Lennox International Inc (LII) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Lennox International Q2 2012 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 call over to our host, Mr. Steve Harrison, Vice President of Investor Relations.

Please go ahead, sir.

Good morning, thank you for joining us for this review of Lennox International's financial performance for the second quarter of 2012.

I am here today with Todd Bluedorn, Chairman and CEO, and Joe Reitmeier, CFO.

Todd will review the key points on the quarter, and Joe 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 you find a direct link to the webcast of today's conference call on our 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 materially 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 Chairman and CEO, Todd Bluedorn.

Thanks Steve.

Good morning and thank you for joining us.

Before I begin, I would like to introduce Joe Reitmeier, our new CFO effective earlier this month.

Joe has been the CFO of our commercial heating and cooling business since 2007.

Joe is a CPA with an MBA from Case Western Reserve University.

Joe is a proven leader with a record of success at Lennox and he will bring a seasoned business perspective to the LII leadership team, so an official welcome as CFO, Joe.

Thanks, Todd.

Good morning everyone.

Glad to be with you here today, and I look forward to working with Todd and the rest of the leadership team as CFO.

I also look forward to working with everyone in the investment community, and I will have a chance to meet many of you in person at our upcoming conferences.

Great.

Thanks, Joe.

Let me take you through a few key points on the second quarter, and then Joe will discuss the financial results in more detail and our outlook for the balance of the year.

Total Company revenue in the quarter was up 4% at constant currency, led by 11% growth in our residential business.

The Company overall had 2 points of negative impact on revenue from FX in the quarter.

Volume and price were up, and mix was down.

Total segment profit margin expanded 20 basis points to 8.5% in the second quarter.

Adjusted EPS from continuing operations was $0.96, up 12%.

GAAP EPS from continuing operations was $0.93, up 9%.

Cash generation was strong, with free cash flow $18 million better than second quarter last year, and $133 million better in the first half than the same period a year ago.

In addition to our quarterly dividend payout, we are set to repurchase a minimum of $50 million of stock in the second half of this year.

In our residential business, segment profit was up 19% on the 11% revenue growth.

Residential capitalized on the significant growth opportunities in new construction for us in the second quarter, as well as in the replacement market, where we saw above average temperatures in the quarter, but comparable overall to the second quarter last year.

Equipment revenue from residential new construction was up more than 30% in second quarter.

Equipment revenue from our replacement business was up mid-teens.

For the second quarter in a row, equipment sales outpaced parts, supplies, and accessories.

R22 shipments were comparable to what we saw last year in the second quarter, but R22 shipments spike up in the key summer months of June, July and August, and we still expect R22 shipments to be up year-over-year.

Overall, we saw 13 share shipments increase 2 points above the prior year quarter to 68% of cooling product shipments, so based on the second quarter and so far in July, we continue to expect about $15 million of headwind to EBIT from residential mix in 2012.

Overall it was another nice quarter for residential.

We have been outpacing the market and continue to aggressively move forward with our strategic initiatives for growth.

We are off to a strong start to third quarter on continued strength in residential new construction and July has been hot.

That being said, the month of September makes up one-third of the quarter for the industry, and this is a transitional period to the heating season.

Some caution is warranted with consumer confidence still fragile, and the political and economical uncertainties ahead in the second half of the year.

Turning to our commercial business.

Revenue was up 5% at constant currency, segment profit was up 11%.

Growth was comparable in both North America and Europe at constant currency, although there was a sizeable negative impact from FX to Europe at actual currency.

In North America, national account new construction business was especially strong.

Lennox continued to win in the marketplace with 15 new national accounts signed up in the second quarter, bringing the first half total to 24 new national accounts.

In the first half alone, we have surpassed a total of 20 for all of last year, and are closing in on our best years of 2000 and 2008 for winning new accounts.

In addition, we continue to gain momentum with our growth initiatives in the emergency replacement market and are seeing good success with our landmark rooftops for that marketplace.

In Service Experts, revenue was down 9%, primarily from a decline in the residential business, and segment profit margin was 1.5%.

In Refrigeration, revenue was flat at constant currency.

With Europe and Australia down mid-single digits in the quarter and all other regions up at constant currency.

