Lennox International Inc (LII) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Lennox International's second-quarter 2013 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.

(Operator Instructions)

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.

Good morning, thank you for joining us for this review of Lennox International's financial performance for the second quarter of 2013.

I'm here today with Chairman and CEO, Todd Bluedorn; and CFO, Joe Reitmeier.

Todd will review key points on the quarter and Joe will take you through the Company's financial performance and outlook.

Financial results in prior periods have been revised to reflect sold businesses and discontinued operations.

In 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 website at www.lennoxinternational.com.

We will archive the webcast on that site and make it available for replay.

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 risk and uncertainties that could cause actual results to differ materially from such statements.

For information concerning these risk 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, Todd Bluedorn.

Thanks, Steve.

Good morning and thank you all for joining us.

We continue to see strong momentum from our strategic initiatives and operational execution in the second quarter as the Company set records for total segment profit and operating margin.

(Inaudible) market environment is still 25% to 30% below peak shipment levels for the industry.

For the Company overall in second quarter, revenue was up 9% from the prior-year quarter and total segment profit margin expanded 200 basis points to a record 11.6%.

Adjusted EPS from continuing operations was a record $1.31, up 34%, and GAAP EPS from continuing operations was a record $1.26, up 31%.

The Company's growth continues to be led by our Residential business with revenue up 16% in the second quarter, driven by both replacement business and new construction, residential profit was up 58%.

Despite weather being cooler across the US than in the second quarter last year, replacement business revenue was up 17%.

In addition to our market share gain initiatives, we are seeing strong growth in replacement business, as the market benefits from stabilization in unemployment and a general improvement in consumer confidence, home values and existing home sales.

Replacement accounts for more than 75% of our Residential business.

We also continue to capitalize on growth in Residential new construction with revenue up 13%.

This is a traditional strength for Lennox and we continue to be well positioned in this market with more than 50% of the top 50 builders using Lennox, many on an exclusive basis.

In addition to capturing price across our Residential business, we also benefited from an improved product mix as replacement business grew even faster than the new construction in the second quarter.

14 plus SEER shipments were up 4 points to 36% of cooling product shipments in the quarter.

The first increase in this measure for a second quarter since 2010.

With minimum efficiency 13 SEER equipment shipments, R-22 equipment continued to trend down.

In our Commercial business, revenue and profit were up 4%.

Growth was led by North America Commercial equipment and services while Europe remains soft and was down in the quarter.

Our Lennox National Account Service business was especially strong on the growth on national wide services.

In Refrigeration, profit was up 22% in the second quarter.

Revenue was flat on the timing of National Account Businesses in North America and soft economic conditions in Europe, while growth was strong in South America and Asia Pacific.

South America revenue was up more than 20% and Asia Pacific, Australia revenue was up high-single digits as we continue to expand refrigerant sales in our wholesale business there.

In China, revenue was up more than 30%.

Before I turn it over to Joe, let me update you on a couple of our strategic initiatives.

In Residential we added 12 more Lennox PartsPlus stores to our distribution network in the second quarter and are on track with plans to add a total of 28 of these wholesale stores this year.

We now have 127 PartsPlus stores and they continue to be one of the keys to the success we're seeing in our Residential businesses.

Within these stores, about 75% of the sales are HVAC equipment and 25% of sales are parts and supplies.

In Commercial, our new Raider product line of Rooftops focused on the emergency replacement market came out in March.

This market is a sizable opportunity for Lennox since it has not been an area of our traditional focus for us compared to our success in planned replacement and Commercial new construction.

But with Raider, we now have the right product to sell in the segment in the market that prioritizes up front cost, and while it is early, the launch is going well.

With 27 Commercial regional local distribution centers at the end of second quarter, we continue to invest in distribution to provide the high level of same-day, next-day delivery that customers require for emergency replacement.

We are on track with our plans to have at least 32 Commercial distribution centers in place by the end of 2013.

With a solid balance sheet, we are well positioned to continue to make transformational investments in our businesses.

From expanding our Residential and Commercial distribution networks to introducing new products to attack major market opportunities, to continuing to lead the field in energy efficiency and product innovation like our new 25 SEER air conditioners and heat pumps.

