Lennox International Inc (LII) 2014 Q2 法說會逐字稿

Welcome to the Lennox International second-quarter 2014 earnings conference call.

(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 2014.

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

Todd will review key points for 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 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 website at www.lennoxinternational.com.

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

We'd like to remind everyone that in the course of this call, to give you a better understanding of our operations, we will be making certain forward-looking statements.

These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements.

For information concerning these risks and uncertainties see Lennox International's publicly available filings with the SEC.

The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Now let me turn the call over to Chairman and CEO Todd Bluedorn.

Thanks Steve.

Good morning and thanks to everyone for joining us.

In the second quarter Lennox International grew revenue 6% at constant currency, EBIT margin expanded 70 basis points to a record 12.3%, and adjusted EPS from continuing operations was up 15% to a record $1.51.

The Company's performance in the second quarter continued to be led by our Residential business.

Residential revenue was up 11% at constant currency, and profit rose 28% to a record $85 million.

Revenue from both replacement and new construction business was up double digits from the prior year quarter.

Our new construction business had a solid recovery in the second quarter after being down in the first quarter from the severe winter.

In addition to capturing price, we continue to see a richer product mix with 14 SEER and above products comprising 37% of coolant products shipments in the second quarter, up 1 point from the prior-year quarter.

Our 22 products were 11% of coolant products shipments, flat with the prior-year quarter.

In Commercial, revenue was up 5% at constant currency, and profit rose 13%.

Our Commercial business set a second-quarter record for sales, margin and profit.

North America Commercial equipment revenue was up low double digits on continued growth in both planned and emergency replacement business.

We also saw a strong rebound in Commercial new construction, with mid-teen growth in the second quarter.

On the national account front we won 10 new customers in the second quarter to total 21 in the first half alone.

In Europe, Commercial HVAC revenue was down high single digits at constant currency, still impacted by the uncertain geopolitical environments in Eastern Europe.

In Refrigeration, as expected, market conditions remained challenging.

The upside that we are realizing in Residential, Commercial is being dampened by Refrigeration where our North America supermarket and Australia wholesale businesses have been weak.

Refrigeration revenue was down 6% at constant currency.

Refrigeration profit was down 47% from the record level in the second quarter a year ago.

Looking at revenue at constant currency by region, Asia and South America were up low double digits, Europe was up high single digits, Australia was down mid-single digits, and North America was down low double digits.

Looking ahead for North America, we have been successful in winning new national account business that is scheduled to ramp up through the second half of this year and into 2015.

In the first half of the year we have been making investments and positioning our operations to support this new business and other future growth opportunities.

In Australia, economic conditions remained soft, but the larger issue has been the uncertainty around the carbon tax repeal.

With the repeal of the carbon tax we expect improvement in our refrigerator equipment business in the second half of this year, following several quarters of it being on pause as customers waited for more clarity on the issue.

However, the repeal and associated lower prices for refrigerant will negatively impact our wholesale refrigerant business.

Overall we expect the profitability of our Australian business to be down in the second half of the year against the second half last year.

To update you on our strategic initiatives, in Residential, I previously mentioned that we are transferring certain furnace production from the United States to Mexico, and are also insourcing sheet metal fabrication as part of our Mexican operations.

We expect $15 million in annualized savings from this initiative by 2016.

Saltillo planned to begin furnace production on June 16, one year to the day from groundbreaking.

After completing process and production qualification the plant began shipping units into distribution network in early July.

We are currently operating on two shifts, and are well into the ramp-up towards this year's peak heating season.

In our Residential distribution expansion initiative, we opened up 10 new Lennox PartsPlus stores in the second quarter, to bring our total stores to 150.

With 15 new stores opened in the first half, we are tracking well to our target to open 25 new locations this year and exit the year at 160 stores.

In our Commercial distribution expansion, we opened up a new regional distribution center in Laredo, Texas, to bring the total of dedicated Commercial locations to 33.

In addition, we continued to move Commercial product into select Lennox PartsPlus stores.

On the Commercial service side of the business we've added two more national account service branches to bring the total to 84 locations supporting national accounts across North America.

And the last point in Commercial, in July we entered the VRF market in North America, as planned.

Our partnership with Midea is going well as we launched Lennox-branded VRF Commercial products through Lennox company-owned distribution.

We're excited about our opportunities in this fast-growing $500 million market in North America.

In the first half of the year across all our businesses we made significant investments to drive future growth.

With a strong balance sheet and cash generation we will continue to invest in the future, grow dividends with earnings, and repurchase stock.

In the second quarter we raised the dividend 25% to $0.30 per share quarterly.

