in the first half, the other half yet to go for the second half of the year.
Jeff Hammond - Analyst
Okay.
And just the $50 million of price, how much have you captured to-date?
Bob Hau - CFO
A little less than half of that in the first half.
That is really driven by we're seeing immediate impact from the residential price increases, but in our refrigeration and our commercial business there is a little bit of a lag given contractual agreements we have with some customers as those roll off, they get the higher prices so it is a little back half loaded, but roughly 50/50.
Jeff Hammond - Analyst
Okay, that seems more balanced than what you guys had been previously talking about, where price costs would come more in balance in the second half.
Bob Hau - CFO
I think all along we expected the commodities to be front half loaded when we were looking at an overall raw commodity situation.
Now that we have got the second tier it's more 50/50, and price initially expected that to be a bit back half loaded with those commercial facing businesses, both commercial HVAC and refrigeration and the timing of those price increases.
Jeff Hammond - Analyst
And the $50 million of price does not reflect any capture of these follow-on price increases?
Bob Hau - CFO
Actually, it does.
We announced price increases in all of our businesses beginning of the year, first quarter of the year.
We did announce a second level increase effective January 1st in our residential business.
The $50 million incorporates all of those.
Jeff Hammond - Analyst
Okay.
Todd, on the 50 basis points of share on a rolling 12-months, what would you attribute that to?
I think you had some furnace dynamics, then maybe just touch on how R22 would be impacting share?
Todd Bluedorn - CEO
Again, it is unit shipments 12-month rolling share.
We are winning at Allied so we are actually gaining some share on the entry level products in Allied, and where we have lost shares is in the premium Lennox brands, and it is as you suggesting, which is our strength is, or we have a strong position in furnaces.
We especially have a strong position in premium high-end furnaces, and we have found that has been the area that has most affected by the mix down.
We are also very good at system selling, when the condensing unit has to be replaced, we tie it into a furnace and the elimination of the tax credit has made the system sell a harder sell this year.
Jeff Hammond - Analyst
Okay, thanks, guys, I will get back in queue.
Operator
Thank you.
Next question from the line of Adam Samuelson, Goldman Sachs, please go ahead.
Adam Samuelson - Analyst
Good morning.
I was hoping to dig into the organic revenue growth guidance a little bit, it looks like it would imply somewhere about 3% to 9% in the second half, and maybe help us by segment.
You got a tougher comp on the commercial side, then a tough 4Q in residential given the inventory build last year.
Maybe is it price that's getting better?
Maybe what's+ year-on-year getting better in the back half to drive the organic acceleration?
Todd Bluedorn - CEO
I think a couple of things.
One is price, we have talked about the price increases that we have had.
We remain bullish on commercial and refrigeration, even with the tougher comps during the second half of the year as we raised our thinking on the industry for commercial, and we have talked about backlog and broad strength in both commercial and refrigeration during the balance of the year.
The other piece is last year we had a partial launch of our new furnace product line, and this year we will have the full product line going into the furnace selling season, which we think will help our residential business.
Adam Samuelson - Analyst
That is helpful.
Maybe just taking a step back and thinking a little bit longer term.
The Company has 2013 margin targets of 10.5% that you outlined in the past.
Maybe talk about how we should be thinking about those relative to the 2011 performance, and where we are today?
Todd Bluedorn - CEO
Right.
Since we gave that guidance in December, there has especially as we rolled into the selling season, there are some near term market distortions in residential HVAC because of R22 and because of the tax credit, but as I mentioned, residential HVAC remains a market with strong fundamentals, real and significant pent-up demand, there continues to be a demand for premium high efficiency product.
So while this quarter is disappointing and we have lowered our full year guidance, the fundamentals of this industry remain strong, the fundamentals of our Company, and the focus we have had and continue to have on margin expansion remains strong, so we are still very comfortable and confident this is a double digit ROS Company.
It has shifted to the right a bit in terms of getting to the revenue level to make that happen.
Adam Samuelson - Analyst
Okay.
And maybe just one quick follow-up.
Is there any change on the cash flow expectations for the year?
I think in the past you've said approximate net income, net income has come down for the years, free cash conversion of about [1%] still the expectation?
Bob Hau - CFO
Yes, what we said was over the long-term cash would approximate net income, clearly with the reduced net income overall cash flow, we will see some pressure, but as I explained in the script upfront, we typically use cash in the first half, and generate in the second.