Beyond investing in the business to drive growth, we also continue to return cash to shareholders.

In the second quarter, we increased our dividend 20% and repurchased $33 million of stock toward our plan of $100 million in buybacks this year.

We plan to continue to grow the dividend over time with earnings as well as continued to repurchase stock.

Currently, we have $338 million remaining under our existing repurchase authorization.

Now, I'll turn it over to Joe.

Thank you, Todd, good morning, everyone.

I'll provide some additional financial details and comments on the business segments for the quarter starting with Residential Heating and Cooling.

In the second quarter, revenue from Residential Heating and Cooling was $476 million, up 16%.

Currency was neutral, volume was up 13% and combined price and mix was up 3% with both price up and mix up.

Residential profit in the second quarter was $66 million, up 58%.

Segment profit margin was a second quarter record 13.9%, up 370 basis points from the prior-year quarter.

Residential result were positively impacted by higher volume, favorable price and mix and lower material costs with partial offsets from higher SG&A and investments in our distribution expansion.

Commercial Heating and Cooling segment revenue in the second quarter was $230 million, up 4%.

Currency was neutral, volume was up 3%, and combined price and mix was up 1%.

North America Commercial equipment and service revenue was up high-single digits in the quarter, led by growth in the emergency replacement market and in Lennox National Account Services.

Europe Commercial HVAC revenue was down high-single digits at constant currency.

Commercial segment profit in the second quarter was a second quarter record $35 million, up 4%.

Segment profit margin was 15.1%, up 10 basis points from the prior-year quarter.

And Commercial results were positively impacted by higher volume, favorable price and mix and lower material costs, with partial offsets from higher SG&A and investment in distribution expansion.

In our Refrigeration segment, revenue in the second quarter was $207 million, flat with the prior-year quarter.

Currency was neutral, volume was down 2% and combined price and mix was up 2%.

From a regional perspective in constant currency, South America was up more than 20%, Asia Pacific was up high-single digits and North America and Europe were down mid-single digits.

Segment profit was a record $26 million, up 22% from the prior-year quarter.

Segment profit margin was a second quarter record 12.4%, up 220 basis points.

Refrigeration results were positively impacted by favorable price and mix and lower material cost with the partial offset from lower volume and higher SG&A.

Looking at special items after tax in the second quarter, the Company had a $1.6 million charge for restructuring activities, $500,000 for the net change in unrealized losses on open futures contracts and $100,000 for other items.

SG&A was $151 million in the second quarter, up from the $131 million in the prior-year quarter on higher selling expenses and higher incentive compensation expense.

Corporate expense was $21 million in the second quarter, up from $15 million in the prior-year quarter.

Cash from operations was $49 million in the second quarter compared to $24 million in the prior-year quarter, capital spending was $11 million in the second quarter compared to $10 million in the prior-year quarter, and free cash flow in the quarter was $38 million compared to $14 million in the second quarter a year ago.

Total debt was $537 million, and our debt to EBITDAR ratio was 1.7 ending the quarter within our targeted range of 1 to 2 times.

Cash and cash equivalents were $45 million at the end of June.

Before I turn it over to Q&A, I'll review our updated outlook for 2013.

We now expect North American Residential HVAC shipments to be of high-single digits for the industry for the full year, up from our prior assumption of low single-digit growth.

We still anticipate North America Commercial unitary shipments to be up low-single digits for the industry in 2013, and we continue to expect our Europe HVAC and Refrigeration market shipments to be down low-single digits for the full year.

Based on the Company's first half performance and outlook on the second half, our guidance for 2013 revenue growth is now 6% to 8%, up from the prior-year range of 3% to 6%.

Foreign exchange is still expected to be neutral for the full year.

With Residential product mix up slightly in the first half, we no longer expect a $10 million of negative mix for the full year.

We are now assuming $5 million of negative Residential mix for 2013 with the rest of the summer still to go and then the transition into the heating season.

We continue to be on track for approximately $30 million in material cost savings through a combination of sourcing initiatives and engineering lead cost reductions.

We expect about two thirds of this benefit in the second half of the year.