We bought back $50 million of stock in the quarter and plan to repurchase $100 million more of stock in the second half.

Now I'll turn it over to Joe.

Thank you, Todd.

Good morning, everyone.

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

In the second quarter, revenue from Residential Heating & Cooling was $528 million, up 11%.

Currency was neutral, volume was up 10%, price and mix combined was up 1%.

Residential profit in the second quarter was a record $85 million, up 28% from the prior-year quarter.

Segment profit margin was a record 16.1%, up 220 basis points.

Segment profit was positively impacted by higher volume, lower material costs, lower SG&A, and favorable price.

Partial offsets included a less favorable warranty reserve adjustment than in the prior-year quarter and investments in distribution expansion.

Turning to our Commercial Heating & Cooling business, in the second quarter Commercial revenue was $241 million, up 5%.

Currency was neutral, volume was up 5%, and price and mix combined was flat.

North American Commercial HVAC equipment and service revenue was up high single digits.

Europe Commercial HVAC revenue was down low single digits on a reported basis.

Commercial segment profit in the second quarter was $39 million, up 13% from the prior-year quarter.

And segment profit margin was 16.2%, up 110 basis points.

Segment profit was positively impacted by higher volume, favorable price and mix, and lower material costs.

Partial offsets included investments in distribution expansion and startup cost to enter the VRF market in the third quarter in North America.

In our Refrigeration segment, revenue in the second quarter was $192 million, down 7%.

Currency had a negative 1 point impact, volume was down 6%, price and mix combined was flat on a revenue basis.

Todd mentioned the revenue change by region in constant currency.

At actual currency Europe and Asia were both up low double digits, South America was up low single digits, and North America and Australia were both down low double digits.

Segment profit was $14 million, down 47% from the record level of the prior year.

As Todd mentioned, the weakness in the second quarter was from the North American Refrigeration and to a lesser degree Australia.

Segment profit margin was 7.1%, down 530 basis points.

Segment profit was negatively impacted by lower volume, unfavorable mix, investments to support future growth, and foreign exchange, partially offset by lower material costs.

Looking at special items in the second quarter, the Company had total after-tax charges of $300,000 net.

This included a gain of $500,000 for the net change in unrealized gains on unsettled futures contracts, and a charge of $500,000 for restructuring activities, and a net charge of $300,000 for other items.

Corporate expense was $19 million in the second quarter, down from $21 million in the second quarter a year ago.

Overall, SG&A was $149 million in the second quarter, down $2 million from the prior-year quarter on lower incentive compensation, as planned.

Cash from operations was $52 million in the second quarter compared to $49 million in the prior year.

Capital spending was $24 million, up from $11 million in the second quarter a year ago as the factory expansion in Mexico was completed.

Free cash flow was $28 million compared to $38 million in the prior-year quarter.

Looking at liquidity, cash and cash equivalents were $50 million at the end of June.

Our debt-to-EBITDA ratio was 1.6 ending the quarter, within our targeted range of 1 to 2 times.

Total debt was $607 million at the end of June.

Before I turn it over to Q&A I'll review our outlook for 2014.

With half the year behind us we are raising our assumption for North American Residential HVAC shipments from mid single-digit growth to high single digit growth for the industry.

We are maintaining our assumption for North America Commercial unitary shipments to be up low single digits.

And we still expect Refrigeration shipments to be flat globally for the industry in 2014.

Based on the underlying market assumptions and the Company's performance year-to-date and current outlook, we are raising our revenue guidance for the full year from 2% to 6% to a range of 5% to 7%.

We still expect foreign exchange to have a negative 1 point impact.

Looking at our other guidance points for 2014, we still expect about $30 million of savings from our sourcing- and engineering-led cost reduction programs for the full year.

We continue to expect $10 million for favorable mix in Residential in 2014.

And we still expect $10 million from favorable price for the full year.

We now expect commodities to be flat in 2014 versus prior guidance of a $5 million headwind.

Among the headwinds for the year we expect a negative $10 million impact from foreign exchange that will not be offset by price in 2014.

In our Australian business, we expect a negative $10 million impact in the second half versus the prior-year period with the repeal of the carbon tax in that country.

In 2013 we benefited from the expansion of refrigerant operations in our wholesale business, including some one-time purchases of lower-cost refrigerant that we sold at higher prevailing market prices.

With the repeal of the carbon tax we expect market prices to decline, negatively impacting profitability in that part of the business.

Corporate expense is still expected to be approximately $70 million for this year, down $18 million from 2013.

A few other guidance points -- we expect net interest expense for the full year of about $15 million.