For the first time in a long time we had a material impact from foreign exchange, with a 5 point hit to revenue growth for the refrigeration segment in total.

Segment margin expanded 50 basis points to drive segment profit margin to 10.3%.

While refrigeration growth paused in the second quarter due to some softness in Europe and Australia, and slower growth in North America due to the timing of some national account business, backlogs look solid, and we continue to expect a solid second half for refrigeration.

Before I hand it over to Joe, let me make a couple of points on our strategic initiatives.

In residential we continue to expand our Lennox Parts Plus stores across North America as part of our HVAC growth strategy.

We're now up to 87 stores, and plan to be at more than 100 stores by the end of the year.

Among the benefits of the Parts Plus stores are helping us gain market share by capturing new business with non-stocking HVAC dealers, as well as better serving all dealers with equipment and parts, supplies and accessories.

We also continue to invest across our businesses and move forward with innovation.

Like our new iComfort Wi-Fi communicating controller and our new Environ aluminum coils.

In fact, our product vitality index or percent of sales from new products introduced within the last three years and not mandated by government regulations has improved from the low 20% range in 2009 to the mid 40% range in the first half of this year.

This is a real advantage for Lennox, as we continue to win across the residential, commercial and refrigeration markets we compete in.

Now I will turn it over to Joe.

Thank you, Todd.

I will 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 $412 million, up 11%.

Volume was up 14%, price was up slightly, and mix was down 3%.

Currency was neutral to revenue growth.

Residential segment profit was $42 million, up 19%.

Segment profit margin was 10.2%, up 70 basis points.

Results were primarily impacted by higher volume and sourcing and productivity initiatives, with offsets from lower mix and a less favorable warranty adjustment than the second quarter a year ago.

Turning to our commercial heating and cooling business.

In the second quarter, commercial revenue was $201 million, up 1%.

Volume was up 4%, and price and mix were up 1%, and currency had a negative 4% impact on revenue.

North America commercial HVAC revenue was up mid-single digits.

Europe commercial HVAC revenue was up mid-single digits at constant currency, but down high single digits at actual currency.

Commercial segment profit was $30 million, up 11% from the prior year quarter.

Segment profit margin was 15%, up 130 basis points.

Results were primarily impacted by higher volume, favorable price and mix, and sourcing and productivity initiatives with offsets from higher freight expenses and negative foreign exchange.

Moving to our Service Experts business segment.

Revenue was $133 million in the second quarter, down 9%.

Currency had a negative 1% impact to revenue.

Volume was down 9%, price and mix were up 1% on improved mix from commercial service.

Segment profit was $2 million compared to $3 million in the prior year quarter.

Segment profit margin was 1.5%, compared to 2.2% in the second quarter a year ago.

Results were primarily impacted by lower volume, partially offset by lower SG&A expenses driven by productivity initiatives.

In our Refrigeration segment, revenue in the second quarter was $207 million, down 5%.

Currency had a negative 5% impact to revenue growth.

Volume was down 1%, and price and mix were up 1%.

On a regional basis in constant currency, South America was up low double digits, China was up mid single digits, North America was up low single digits, and Europe and Australia were both down mid single digits.

Segment profit was $21 million, flat with the prior year quarter.

Segment profit margin was 10.3%, up 50 basis points.

Refrigeration results were primarily impacted by favorable price and mix and sourcing initiatives, with offsets from lower volume and negative foreign exchange.

Looking at special items in the second quarter for continuing operations, the Company had $400,000 in after tax restructuring charges, $300,000 after tax for the net change in unrealized losses on open futures contracts, and $700,000 in after tax charges for other items net.

Corporate expenses were $16 million in the second quarter, up from $12 million in the prior year quarter, primarily due to higher variable incentive compensation.

For 2012, our corporate expense guidance remains $65 million to $70 million.

Overall, SG&A was $173 million in the second quarter, up 2% from the prior year quarter.

For the first half of 2012, SG&A is roughly flat.

For the second quarter, cash from operations was $24 million, up from $6 million in the prior year quarter.

Capital spending was $10 million in the second quarter, consistent with the prior year quarter.

Free cash flow was $14 million in the second quarter, compared to a negative $4 million in the prior year quarter.