We now expect a $30 million benefit from price and lower commodity cost this year versus our prior assumption of $20 million.

We expect about 45% of this benefit to be in the second half of the year.

For corporate expenses, we are increasing our guidance from $70 million to approximately $85 million for the full year on higher incentive compensation for both our annual and long-term incentive programs to reflect the Company's financial performance for these periods.

We are raising our 2013 guidance for adjusted EPS from continuing operations from a range of $3.25 to $3.55 to a new range of $3.45 to $3.75.

GAAP EPS from continuing operations guidance incorporates the $0.07 difference in the first half and moves to a range of $3.38 to $3.68.

And to wrap up with a few other guidance points for 2013.

We currently expect net interest expense of about $15 million for the full year, our tax rate is still expected to be between 34% and 35% on a full-year basis and our fully diluted share count for 2013 overall is now expected to be approximately 51 million shares.

And finally for capital spending, we continue to expect approximately $60 million in 2013.

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

(Operator Instructions)

Sanjay Shrestha, Lazard Capital.

Thank you, it's (inaudible) from Lazard Capital Markets.

Congratulations on the strong execution.

I had two questions here, could you elaborate on your PartsPlus strategy and how we should think about the total contribution of the expanded distribution channel to both overall growth and market share gain?

When we initially launched this initiative, three or four years ago, we talked about half the benefit of a $25 million 2013 savings from logistics cost and the balance, $12.5 million, $13 million from share gains that we got from the distribution network.

I think on the -- the way I'd calibrated it is on the logistics side, so the cost savings I think we're tracking about where we thought we would be given adjusting for the volume that we have.

And I think on market share gains, we're probably actually doing even a little bit better.

When it think about the momentum of our Residential business and the implied market share gains, I think a big driver of that is the PartsPlus business or the PartsPlus investments.

Got it.

My second question was on mix, could you please help us understand what kind of feedback you're getting from your distribution channel in terms of this mix towards as you said 14 plus here are going north of 35%, what are some of the feedback you're getting in terms of driving this mix shift here?

Well I think -- I'll even broaden the question a little bit and talk about mix for the quarter in our Resi business.

One driver of the positive mix was add on and replacement was stronger than new construction and it wasn't the new construction was down, it was AOR was so strong for us, up 17% so that helped.

And then the mix up within AOR, add on and replacement, where we mixed up in the SEER levels, I think that reflects the strengthening of the American consumer and the consumer confidence and existing home value.

And some of the other metrics that we've talked about that talking in business jargon if people are managing for MPV, they'll make the investment into the higher SEER product in many locations in the country, and that when people are managing for cash they resisted it.

I also think quite frankly it's after two or three years of mix down, we were due for quarter were the market started to change, comps got a little easier too, I think.

All right, thanks, that's all I had.

Rich Kwas, Wells Fargo Securities.

Todd, could you detail as the quarter played out we saw particularly on the replacement side?

I know back in April you said that Q2 got off to a pretty good start but it sounds like you got some incremental momentum as the quarter went on.

It was pretty solid the entire time, Rich, to be honest with you.

It was -- in the quarter it started out, overall for the quarter while it was warm historically, it was down 10% in cooling degree days.

And so it was cooler than it was a year ago, I think maybe the only way it helped us at the end in June was the last week or two of June was warm even on a year-over-year basis.

April, May was cooler but we still had good momentum and so I think during the full quarter we saw it.

And then Q3 as you mentioned some pretty warm weather here, I assume it's gotten off to a pretty good start, but any comment there would be helpful?

Again to calibrate a little bit on the weather because it's all relative on a year-over-year basis and we had a really hot summer last year.

So through mid July, cooling degree days are actually down 15% in the US and Canada, so actually cooler than a year ago which is hard to imagine but it's true.

All that being said, we're off to a solid start in July in Residential and the momentum that we saw in second quarter has, broadly speaking, has continued.

In our Commercial business, we've seen some choppiness in shipment timing with grocery customers, we have pretty solid backlog in order rates in our Commercial businesses, both Refrigeration and Commercial going into third quarter.

Okay.

And then when you look at M&A and the balance sheet right now, anything change in the last few months whether it's properties that are out there or just the attractiveness of it at this point?