We expect that 2.3 times debt to EBITDA to drop below 2, back into our range of one to two that we have given from a guidance standpoint.
Adam Samuelson - Analyst
Okay, thanks very much.
Operator
Thank you.
Next question from the line of Rich Kwas, Wells Fargo Securities.
Please go ahead.
Rich Kwas - Analyst
Hi, everyone.
Todd, could you give a little more on the market share loss there between Allied and Lennox?
It seems like Allied you've picked up more than [50], and in the Lennox brand you've maybe lost more than 50.
Could you provide more color there?
Todd Bluedorn - CEO
These things tend to be more sliced when you look at rolling-12 (inaudible).
I am not going to go into sort of the intense detail.
I would say we have done well in Allied.
The R22 has been a focus of that business so we've sort of rode that wave.
They are good at selling the individual unit rather than the system sales with our Allied brands, so we have done well there.
Then on the premium side, we have had the pressure that I talked about.
Rich Kwas - Analyst
Okay.
And then I guess as you think about the tax credits expiring, and as you move into next year, what are your thoughts here with R22?
How much of a headwind do you expect this?
You obviously expect this to be a headwind for the rest of the year, but as you move into 2012, how do you think mix is going to play out?
I know that there are some factors there with the macro that affect that.
What are you thinking right now?
Do you think it is just going to be a slow ramp in terms of mix recovery?
Todd Bluedorn - CEO
I think that as we went into the selling season this year, we were all surprised, I will personalize it, we as a Company were surprised by the impact on mix from the tax credit.
We thought we were positioned to sort of work our way through it, and through May we were fine on mix, then in June we saw significant deterioration as we started to sell through our dealers.
We are confident that as an industry, whether it is moving from 10 SEER to 13 SEER, whether it is changing refrigerants, whether it is elimination of this tax credit, sort of the history of the industry is there is shocks to the market dynamics that effects a compression of the segmentation of the market, then as a industry we work our way back towards three tiers of product and premium product that you are able to sell to, and you do that with the things that we do which is focus on premium differentiation, whether that it is in energy efficiency, whether that is in controls, whether that is in alternative energy, like our SunSource.
So we are confident that the compression that we have seen this year on mix we'll be able to move it back out.
Rich Kwas - Analyst
Okay.
And then final one from me on the components.
I guess I am surprised that the components cost was a surprise to you, because I would have thought that you would expect that the components suppliers would be passing this on, so that would have been embedded in the cost headwind that you had articulated before, if you can provide any color on that, what really surprised you there?
Todd Bluedorn - CEO
I think what surprised us is we have done a good job over the last few years as we have aggressively moved components to Asia to offset factors, cost pressures that our domestic suppliers had felt.
Given the steep inflation curve that we saw in commodities over last year, and it has leveled off the last 6 months, but over the last year we were no longer able to hold that off with some of our key suppliers, and it sort of worked its way through in second quarter.
Rich Kwas - Analyst
So it was really a lag for some -- a lag coming from some of the new suppliers that you brought on?
Todd Bluedorn - CEO
I think that's fair.
I think it was the ability to sort of outrun it by changing suppliers became more challenging over time.
Rich Kwas - Analyst
Okay, that is helpful.
Thank you.
Operator
Thank you.
Next question from the line of Keith Hughes, SunTrust.
Please go ahead.
Keith Hughes - Analyst
Thank you, I have a couple of questions.
You had mentioned on the mix that it really came to hit you in June.
I don't really understand why it would have hit you in June, and not in the months leading up to it.
Can you go over that again, please?
Todd Bluedorn - CEO
Yes.
Good question, obviously.
What we saw was dealers thought they were going to be able to do what we thought we were going to be able to do, which is to sell the similar mix in system sales that we have done in the past.
So leading up to the summer selling season dealers are buying, loading their shops, doing some replacements, but sort of the big selling season in June is when you really start to see the sell-through the dealers, and when the dealers start to reload from us.
And what we saw from them was the dynamics that I am talking about, so in essence they reach back to us and said we don't right now need any more premium furnaces, what we need is more R22 or more 13 SEER entry level condensing units, so we didn't really see the sell-through effect until June.