For the first half, free cash flow improved by $133 million from the same period a year ago.

Cash and cash equivalents were $69 million at the end of June.

Our debt to EBITDA ratio was 2.1 ending the quarter, and we expect this to trend down through 2012.

Total debt was $529 million at the end of the quarter, down $49 million from a year ago.

Our 2012 plan is to repurchase a minimum of $50 million of stock in the second half of the year.

We have $121 million remaining under our current stock repurchase authorizations.

Before I turn it over for Q&A, I'll briefly talk about our outlook from 2012.

Driven by the warm weather in June and July, we believe the summer season is coming in strong for the industry.

We now expect residential shipments for the industry overall to be up mid-single digits for 2012 versus our prior assumption of low single digit growth.

Through the first half, our residential shipments clearly outpaced the industry.

For the North America commercial unitary market, we continue to expect industry shipments to be up low single digits in 2012, and we continue to expect Europe HVAC and refrigeration shipments to be up low single digits as well for the industry.

Based on these assumptions and with half of 2012 completed, we are narrowing our guidance for revenue growth at constant currency from 2% to 6%, to a range of 3% to 6%.

We now expect a negative 1 point impact from foreign exchange on a full year basis, resulting in revenue growth guidance at actual currency of 2% to 5%.

With commodity prices trending down, we now expect commodity headwind between $10 million to $15 million for the full year versus our prior assumption of approximately $15 million.

We continue to expect that price for the Company will offset commodity headwind on a full year basis.

Our global sourcing and engineering led cost reduction programs are on track and providing real benefits for us.

We continue to expect $20 million to $25 million of savings for the full year, we continue to closely manage costs as reflected in SG&A dollars being flat in the first half of the year on up revenue.

However, we still expect $20 million of headwind in SG&A this year due to the reinflation of variable incentive compensation for this year's performance targets.

We are raising our adjusted EPS from continuing operations guidance from a range of $2.20 to $2.60, to a range of $2.35 to $2.65.

The midpoint of our guidance range increases from $2.40 to $2.50 for the year.

Our GAAP EPS guidance range increases from $2.17 to $2.57 to a range of $2.30 to $2.60.

The weighted average diluted share count guidance for the full year remains approximately 51 million shares.

We still expect our full year tax rate to be 33% to 34%, and for capital spending, we still expect approximately $55 million in 2012.

And with that, let's go to Q&A.

Thank you, sir.

(Operator Instructions).

Our first question comes from the line of Steve Tusa, JPMorgan.

Please go ahead.

Good morning,.

Hey, Steve.

Good morning.

Want to talk about the discrepancy again between Service Experts and the residential equipment business.

Can you talk about the dynamics there?

You said parts and services were weaker.

How bad were parts and services in that kind of activity?

Parts and services in our residential business was flattish versus the growth rate that we saw in equipment.

In service experts, it's a broader answer than just parts and service.

As we've talked about the residential portion of Service Experts is focused on the most premium segment of the marketplace; they're our most premium dealers, and they focus on add-on and replacement, don't do any new construction resi-wise to speak of.

What we've seen on a year-to-date basis as the two segments of the market in resi that have grown are new construction and the entry level segments of the market, that the premium level, actually, we think is down year-over-year, and so our Service Experts quite frankly has historically been focused on premium and add-on replacement premium, and that is a segment that has been shrinking.

Now, all that being said, they are in a process and continue to be in a progress of refocusing to be a broader line dealer, and we've done a lot of the heavy lifting to drive productivity and efficiency in that business, and we'll continue to focus to drive some more volume across the assets.

Okay.

Got you.

Just as far as the customer behavior is concerned.

Do you see R22, Trane mentioned that their call is that R22 is actually going to peak out and start to move down, that they were encouraged by the 410A that they saw, and I guess you're talking about the parts and stuff growing slower.

Do you think there's the consumer coming out of bed a little bit here?

I think on a year-to-date basis there's some positive signs.

I think a second quarter in a row of equipment outpacing parts, it starts to build a trend, but there's so much uncertainty right now in the economic environment around the consumer, and more broadly about the macro economic environment.

Let me even go a little bit more on a divergence on mix for the quarter.