Our effective tax rate is still expected to be between 34% and 35% on a full-year basis.

We still plan a total of $150 million in stock repurchases.

And the weighted average diluted share count for the full year is expected to be approximately 49 million shares.

We continue to expect capital expenditures of $90 million.

And, finally, to wrap up, we are narrowing our 2014 guidance for adjusted EPS from continuing operations from a range of $4.20 to $4.60 to a range of $4.30 to $4.50.

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

(Operator Instructions)

Jeff Hammond, KeyBanc Capital Markets.

Good morning, guys.

Maybe just to go into the Refrigeration issues a little bit more, I think of your business as having 30% incremental, decrementals, obviously a lot higher.

Can you delve into what were the big driver's maybe outside of your normal decremental?

Let me ramble a little bit broadly about our Refrigeration, Jeff.

As Joe talked about, and I spoke about in the script, the major driver of margin compression was North America weakness, particularly in supermarkets.

Revenue was down low double-digits and so we had volume impact.

But we also had a negative mix shift with some major national account customers moving towards, in our KW business, cases versus systems.

And we make higher margins on systems versus cases.

We also made investments during the quarter to support the ramp-up we expect in the second half of the year.

In our traditional business in North America, our Heatcraft business, our backlog is up double-digits from this time last year.

We also won a large part of new business from Walmart at our Kysor/Warren business, which we've had to make some investments in our factory to be able to support in the second half of the year.

In Q3, and more so in Q4 as the volume starts to flow, we'll expect that profit performance in North America will improve.

The second reason for weakness in Refrigeration in Q2 was Australia where revenue was down 5% in constant currency, and down 10% as reported.

Whereas North America was the primary reason for the Refrigeration weakness in the first half, Australia will be the primary Refrigeration headwind during the second half.

As Joe talked about, we expect a negative $10 million impact in the second half versus the prior-year period with the repeal of the carbon tax in Australia.

As Joe discussed, in 2013 we benefited from the expansion of refrigerant operations in our wholesale business, including some one-time purchases of lower-cost refrigerant that we sold at higher prevailing market prices.

With the repeal of the carbon tax we expect market prices to decline, negatively impacting profitability in that part of the business.

Okay.

That's helpful.

And then margins in the second half for Refrigeration, are they closer to second half last year, or closer to first half this year?

We're still going to have some pressure during the second half of the year in margins.

I think fourth quarter will look better than third quarter.

I think North America will look better second half of the year than first half of the year.

But I think that the headwind from Australia will have an impact on the overall margins.

Okay.

And then just final question.

Incrementals very good in Commercial Heating and Residential.

Maybe just talk about sustainability as you think about some of these.

Seemingly within your initial guidance I think a lot of your savings was more back-half weighted.

So, just talk about incremental momentum in those businesses.

Are you talking for the second half of the year or longer?

Yes.

I think two out of the three businesses have strong momentum, both on revenue on margin expansion.

That's going to continue the second half of the year.

The headwind, obviously, is Refrigeration.

I've signaled that we're going to have margin pressure second half.

Our initial guide, when we started the year, was 30% incrementals.

As we raised revenue and capped the bandwidth around the mid point being the same, we're now signaling, given some of the headwinds in Refrigeration, that our drop-through may be close to 30%, but I think about it between 25% and 30%, is what we're signaling for this year.

Over the three years we still think it's going to be 30% as we get through this rough spot in Refrigeration.

Okay.

Thanks a lot.

Rob Wertheimer, Vertical Research Partners.

Hi, good morning, guys.

Just wanted to -- and, obviously, the Resi results and the Commercial look great, too -- I just wanted to focus a little bit on the bifurcation between Refrigeration and Commercial.

I'm curious as to whether you saw Refrigeration as a market issue or really a share issue, or maybe a little bit of a timing issue.

But is there a differential desire to spend capital on your Commercial customers versus your Refrigeration and/or are you just losing share in Refrigeration right now?

I think there's a bit of a difference in the customer base.

In the sense of, in our HVAC equipment I think there's increasingly, has been an increasingly, compelling reason for customers to accelerate to switch out for energy efficiency reasons.

I think, number one.

Number two is I think the grocery segment has had slower growth than some of the other verticals that we play in, in big box retail and light industrial, even in schools.

But I think the honest answer is, especially in KW, as I've spoken about before, I don't think we're losing share with individual customers; I think it's the customers who we've traditionally done business with aren't growing as fast as the overall market, which means you lose share if that happens.

We've been focused on adding to our customer base.