I don't think anything's changed.

And it's the constant thing that we've said for several years now which is we'll invest in Kysor/Warren like acquisitions to build out our Refrigeration business and our Commercial Service business and those are $100 million, $150 million deals like Kysor/Warren is the way I think about it.

And if a property opened up in North America HVAC in the unitary business either Residential or light Commercial, we think we could create value by consolidating the industry.

And if something opened up in evaluations or writing, we could create some value by doing it, we would want to do that.

Okay.

Good, I'll pass it on, thanks.

Jeff Hammond, KeyBanc Capital Markets.

Great margin improvement in Residential and Refrigeration.

I just wanted to get a better sense of how much of that you think is execution and mix and how much was maybe a favorable variance on price, cost and some of the deflation we're seeing?

Well we spiked out on a full-year basis that we're now calling for $30 million tailwind from price and commodities and about half of that is commodities, so order of magnitude $15 million on a full-year basis on lower commodities up from order of magnitude to $10 million that we're calling out before.

So there's some benefit from lower commodities, but I would tell you that really the driver of the quarter and the margin expansion across all our businesses was what we're doing on material costs reduction, both the design out which we've called out as increasingly important, as well as continue to move to -- within China and within Asia to lower cost sources.

Positive mix up and price up, and so you can define that whether that's sustainable, how you want to but I would argue the mix up.

In Residential, we launched a 25 SEER product along with icomfort Harmony, which is new control system and we're calling it the Ultimate Home Comfort System and I think having that pinnacle premium product helps with the mix up.

And in our Refrigeration business, lots of good work on the cost side, on flat revenue globally really good work on the cost side.

So I think the margin expansion -- and then the final piece is obviously volume leverage that we've said all along that if we could get some volume flow across all our businesses including Residential, that we would grow SG&A at half the rate and get some volume leverage and I think we saw good volume leverage in the quarter also.

Okay and then on mix, I think you called out 36% for this quarter and maybe that was versus 32% a year ago, can you give us a sense of what that was at peak and what you think normal should be?

We're going to the archives to see --

And maybe while you're looking for that, did you say $85 million for corporate expense?

Yes.

In second quarter of 2010, as I quickly look back and I think that was the peak of the mix, second quarter 2010 we were 45%.

And I think what we've called out back in 2011 when mix went down that we said 2012 would be worse.

And then we called it mix -- we're calling mix will be a little worse this year but then I think it starts to go back up to the more historic levels of 40%, 45%.

Okay and then final question, so you mentioned Refrigeration and Commercial backlog pretty good, I mean should we see an acceleration in some of those growth rates into the second half?

Not to parse the words too much, I think I meant to use the word solid.

I don't know if I used the word good, I meant to say they were solid going into third quarter.

I think short answer is yes.

I mean I think what we've talked about was some national accounts pushing out to the second half of the year and that's still our view on things.

Okay, thanks, guys.

Keith Hughes, SunTrust.

A question on Commercial in Europe it was up in the first quarter, down in the second, is there any trend you can read there or is this the volatile results you expect to see moving forward?

I think no and unfair characterization.

So I don't think there's any major trend, I think our sense is what others are sensing that Europe has hit bottom and bubbling back up, albeit at a slow pace.

I think we have some large project business especially in Eastern Europe and some of that, the timing got pushed out to the second half of the year.

We're not concerned about the European business now that the markets have solidified a bit.

So I just think it's timing and we'll must see better growth rates we hope second half of the year.

And the US business Commercial or North America did fantastic in the quarter, was there some timing of shipments there or is that strong demand issue continuing in the second half?

I think it's solid demand, I also think we gained share.

I think investments that we're making on emergency replacement both on now up to 27 distribution points on our way to 32 along with the new Raider product I think paid dividends during the first half of the year, and I think that's where we saw the growth was in the emergency replacement business.

Okay, thank you.

Rob Wertheimer, Vertical Research.

So great results and as I talk about, right, you gain share in price and cost all at once, are you seeing the industry getting any more disciplined to the extent you're able to comment or do you think it's more that you're, as you mentioned on the cost out et cetera, outpacing and able to keep all three things going?