We saw negative mix for the quarter in resi, but it's slightly different than maybe what we had expected in the second quarter, which is R22 shipments in second quarter were actually flat year-over-year, but what we saw was residential new construction growing much faster than add-on replacement, and we make lower margins there so that gave us some mix headwind.

Then the other point as we mentioned in the call, is even though R22 was flat year-over-year, we continue to see a mix down to the entry level.

While that puts some pressure on our mix, it's still incrementally a good news story year-over-year that R22 is flat because now even if it's entry level product, we're getting the full system sale which was a headwind last year.

Right, that's encouraging.

And pricing is holding in okay with commodities coming off here?

Yes.

What Joe mentioned in the script was commodities a little bit of tail wind from commodities from our prior guidance, and we've said we can cover commodities with price and that's still our guidance.

Okay, great, thanks a lot.

Our next question is from the line of Jeffrey Hammond with KeyBanc Capital Markets.

Please go ahead.

Hi, good morning, guys.

Back to the mix dynamic.

What are you seeing on pricing for kind of this lowest common denominator R410A, because it just seems like where everybody is flocking to, even away from repairing?

What are you seeing from a pricing standpoint and competitive standpoint in that market, and how are you kind of positioning for that?

Pricing is hanging in there, Jeff.

It's hard in the current environment maybe to get new price, certainly at the entry level, but we haven't seen significant price erosion or price erosion of any degree at the entry level.

We think we're hanging in there.

So the shift to this kind of 13CR 410A is a function of, you think, the consumer feeling maybe a little bit better to actually replace even if it's at the lowest end, and maybe a little bit of aversion to R22?

I think the mix from the premium to the entry level is the economic overhang and the concern that the consumer has.

I think the silver lining here is that maybe R22 won't be quite as high as we thought, although that's still our guidance, because we've got to see July and August to make sure.

But June second quarter was a good sign and it was flat year-over-year, and I think what we're seeing there is some of the shocks that we have talked about earlier, about what the EPA did, what the DOE did, the increase in refrigerant costs.

I think have many of the dealers nervous about going to their customers and selling an R22 unit.

We've said all along that we think the right decision for most consumers is 410A, but we would have both options, which we continue to do.

But I think the spike up in refrigerant costs has probably had an impact on folks.

Back to Service Experts.

What are you seeing on service contracts?

Is that having any negative impact or does it really come down to this mix shift?

I think largely it comes down to the mix shift, if you think about the residential piece of Service Experts there's ongoing maintenance contracts and preventive maintenance, then there's for lack of off of a better word equipment sales, where you go and replace equipment.

In many ways they are tied together.

The baseline preventive maintenances, you don't have big ups, you don't have big downs, that sort of continues to chug along.

The issue has to do with the equipment replacement sales that we're getting there.

Again, it's our sales force, our customer base has traditionally been the premium end, and that's not where the growth is right now in the marketplace.

Finally on refrigeration.

Can you talk about how Kysor/Warren is doing relative to expectations?

Your comment about some of the Q2 softness and good backlogs, does that suggest some modest growth into the back half for refrigeration?

KW continues to perform exactly as we expected it would on the cost side, outstanding performance.

On the revenue side, we think we continue to win in the marketplace, both in North America and in Mexico.

On refrigeration growth, yes, solid is sort of a euphemism for we've said we think that the market's going to grow low single digits and we expect to grow market share.

So there was some timing of some large national accounts here over the last few months, and we had some weakness in Australia, but we think during the back half of the year the performance on the revenue line is going to continue to be solid, backlog solid, but all of that is with the caveat of, that there continues to be risk on the macro economic environment as we go into the second half of the year, and we have caution around that.

Okay, thanks, guys.

Our next question is from the line of Sanjay Shrestha with Lazard Capital Markets.

Please go ahead.

Thank you, good morning guys.

First, Todd, on the Service Experts, you touched on it a little bit that you guys are focused more on the premium market and the premium market has been relatively weak, which is why the performance of Service Experts has been what it has been, and you are trying to fix that business.

But can you give us a sense, right, how do you feel about sort of 18 months out, two years out in terms of sort of hitting the target margin?

How do you feel about the Service Experts business at this point?

I think we've done a lot of the cost take-out that we needed to do.