And I think that is consistent with what we've said, Keith, where we said, look we were surprised by the mix, but when we were asked on the last call about R22 and tax credit, I think at least I think I always tried to characterize the answer was, talk to me in July I will have a better perspective after we see the season starting and the sell-through effect.
Unfortunately, I have a better perspective, and it is not a good one.
Keith Hughes - Analyst
Do you have an R22 dry ship you are selling right now?
Todd Bluedorn - CEO
Absolutely.
Keith Hughes - Analyst
And what is the margin on that unit basis look like versus one with -- at same efficiency rate with a 410A?
Todd Bluedorn - CEO
It is not so much different, but I think the issue is the ability to system sell, and when you sell the 410A you are going to sell the coil, you are going to sell the refrigerant line, you will upgrade the entire system, and then if you have a tax credit you are able to tie in the furnace and have a $5,000 to $10,000 ticket, rather than just replacing an R22 condensing unit for a couple thousand dollars.
Keith Hughes - Analyst
How much is a dry ship at your business now?
Todd Bluedorn - CEO
We said on the script for our air conditioning business in second quarter, it was about 17% of our revenue.
Keith Hughes - Analyst
Okay.
Todd Bluedorn - CEO
Revenue or shipments?
Shipments, 17% of our shipments were dry charge.
Keith Hughes - Analyst
Okay.
Todd Bluedorn - CEO
And the vast majority of those were in Allied, by the way.
Keith Hughes - Analyst
Allied, okay.
Final question.
You had said up, I think I heard low single digits in residential.
Is that for the year or the back half, or what number is that representing?
Todd Bluedorn - CEO
I think I said something different than Bob, and I probably screwed everything up.
The guidance that we are giving for the industry is up low single digits for resi and that is for a full year number.
Keith Hughes - Analyst
For the full year, which would imply that you are going to solidly positive numbers in the second half for you, if you are going to get to close to that?
Todd Bluedorn - CEO
We are talking in an industry number.
The guidance we gave is always industry, so we are saying the residential HVAC industry will be up low single digits in units.
Keith Hughes - Analyst
You were down 10 in the first and down 5 in the second, and I know you sell through your own distribution, so you haven't had some of the channel disruption.
It seems though you would have to outpace that number in the second half to get close to it?
Is that what you are pushing us towards?
Todd Bluedorn - CEO
Just to be clear, one is a revenue number, one is a unit number, and one is ours, one is the industry's.
I think the numbers you quoted were our revenues, and the numbers I am quoting are units for the industry.
And I am sort of making the point that we think the industry's mixed down, and so industry unit shipments are down -- we think are going to be up low single digits.
We think unit shipments over the last rolling 12-months we have lost about 0.5 point a share.
Keith Hughes - Analyst
Where do you think your dealers stand in inventory versus the rest of the channel?
Todd Bluedorn - CEO
You mean compared to other people's dealers?
Keith Hughes - Analyst
Yes.
Compared to the independents.
Are the independents over inventoried in the channel, or where is your view of that?
Todd Bluedorn - CEO
Again I think about independents as distributors, and I think about our dealers as dealers, right.
Independents are selling to the same dealers that we are selling to.
I think our dealers have some inventory.
July is helping, it is still even with all of the cross forces I talked about when it is hot it helps.
I think our dealers were cautious in June, you saw that in our results, and we are hoping the weather clears some of that out of the way.
Keith Hughes - Analyst
Alright, thank you.
Operator
Thank you.
Next question from the line of Josh Pokrzywinski of MKM Partners.
Please go ahead.
Josh Pokrzywinski - Analyst
Hi, good morning, guys.
Todd Bluedorn - CEO
Hi, Josh.
Josh Pokrzywinski - Analyst
I just want to focus here on furnace particularly in the fourth quarter coming up.
I know that that was kind of a buy ahead or pull forward quarter for you guys last year, and it seems like a lot of these issues around R22 are really coming home to roost in the air side of the business.
I guess help us with what kind of order of magnitude we could expect there, any numbers you can put around what the mix of high efficiency furnace was last year, or what kind of mix implications we should expect given this new reality around R22 and lower furnace demand?
Todd Bluedorn - CEO
I think that the thing I would talk about is what we have consistently said was that we had some pull forward last year of units from first quarter into December, as we eliminated the tax credit.