I think the industry on price has always been reasonably disciplined.

I mean I think it's consolidated competitor base with similar profit motives to ourselves and we've -- I think after some shocks up and down and sideways around commodities that everyone understands that even if commodities may be trending down over the last five or six months, we're one mill shutting down or copper spike up from it going back up.

And so when you announced price increases, you have to realize almost irregardless of what happens with commodities and I think that's how we're behaving and my sense is that's how others are behaving.

Thanks.

And I don't think you mentioned within the Resi business, are you able to have a sense of planned replacement versus emergency replacement?

You mentioned the mix was good, I assume that correlates.

I'm curious if that's been strong on the cooling degree days down, it sounds like people are doing more planned, but what's your insight on that?

I do slightly different words.

I think there's very little planned replacement in Residential.

I mean there's some when people are selling homes that they're told they have to replace them but we think 85%, 90% of units that are sold happen when the unit breaks, that's just the only way people are going to do it.

I think some of the things that when I look at the quarter, one quarter isn't a trend.

But we're encouraged by what we saw in the sense that weather degree cooling days on a year-over-year basis is down 10% but our replacement revenue was up 17% and some of that was share gains but some of that, a large part of that was market growth.

And the preconditions that we've talked about for pent-up demand over the years, about stabilization and unemployment and consumer confidence and housing values and existing home values, I think a lot of those are heading the right direction.

The other metric that we've talked about is six quarters in a row, with second quarter, the growth rate of Residential equipment as a percentage has been greater than replacement parts as a percentage and that what -- and that was after a couple years of it being just the opposite.

So while one quarter is not a trend, in second quarter I think we saw some things moving the right direction in the add on replacement market in North America, vis-a-vis pent-up demand.

Thanks.

Glenn Wortman, Sidoti.

One question, you had quite a strong margin performance in Residential in the quarter, does this change at all your long-term view for the margin potential of that business?

I think you take it and then you move on, Glenn.

So I mean I think we said 12 % to 14% for Residential for I guess our 2015 targets.

And someone just pointed to me 11% to 14% instead of 12% to 14%, but 11% to 14%.

Again we play it out and see what happens.

But I think I'd underline what you said, we are very encouraged by the strong margin performance of our Resi business in second quarter.

Good.

Thanks for taking my question.

Steve Tusa, JPMorgan.

How much -- just to keep clarify, how much of the $30 million in favorable price cost is realized in the first half and what versus the second half?

And then how are you positioned assuming a stable environment for the carryover into '14?

We're say -- we think about -- we saw about 55% of the $30 million first half and we'll see the balance, 45% second half.

I think on the commodity side, we all know coppers trended down during the second half of the year, so I think that helps us, if it stays there as we go into 2014.

I think steel is more complicated, steel prices have spiked up over the last month or so not for any demand reasons but on the supply side.

So I think as we get closer to 2014 when we give our guidance in December we'll have a better view.

But I think the big variable is going to be what steel does we saw on the commodity side.

Got you.

On the new systems, can you maybe comment on the related revenue pull through from the -- from 410A?

I mean I would assume that it's already in the run rate, but was there anything interesting that from the indoor versus outdoor units, that kind of thing?

You're talking about R-22 or you --?

Well just the 410A, any benefits the new systems obviously -- I assume that's in run rate but is there anything -- was there any benefit to revenues from that with the new systems now the replacement is up?

You mean attachment rate yes.

Short answer is yes, I mean the things that some of our competitors talk about, same thing we're saying that when R-22, I'll say it in the negative and then get to the positive.

I mean R-22 was down to about 10% of our second-quarter sales were it was about 15% last year.

So R-22 trended down in the quarter which is good news.

And then when that happens obviously you're not just selling a condensing unit, you're selling an indoor unit and an outdoor unit at the same time and I think obviously part of that -- that was part of our 17% revenue up on the add on replacement also.

Got you.

And then one last question I guess you guys talked about being interested in the Resi, perhaps a Resi acquisition if that's out there and it's reasonable.