Again, the one silver lining on Service Experts is margins are down 70 basis points, only 70 basis points on an 8% drop in revenue.

I think that reflects a lot of the cost and margin focus that we've had on the business.

I think two things.

One is, we sort of continue to reorient that business to be able to compete on the entry level and win there.

And second is the consumer continues to heal, and the premium segment stabilizes and starts to grow again.

As we get revenue, I am confident that the margins will expand in that business.

Again, it's the stabilizing of the premium segment, our refocus on the entry level, leveraging all of the costs we've already taken out of the business.

Okay, that's great.

Now, in terms of you guys winning all of the national accounts on the commercial side in the face of what looks like a pretty tough market overall, right.

What do you think it is that you guys are doing that's allowing you to actually get all these national accounts, and how long do you see that trend continue for you guys?

I think it continues.

We have a strong machine going in our commercial business on the national account business, and it has to do, I talked a little bit about our vitalization index of mid-40's across all of our enterprise of equipment that we've developed new over the last three years for non-regulatory reasons.

A shining example of that is our commercial business.

Whether it's coming out with the Environ, all aluminum micro channel heat exchanger, whether it's the launch 18 months ago of the Energence, and the new control system, we just continue to innovate in our commercial product lines in such a way that national accounts, their largest operating cost is energy, and a big piece of that along with refrigeration is cooling, and so we provide operating cost solutions for them.

Then on top of that, we have a very flexible factory and dedicated sales force, so we have a business unit within commercial just focused on national accounts.

And I think focus wins, and we're focusing.

One final question then for me, guys.

We touched on R22, 410A, and all of that.

So one question.

You've touched on it -- the whole consumer confidence, which is key to starting to see the replacement market coming back.

The strong performance here in Q2 and anticipated Q3, do you think that's largely because of the heating season, or are you starting to see some signs that rather than just repair, there's a bit more for replace that is starting to happen and where we're finally getting to a point where there's an unwinding of this massive pent up demand?

You never know when you are going through it, but I'd point to a couple of things to be optimistic.

One, to repeat myself, second quarter in a row, that equipment outpaced parts, and so that's a good sign.

I think the other point I would make in second quarter, it was very, very hot historically in second quarter, but it was very, very hot historically last year second quarter.

So if you look at degree cooling days, it was actually flat second quarter this year versus second quarter last year.

So one way to think about it is our revenue was up 11% in resi, our replacement revenue for equipment was up mid teens on a second quarter that was no hotter than second quarter last year.

I think that may be one way to think about it, and get some confidence that we're seeing some momentum in the marketplace.

That's great.

Thanks a lot, guys.

Our next question is from the line of Josh Pokrzywinski.

Please go ahead.

Hey, Josh, are you there?

Sure.

Wanted to dig in a little bit on these cost savings.

Any expectation about how that layers in over the course of the year?

How much of that you've already realized year-to-date, and any, I guess, salient thoughts between 3Q and 4Q on that $20 million to $25 million?

We've said the $20 million to $25 million is back end loaded so we're going see the majority of it third and fourth quarter, so that's still in front of us.

On the SG&A, we've talked about we're flat year-over-year, year-to-date but we're going have the headwind the second half, so you can think about the SG&A head wind of reinflating incentive comp the second half of the year.

Then on the commodity headwind, the $10 million to $15 million, we think we've seen most of that during the first half of the year, and probably a third or so of it is still to play out during the second half of the year.

Okay, that is fair.

I know you've answered a lot of questions on Service Experts.

I guess just to boil it down.

Did Service Experts make money this year on the whole, and if not what do you need to see in terms of mix in the marketplace or volume growth to bridge the gap back to profitability?

Obviously, you guys have been running that business well over the past couple of years, given the premium focal point in the marketplace, but at some point I would imagine that you need the market to help you out?

I think we -- I'm just going to repeat what I said, Josh.

It's two things.

It's one, the market needs to come a little bit our way on the premium side, but we're not just going to sit on our hands and wait for that to happen.

The other aspects that we're doing is we continue to grow our commercial service arm, our national account services, and we are growing that as fast as we can and that continues to be a growth engine for us.