And the number we referred to was our unit shipments were up 30% in December of last year, and I think a big piece of that was sort of the pull forward into the month of December.
I think so to the offset that we are going to have around all of the pressures that I talked about in the industry is our having a full furnace product line as we go into the selling season.
I think is going to be important for us and we are going to be focused on leveraging the new product that we have in the marketplace.
Josh Pokrzywinski - Analyst
Okay, taking a step back here.
I understand some of the longer term dynamics around pent-up demand certainly kind of painting a rosier picture as we get through some of this R22 mess.
But how long are we kind of stuck in the mire here?
Obviously R22 becomes less viable as time goes on, and that refrigerant is harder to come by.
But anything out there that you are seeing out there right now that says that this clears itself up, or becomes less of an issue into next year apart from just being an easier comp?
Todd Bluedorn - CEO
I think it is what I said earlier.
I understand the question, but I think it is what I said earlier, which is this industry has done a good job where when you have a reset from an external shock that the industry has had thrown on it like this, that the industry is able to find a way to continue to differentiate product, and tier the product in the marketplace.
So we are working on making that happen.
I mean I also think, and again, I don't know what next year will bring, but I think overhanging all of this is a macro economic situation that is not beneficial either to overall volume or to mix up.
I think as we head into next year we will be in a certainly a better position than we are this year to continue to tier the brand.
Josh Pokrzywinski - Analyst
Okay, and then just one more if I may.
On the SG&A reductions, how much of that fell into the second quarter versus into the back half?
Todd Bluedorn - CEO
I am turning to Bob.
I think a majority of it is during the second half of the year.
Bob Hau - CFO
We actually ended up the first half of the year down slightly from prior year, so we will expect to actually hold that about consistent across the full year.
Josh Pokrzywinski - Analyst
Okay.
So I guess on that with the higher inflation expectations and lower SG&A that the net is a wash and maybe a modest positive, so we should look at kind of the underlying results in the second half as being more indicative of leverage and mix than of inflation?
Todd Bluedorn - CEO
If I understood the question, yes.
I think the balance of the year is, if I understood the question right, is more about volume and mix issues that we talked about.
Josh Pokrzywinski - Analyst
Got you.
Thanks, guys.
Operator
Thank you.
The next question from the line of Jeff Hammond, KeyBanc Capital Markets.
Please go ahead.
Jeff Hammond - Analyst
Hi, guys, just a couple of follow-ups here.
Can you just talk about -- I know you had the warranty comp, but why would margins be down in the commercial business if you are kind of matching price versus costs, and mix was favorable?
Bob Hau - CFO
In the commercial price didn't match cost exactly, given the ramp up of the price increases.
I think I mentioned slightly more weighed to the second half of the year really both in our commercial and our refrigeration segment, and so commodities both impact to raws and components was slightly larger than our price benefit.
And then the warranty headwind in that it was less favorable, we take an annual warranty adjustment in the [June] quarter, and it was less favorable than last year.
Jeff Hammond - Analyst
That was about $1.5 million last year.
What would it have been this year?
Bob Hau - CFO
It was net decrease of benefit of $1 million bucks for commercial.
Jeff Hammond - Analyst
Okay.
What about volume leverage?
That got eaten up by commodities?
Bob Hau - CFO
Correct.
Jeff Hammond - Analyst
Okay.
And then refrigeration, certainly some noise there with Kysor/Warren, if we look at the back half, should we kind of build the model the same where you are getting underlying margin improvement in the base, offset by bringing Kysor/Warren in at a lower margin?
Todd Bluedorn - CEO
Yes.
Jeff Hammond - Analyst
Then how should we think about corporate expense and share count for the year?
Bob Hau - CFO
For the year, we have got corporate expenses now forecasted full year basis of about $60 million, that is down from the prior guidance of $70 million.
Then share count we expect to end the year at 54 million shares.
Jeff Hammond - Analyst
Why isn't that moving more based on the share repurchase?
Bob Hau - CFO
That is an overall weighed average for the year.
Jeff Hammond - Analyst
Oh, the 54 is weighed average, not ending?
Bob Hau - CFO
That is correct.
Jeff Hammond - Analyst
Okay.
Then finally, how did the demand dynamics and maybe the mix dynamics impact, one, your distribution roll out and store roll out, and two, how you think about production in Mexico versus other facilities?