And I mentioned we got a nice order from Walmart that we think is going to help second half of the year.

But I think that's the fundamental issue in North America volumes.

Okay that was helpful.

Thank you.

And then just one quick question on pricing in those two markets.

Anything dramatic going on in Refrigeration pricing?

You mentioned the mix issue just a moment ago, the pricing side.

No.

Pricing -- we passed on a price increase and we're getting price in the marketplace.

Great.

Thanks, Todd.

Steve Tusa, JPMorgan.

Hey, good morning The $10 million that you called out, I just want to understand the trajectory on Refrigeration -- sorry -- for the second half.

Is that the major headwind?

So, should we look at second half last year to second half this year and think $10 million is a starting point and then factor in some other stuff?

This 7% that you did this quarter, it's obviously going to get better.

But I think it would just be helpful to get a little bit of a magnitude around what the second half could look like so you can at least baseline it so we can reset the bar here.

I'd start with $10 million.

And then in North America I'm signaling that, while we're going to get better, we're still going to have some margin pressure in second half in North America, although the rate of deceleration is going to be slower second half than first half.

Okay.

Got you.

And as we look out to the three-year plan now in Refrigeration, I think the guide is 13% to 15% margin.

Obviously that looks like a pretty dramatic stretch at this stage of the game.

How do we think about the levers over a multi-year period here?

Is this now just a structurally lower margin business?

No, I don't think so, Steve.

We may not get to 15% but I still think 13% is within our sights.

We ended last year at about 10%.

We're going to be down, obviously, this year given where we are first half of the year.

But as we get volume to flow back through our North America business, we get to the other side of this dislocation due to the carbon tax in Australia, we continue to make momentum in our European business, Brazil continues to do well, I think we're still targeting at least a 13% over the three-year period.

I reflect about where we were -- it's not the exact same analogy but back in 2011 when we had a severe mix down in Residential, our margins went down dramatically.

There was some severe concern about what we were going to be able to do there.

And here we sit 2.5, 3 years later and we're in great position in Residential.

I think you get to the other side of these mix issues, you get to the other side of volume issues, things look a lot better and I think we'll do that in Refrigeration.

Right.

So, my point is that if you look out to that, does that mean that 2015 is a snapback year, or it's pretty back-end loaded, there's a lot of heavy lifting to do?

That's what I'm trying to get my arms around.

I think we've put in place a lot of the initiatives, whether it's material cost reduction factories, getting everything ready.

What we need is some volume and mix to head the right direction, which is based on customers.

And we're getting that in place.

I'm not going to signal necessarily on 2015, but I think we have a three-year plan to get the margins to 13% in Refrigeration.

And did you win the Kysor/Warren thing?

Was that won from the incumbent at Walmart?

I think all three of us got business, so It was just a reshuffling and we ended up with more than what we had before.

Okay.

And then one last question just on Residential.

What kind of benefit on the margin was mix, on the margin improvement?

I'm looking around the room to see if we called it out.

We had positive mix of 1% or 2% for the quarter.

On the margin, as well?

Yes.

So, why would that be any different as the transition comes through next year?

Ask the question again, Steve?

Why would that benefit -- would the margin benefit for any reason be different next year if the mix goes up materially with the 14 SEER transition?

Yes, because the pricing on 14 SEER, post regulation, will be lowered than the pricing of 14 SEER pre regulation, because all of a sudden, when you make it the minimum efficiency, that becomes the battleground over pricing.

All of a sudden when half your business goes from 13 SEER to 14 SEER in the South you don't get the full margin impact.

We'll get some impact but that will become the battleground for pricing.

And you think that happens that quickly?

In 13 SEER it took a while for that, the 10 to 13 SEER, it took a while for that price to come down.

Would you expect that to happen in 2015?

Or is that more like a 2016, we're talking about more of a normalized longer-term dynamic?

I think it happened reasonably quick last time.

And, again, we'll guide on 2015.

What you're suggesting is there is some upside.

There probably is, I don't disagree with that.

Okay.

Great.

Thanks a lot.

Keith Hughes, SunTrust.

Thank you.

A couple questions.

Back to Refrigeration, how much does Australia represent of that segment?

About 25%.

Has that been a constant number or has it come up in the last couple of years?

Order of magnitude, constant.

After we did the KW acquisition it went down.

But 25% has been about where it's been since we did KW.

Okay.

And switching back to Residential, you're going to have 160 PartsPlus by the end of this year.

Do you have any early views for 2015 and what that number will do?

What we said was 2016 we'll have 215 stores.

I just lay the math out and think about it as a linear, which is 25 to 30 stores a year.