On the residential side, we continue to refocus the business on the segment that is growing which is entry level.

There's no way to sugar-coat it, it was a disappointing quarter on the revenue side for our Service Experts business.

They hung in there and did a good job on the decrementals, but we need to get more revenue across the business, that's for sure.

I take it you heard my question on whether or not it makes money this year?

We don't give segment guidance.

Understood.

Thanks, Todd.

Thanks.

Our next question is from the line of Keith Hughes with SunTrust.

Please go ahead.

Yes, two questions.

First, back to the residential performance and your view of the replacement market, it looks like your numbers are just well above the industry here.

Do you think the industry is seeing the differential between equipment and replacement units, or is that just you?

Ask the question again.

I'm not sure I understand the question, Keith?

My question is you had some great growth in residential here in the quarter particularly on the equipment.

Do you think that kind of trend, both the mix of equipment versus parts, and just the overall growth is as good as what you are reporting?

I don't think the market is growing as fast as what our numbers are.

If your question is are we gaining share, yes.

Then the other question about parts versus equipment.

I'll be interested to see what some of our peers report.

Watsco reported something similar in first quarter.

It will be interesting to see what they say second quarter.

I don't know for a fact whether that's industry-wide or not.

We'll see.

Okay.

And second question, as we look towards next year, given some of the moves in the refrigerant costs, do you think we'll start to see the R22 across the industry start to lose share, and move the mix up in this industry a little bit?

Yes, I think so, Keith.

What we called coming into this year was we thought 2012 would be the high water mark for R22 as a mix of sales and that it would start to ebb back in 2013.

I think if anything given some of the things that have happened with the EPA and DOE, and the results we saw in second quarter, we're cautiously optimistic.

Maybe even better stated, we're even more convinced that's the theory of the case, and so we'll see how it all plays out, but yes, I think we're at the high water mark in 2012.

Okay, thanks.

Our next question is from the line of Rob Wertheimer with Vertical Research.

Please go ahead.

Thanks.

Good morning, guys.

This is a little bit of an odd ball, so I apologize if it's a little too -- something you haven't thought about.

But has the consistent heat we've had for the past two or three years sort of caused your commercial customers to think about an accelerated replacement cycle?

In other words, are the hours on units significantly higher, and therefore a little bit of a higher structural growth rate there?

Is that not something they're talking about?

Just curious.

I don't know is the honest answer, Rob.

I haven't ever had that conversation with a customer.

The theory of your case makes sense.

In many ways it's like a car.

You think about it both the years that you own it and the hours you're running it, so yes, the short answer is that would have some impact.

Okay.

And then just a second question on commercial.

Has your success there led to any changed pricing dynamics?

You have talked about the product, and what you have done to be successful.

Are other people starting to fight back a little bit more, or do you continue to see runway there?

People take shots at our national accounts business and sometimes they lead with pricing.

On the margins, you may lose a deal here or there, but what we found over time is that if you're a world leading retailer who is headquartered in Arkansas, you'll put up with a lot of things, but you won't ever put up with a store being delayed because equipment wasn't delivered, so they factor all of that in when they make a decision.

Our largest customers, our most sophisticated customers are paying a premium not only for product differentiation, but for service differentiation, which means we build what they want, then we get it to the job site and we have a long track record and history of not missing deliveries, and that is a big deal.

Where some of our competitors are a little bit more splotchy on that, then the retailers don't forget.

Great, thanks very much.

Thanks.

Our next question is from the line of Richard Kwas with Wells Fargo Securities.

Please go ahead.

Good morning Todd.

Quick question on the guidance.

When you look at the move up on the $0.10, is that all the residential volume?

I would high level think about it that way.

Okay.

Then on the price costs with the $15 million that you're talking about, in covering that, or $10 million to $15 million, how should we read that?

That seem likes it may be a little bit conservative given that you've lowered the cost, and you're saying you're getting the price, so if you thought you were getting $15 million at the beginning of the year, is there room for out performance later in the year potentially on that front?

There's always room for out performance.

But I would parse my words a little tighter than I did in the script or on prior Q&A.

Within our initial price cost guidance, baked into that was getting some new price along the way.

I think as commodities have trended down it's more challenging to get new price, we're not giving back price, it's just more challenging to get new price.