Todd Bluedorn - CEO
On the distribution strategy we have slowed it down, so the number of PartsPlus stores that we are opening for the balance of the year we have slowed that down.
In fact, we aren't going to be opening, at least right now have sort of frozen the opening of PartsPlus stores.
They are doing well, we are up year-over-year in the stores, but they are an investment in the business that we are putting on hold until we get to the other side of this -- the troubled waters that we saw in second quarter.
Still like the investment, still think it is the right strategy, but as we said based on market conditions we would slow it down, and we have done that.
On Mexico, we continue to look to get as much volume into that factory as fast as quick as we can.
Again, as we grow our Allied business, as we grow our value tier business making sure our costs are as competitive as possible is critical, will continue to be critical, so we look to get as much volume into Mexico as we can.
Jeff Hammond - Analyst
Okay, great.
Thanks, guys.
Operator
Thank you.
(Operator Instructions).
Our next question comes from the line of Robert Barry, UBS.
Please go ahead.
Robert Barry - Analyst
Hey, guys, good morning.
Todd Bluedorn - CEO
Hi, Robert.
Robert Barry - Analyst
Quick follow-up on the commodities.
Whenever the business is growing, are you getting rebates from your suppliers, and is the opposite happening now?
Is that adding pressure there?
Todd Bluedorn - CEO
That is some of it, but we again, our buckets maybe get a little fuzzy, but we tie rebates into a different category which is the $25 million to $30 million in material cost reduction.
When we are talking about the commodities, $60 million to $65 million, it is either the raws or it's component pricing that is tied to either contractual language that we have to raise, the supplier raises their prices to us because their commodities went up, or a price increase that is tied to their commodity costs going up.
Robert Barry - Analyst
Okay.
And I just wanted to get a better sense of what your outlook is for the second half in residential.
You took a pretty significant hit to the guidance, but I am trying to get a feel for how conservative you are being.
So to the extent that you can share some of the assumptions about what the outlook is in the second half for volume pricing and mix, a little bit more explicitly, or any kind of color you can give us to help us get a sense of how conservative you are being around the revised outlook, especially as it relates to resi?
That would be helpful.
Todd Bluedorn - CEO
No, I am not going to get into maybe into the low level details as you would like.
I think high level what we did was to say, look, we saw a mix in July, and more broadly the first half of the year as it mixed down, the impact of the tax credit, the impacts of R22, the impact of our ability to system sell.
Offsetting that is the growth on our Allied business.
Offsetting that is having a stronger furnace product line in the heating season in fourth quarter.
Sort of rolled all of that together into our guidance.
It wasn't an attempt to sort of throw down the year, it was just a reflection on what we have seen in the market year-to-date, what we have seen in the selling season, what our customers are telling us, and that is sort of what we've rolled into our guidance for the balance of the year.
Robert Barry - Analyst
I mean how conservative do you feel you are being?
Do you feel like you are ahead of this now or?
Todd Bluedorn - CEO
I am going to give you the textbook answer.
Robert Barry - Analyst
I know that is a hard question to answer.
It would be easier --.
Todd Bluedorn - CEO
I am going to give you the textbook answer and I'm going to give you the answer to that that's actually true, which is I didn't try and put Kentucky windage on this one way or another.
I didn't try and put the limbo bar so I could step over it.
This is our best guess of where we think it is.
Now the range that we have is wider than you would normally see halfway through the year for us, and that reflects some of the uncertainties that we have, quite frankly, and sort of goes to your question.
But we have given you our best shot on reality as we see it, not sort of a limbo bar.
Robert Barry - Analyst
I think there was a comment about, and I might have missed it, a mix hit of 50% decremental, a $75 million hit on resi.
Could you kind of revisit what that was?
Todd Bluedorn - CEO
Yes.
What Bob was doing was going through sort of a high level [wrap] to get everybody to the drop in our guidance, right.
So what he said was, if you sort of take all of the revenue guidance that we give a little bit byzantine, it says organic revenue of constant currency, full year basis, we lowered our guidance by 5 points.
Robert Barry - Analyst
Yes.