I mean is the synergy here basically that look you guys have all this footprint now set up and you can just take the brand and whatever comes with that and run the volume through distribution channels there, manufacturing, consolidation obviously that's probably out there.

I mean maybe talk about a couple of the positive things that could come that would make you guys better equipped than maybe some others out there.

I think the synergies would be less on distribution consolidation.

At least my sense, it's certainly my experience in the industry is you have to tread very lightly and so you can imagine who we might -- who the combination might be with, but all our competitors have a very good distribution channel, so I think we respect that and leverage that and work with the channels as they are.

I think the more traditional synergies that you would see would be on the factory side, on material purchase side.

I think investments in R&D, and not only in R&D, but we think about launching new products really the expenses and the engineering that's in tooling up your factories and the ability to tool up factories and run product, different brands through the same factor and run three shifts and leverage all that investment, I think you could get cost out that way.

And then I think there would be some SG&A.

But I think on the distribution side, I view it as we run our Lennox product through our Lennox distribution channel and our ally, through our ally channels and if we got additional brands we'd run them through their channels.

Right and the PartsPlus investments, that's leveling off now, right?

I mean are there new investment there is that pretty much where you want it to be?

No I think we're going to continue to go, right.

We've said that, I'm doing this now from memory I don't have all the -- someone's pointing something to me.

We ended the quarter at 127 and we're going to be at 136 by the end of the year.

And then we're targeting to be at 2000 -- excuse me, by 2016, 215 I think is what we talk about in December.

So we think this continues to grow.

Great job.

Thanks.

Josh Pokrzywinski, MKM Partners.

To follow up quickly on Steve's question, thinking about your cost base and how you've tuned it over the past couple of years, I think while cost sourcing alone is probably something around $100 million, how would you handicap Lennox's starting point on that if you were to come across another property in the space?

Do you view that as a good run rate or what you could do elsewhere?

I'm presuming you guys have characterized yourself as pretty close to best in class now, but were you just so far behind the curve that it was more to do or is that probably a good way to think about other properties in the space as well?

I think the last answer is -- as much as I'd like to try and say it the other way around, I think we lagged our competitors.

I mean our larger international competitors, Carrier, Trane, even York, when you're doing business in China like they are and Asia like they are, you just had a better sense of what the supply base looked like.

So I think a lot of that was catching up, and by the way that's good because I think otherwise if everybody's going down the cost curve together, you tend to give it to your customers and I think we've got to keep a lot of that.

But I think there's some opportunities around things that we've done on sourcing new compression in China, or excuse me, in Asia, some of the things we've done in sourcing new motors in China that depending on who you bought, depending on who their suppliers were, either getting volume leverage with those suppliers or introducing then to those suppliers.

So I think -- I don't know if we're best in class but I think we're pretty good at supply chain.

And I think depending on who we -- but so are some of our competitors, depends who the combination was with.

Got you, fair enough.

And then I guess on the sourcing, do you feel like you guys have tapped out or reached critical mass at that point or is there a potential to continue making progress in 2014?

I think the momentum continues.

I think what we find is that as we've talked about we've evolved from the obvious things have moved to China sourcing to designing a product cost.

And we're increasingly now doing a little bit of both which is moving within China or Asia to different suppliers or moving west within China to lower cost sources.

But continue to drive out design out cost really focusing on platform redesigns.

So I think momentum continues into 2014 and 2015, I think it's now become a way of life here and we'll continue to do it.

Got you.

And the one follow up, if I could help unpackage guidance a little bit.

It does seem like historically you guys have gotten 55%, 60% of your earnings in the second half and that still seems to be the case here even at the high end.

But I hear you talking about a lot of these tailwind's being much more backend loaded, I mean are there anything -- is there anything out there in the way of incentive comp or investment spending that you would look to accelerate at the high end of demand that would buffer some of that or how should we think about it?

Yes, I think that's true.

I think there's variable expenses that if revenues strong -- or earnings are strong second half of the year relative to what we forecast that there'll be some buffer.

I also think the guidance, and I don't think I've ever raised guidance $0.20 since I've been here, so I'm not going to be bashful about raising it $0.20.

But that being said --

We haven't gotten very good tailwind's either.

Fair enough.