That is helpful color.

And then last question, on the institutional front, I know you have a pretty big position on the school side within commercial.

You've heard some of the other players that are a little more situated in the applied product saying institutional has become weaker.

What are you seeing for your base business on the institutional side in your markets?

We're seeing schools down.

And they've been down -- they started trending down probably 18 months ago, and it continues to be down year-over-year this year.

So your strength is more kind of the retail piece?

I know you're strong there, and just winning new business?

I think the two areas that we've sort of ramped up to offset that has been retail, big box, and then sort of the broader, multi industry emergency replacement business, and we've made investments both in product and distribution to help us grow that segment and that will increasingly be a focus of ours.

Okay, great, thank you.

Thanks.

Your next question is from the line of Nigel Coe with Morgan Stanley, please go ahead.

Hi this is Claire Diesen, actually, filling in for Nigel.

Hi, Claire.

Just a couple of questions.

Thanks.

Could you first maybe speak to the state of inventories in the industry in general, and the backlog entering Q3?

I can't really speak to our competitors and where they stand, and our resi business as you know, we're 80% through our Company owned distribution and so we're fine there.

And then our 20% that flows through independent distributors, I continue to call them as cautiously optimistic, which is a euphemism of their inventories are reasonably lean.

As they see end demands, it's not too long after that we're replenishing them.

Sure.

Thanks.

How are you viewing the sustainability in US-light commercial given the ABI?

Again we're exposed to vertical slices of the end market and our biggest slice is retail and big box, and a large chunk of that, 60%, 65% at this point is replacement and upgrading equipment, and they continue to make investments, and we're seeing it in our order rates around lowering our operating costs.

So a lot of the lot of new construction numbers that you see in the index that you cited are segments quite frankly don't play with in the unitary segment.

Got it.

Thanks so much.

Thanks.

(Operator Instructions).

We'll go to the line of Adam Samuelson with Goldman Sachs.

Please go ahead.

Thanks for taking my question.

A lot of ground has been covered, so only a quick couple of follow-ups here.

First, the warranty adjustment in residential or the lack thereof year on year?

How big was that this year versus last?

A couple million.

A couple million, okay.

Then within the commercial business, called out mid single growth in Europe.

Maybe any color on geographies there that are actually strong, just given the macro?

It's pretty impressive growth just given the economies.

Yes.

We continue to have growth in France, which is sort of our largest end market, and we continue to grow in Eastern Europe.

Now, the caveat I would make, not caveat, I'd just sort of make a statement, is we have a small keyhole into Europe and we have sort of a segment, a narrow segment of the market that we play, and even as the markets have softened, our business -- our team has done a good job of gaining share and winning in the marketplace.

As we go into the second half of the year, we're all concerned about what's going to happen in Europe, but so far especially in our commercial HVAC business backlog remains solid, and the team continues to grow the business.

Okay, that is helpful.

Then just finally, maybe any differentiation in residential between the Allied brands and the Lennox brands within the new construction piece?

Is that also going through the Lennox brand, or is the Allied brand taking up a bigger share of that market and that growth?

New construction is predominantly not quite exclusively, but predominately Lennox brand, so we have relationships with the big builders, we sell it through dealers, but we have direct relationships with the big builders.

On the add-on replacement, we saw similar growth rates in the Allied business as we saw in the Lennox business.

Okay, great, thank you very much.

Thanks.

Mr. Bluedorn, sir, we have no further questions in queue.

Please continue with any final remarks.

Great.

Thanks.

I want to leave everyone with a couple of key points.

We continue to be encouraged by the strength in our residential and commercial businesses, and refrigeration backlog remains solid.

The third quarter is off to a strong start with warm weather so far in July.

Although we remain cautious on the global macro economic environment for the second half and the fragile condition of consumers.

On balance we are raising our adjusted EPS from continuing operations guidance range with a new midpoint of $2.50.

With Lennox competitively well positioned and winning in the marketplace, we look forward to the second half of 2012.

I want to thank everyone for joining us today.

And ladies and gentlemen, that does conclude our teleconference call for this morning.

Thank you very much for your participation, and for using the AT&T Executive Teleconference service.

You may now disconnect.