Todd Bluedorn - CEO
If you take that 5 points, that's equivalent to about $150 million of revenue, then when we said when you are building your models to sort of understand where we dropped our guidance at, that $150 million of revenue is going to drop down at $75 million of EBIT, a 50% decremental, which is higher, significantly higher than you would normally expect from us, and that is because of the downward mix that we saw in res moving from premium furnaces to R22 dry charge.
Robert Barry - Analyst
Okay, that is helpful.
And then just the last question.
You had mentioned something in the release about planning to buy back a lot more stock in the second half, and I think $65 million is what you said.
How do you square that against freezing the investment in the distribution?
I thought the distribution was a pretty significant initiative kind of positioning you for the long-term.
I am curious how you square those, weighing those?
Todd Bluedorn - CEO
Around a lot more stock, we have been consistent from the beginning of the year that we were going to offset dilution from our incentive programs, and we are going to do $100 million of share buyback.
We're consistent with doing $100 million of share buyback.
I think is the first point.
Second point is on our PartsPlus store, still strategically important, we have -- I am looking around to make sure I got the right number, 75 stores in place from that strategy.
We have an initiative in place, Velocity for Victory, and what we are doing is all the teams who would be focused on starting up new stores and launching new stores, leveraging the share gains with the stores that we have in place.
On a year-over-year basis, our revenue in our stores are up 10%, so we like them and we want to focus on the growth of our existing stores, but like any investment it is sort of a multi-year payback, and we want to spend our team right now with our team, focused on winning with the stores that we have, and let's see where we are at the end of the year, and my guess is we're going to start back up on it.
Robert Barry - Analyst
So it's less of a capital allocation choice, it's more a operational focus?
Todd Bluedorn - CEO
Yes.
It is not capital.
Fair enough, I should have just started there.
It is not a capital allocation choice.
It is operationally where do we want to spend our time and focus.
Robert Barry - Analyst
Fair enough.
Okay, thank you.
Todd Bluedorn - CEO
Thanks.
Operator
Okay, thank you.
And the next question is from the line of Rich Kwas, Wells Fargo Securities.
Please go ahead.
Rich Kwas - Analyst
Just a follow-up on R22.
The 17% number, Todd, do you expect that to stay at that level for the rest of the year, or is there some expectation that moderates in the back half?
And then I guess following up on my other question, was as you move into next year, do you expect that number to come down meaningfully because it is just tougher to access?
Todd Bluedorn - CEO
For the balance of the year, I think we broadly what I said on guidance was we sort of -- to a large degree layered in first half in the second half, at least in terms of market dynamics.
I think that the short answer is we don't think there will be a meaningful change on second half, but we could be surprised.
In terms of next year, I think your hypothesis is right.
I think over time as we get closer to the obsolescence of R22, the more that is going to --- the less customers are going to go that way, and also just the overall economy.
You tell me what the economy is going to be like next year, the more that it is incrementally better than it is now, then I think it helps us on a system sell and the 410A sell.
So, it's sort of -- right now it is fresh, it is new, there is still R22 refrigerant, and there is all kinds of macroeconomic headwinds.
Next year I think reasonable bets are multiple pieces of the headwind get knocked to the side.
Rich Kwas - Analyst
I mean I guess all else equal, if we are stuck in this environment of 2% type GDP growth, you would expect, it sounds like you would expect the R22 mix to come down though next year on a year-over-year basis?
Todd Bluedorn - CEO
Short answer is yes.
Rich Kwas - Analyst
Alright, thank you.
Operator
Okay, thank you.
And back to you, Todd.
Todd Bluedorn - CEO
Great, thanks.
I want to leave you with a couple key points, and I have said these I think during the script and during the Q&A, that while the residential market has clearly been disappointing near term and faces volume and mix challenges compared to last year when the governmental incentives were in place, we have reset the bar on our outlook, continued to take cost reduction measures, and are engaging in new growth and productivity initiatives.
Refrigeration is on track with prior expectations and we are raising our outlook on commercial.
Backlogs continue to look strong in both of these businesses.
The final point is that we will continue to use our balance sheet in a disciplined and balanced way to grow the business, pay a competitive dividend, and conduct more than $65 million of share repurchase in the second half of this year.
I want to thank everyone for joining us.
Have a good day.
Thanks.
Operator
Okay, thank you.
And that concludes our conference for today.
Thank you for your participation, and for using AT&T Executive Teleconference Service.
You may now disconnect.