But it all feels a bit fragile out there to be honest with you.

I mean I -- we like what we see in second quarter, we like the momentum we're getting, we like all that and we forecasted that and rolled that into our guidance.

But when you think about the US economy and you think about the global economy, there's still a lot of risks out there and there's still a fiscal situation in our country and in Europe that needs to be sorted out.

It's uncertain what's going to happen with China and the impact that will have on North America markets.

So there's still uncertainties, there's interest rates going up.

So while we are confident, it's cautious confidence about the end markets and I think that's reflected in the guidance.

Got you.

Thanks, guys.

Nigel Coe, Morgan Stanley.

Morning, is actually Mike Tsang for Nigel.

I guess related to the last question on the uncertainty, could you maybe comment on where you saw channel inventories trend throughout the quarter and where it stands now?

Yes, I mean as you probably know, 80% of our product we sell through our own distribution network and so they're fine.

And on the independent, our ally brands we sell through independent, I think distributors I would characterize as cautiously optimistic.

And we had a strong quarter in our allied business and so I think a lot of that inventory is probably sold through.

So I think I'd characterize it as at least from our side, inventory is not an issue.

Okay, that's fair.

And then on capacity vis-a vis the strong growth from Resi, are you seeing any bottlenecks at this point or what's your sense on it's capacity and the need to hire going forward?

Yes, I don't think we -- we certainly haven't missed any deliveries because of capacity.

Again in our business, given the huge seasonality of the Resi business you have to place your bets in many ways a couple months earlier as you build up inventory for the season.

And so we sent strong signals to our supply base, that's the other constraint, that you got to make sure you have all the right components and I think we planned right and our supply base supported us and we ramped up when we needed to.

So I think we're -- from the manufacturing guys are almost ready to start thinking about furnaces is that how it works as you get into July, August you start to transition even though we're still selling a lot of air conditioners from production viewpoint, you're thinking about furnaces and so I think we've done a good job managing supply chain in an up market.

Okay, thanks again.

Walt Liptak, GBL Hunter.

Hi, thanks, with Global Hunter.

Good quarter and I have two follow-up questions.

One on the SEER14 plus, what was the number in the first quarter if you're at 36% this quarter?

Our guys are again going through the glasses to pull up the number.

It was 42% in first quarter but again that's a little, it's a bit, not misleading, but the first quarter 13 -- 14 plus SEER number matters less than the summertime.

I mean summertime is were the big volume is at.

Okay, okay.

And I wanted to ask to see if I could drill down on the pricing too with the price cost being more favorable.

At what point, these are all price increases that I presume, but at one point do the industry start looking at commodities prices and maybe start to think about bringing prices down or even that were at this price level and we just go up from here?

What to experience with the industry has been is when the commodities spike up you can never raise prices fast enough to capture it.

And so there's a year or two which we've bled pretty hard and I assume our competitors did, on negative commodity price relationship.

And then as commodities start to trend down, you keep the prices where they're at and inch along a couple points a year and then you gain it back.

But over the full commodity cycle, you whole or may be up 1% or 2% price versus commodities, and I think that's what we're seeing now.

And so I -- we have no expectations that we're going to lower price because copper is down today because we're cognizant that copper could spike up tomorrow and then it would take us 18 months to drive price again through the system in a way that we can hang onto customers.

So I think you inch price along, commodities go up or down, and sometimes you're doing well, sometimes you're not doing well.

But over the full cycle, you break about even and I think that's what we've done and what the industries done.

Okay.

Okay, good, thanks very much.

And we have no further questions.

Okay, great, thanks.

A few points to leave you all with, as you saw we raised our revenue and EPS guidance for the full year following the Company's strong performance in the second quarter and July is off to a solid start.

Looking ahead, there's a long way to go for full HVAC recovery with the industry shipments still 25% to 30% below peak levels.

As markets continue to recover, the Company is strategically well positioned to drive our financial performance to continuing new heights as we continue to execute on our key initiatives.

I want to thank everyone for joining us.

Thanks, Operator.

Ladies and gentlemen, that does conclude your conference for today.

Thank you for your participation and for using AT&T Executive Teleconference Service.

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