So, I guess that means we'll have 185 to 190 in 2015.

But we'll give an exact number in December.

Do you think that as you approach that goal, will the magnitude of the add from each location start to go down as you get this network more filled out?

Theoretically, at some point we'll reach diminishing returns, but we haven't hit them yet.

I think -- I saw a transcript from was Wasco's call, I think they said they have 570 locations.

And we have a larger geographical footprint than they do.

So I think we have a ways to go.

Okay.

And then, finally, in Commercial, any view in the second half of the year in the United States, any sign from customers accelerating, decelerating just the volume of orders?

We had a good second quarter.

We were up double-digits both in new construction and in replacement.

And, so, the momentum is pretty good in the Commercial business.

I don't know if I think about it as accelerating or decelerating.

I think if we continue where we're at in second quarter, that's a nice little run rate.

It is.

Yes, I got you.

All right, thank you.

Rich Kwas, Wells Fargo Securities.

Hi, good morning everyone.

Just a follow-up on the Refrigeration.

As it relates to the $10 million for the second half of the year, should we think of that, there's some seep over into the first half?

Or does that pretty much dissipate into the first half of 2015?

Ask the question one more time, Rich.

I think I understood.

You got a $10 million headwind here in the second half of the year.

So, do we think of that as dissipating once the calendar turns, or is there still some leakage there in terms of the negative profit impact?

There will be some leakage in the first half of next year.

Okay.

But should we think of that as materially less than the $10 million?

Or is that still going to be close to that run rate?

I think it would be less than $10 million and we'll have good news to help offset it.

I wouldn't get too nervous about 2015.

We'll guide to 2015 in December.

But, yes, we'll have some headwind in Australia first half of the year from refrigerant.

But then ostensibly the North American business is picking up, as well, so that's starting here -- the incremental business starts second half of the year and that helps.

Exactly.

Okay.

And then on Resi, on pricing, it seems like all pricing has stopped here year to date.

The $10 million, I know you reiterate the guide there for $10 million.

But what's the bogey in terms of upside/downside scenario to that for the balance of the year?

I think part of the issue is -- let me talk about how we've broken these buckets up, is we've said that there's $10 million in net price.

That ignores the FX issue that we have in Canada.

And, so, what we've done is we've raised prices in Canada to help offset the FX we're getting -- the transactional FX issue we have in Canada.

And we're saying there's still going to be a $10 million headwind.

The actual FX problem we have is larger than that.

We've gotten price to help offset it.

So, really, gross-wise we've got more than $10 million of price, but net in Residential it's $10 million.

So, I think that's probably a good number.

Okay.

And then ostensibly how do the first few weeks here in July, given that you raised the guide for North American Residential for the year -- I know Q2 came in better -- but what are you seeing trend-wise here in the early stages of Q3?

Solid, is the way I can calibrate it.

And solid, meaning continuing with what we've seen over the last year or so.

First couple of weeks were a little cooler than last year, down about 10% from last year.

But last August, at least for the summer compared to the rest of summer, was a cool August.

So, net-net we're not worried about the weather yet, and momentum continues.

Okay.

Thank you.

Robert Barry, Susquehanna.

Hi, guys, good morning A very quick follow up on that last comment when you said down 10% in the first couple weeks.

Is that cooling degree days?

Yes.

Okay.

And sticking on the topic of weather, it was a real headwind in the first quarter, especially with RNC.

Did you see any push or volume benefit in Resi and/or Commercial in this quarter because of push from 1Q?

I think what we saw was what we expected to see in the sense of we called that we thought Residential new construction was going to snap back.

We saw it up double-digits in first quarter.

We saw new construction in Commercial up double-digits.

I think in Commercial it was less about the weather.

I just think that's momentum in the Commercial market.

I think Residential was some snap back from first quarter.

Did you say how much the growth was in the emergency replacement piece -- or could you -- in Commercial?

Yes.

It was up low single-digits the second quarter against the comp of second quarter 2013 when we first began the rollout of the rooftop.

And, so, the way I think about is last year we were up 14% as we loaded the barns, if you will, with our distribution.

It was up low single-digits second quarter this year.

And then over the last 12 months we've been up double-digits.

So, the momentum in emergency replacement continued in second quarter.

I think this quarter, though, is also when you started rolling out the expanded line of larger units in Commercial.

Is that just smaller than what was rolled out initially?

Short answer is it was rolled out mid May, and, so, it had some impact this quarter.

But I think we'll really start to see the impact in third quarter from the expansion.

Okay.

And then, just finally, on the SG&A, I know you guys target over time at tracking at growing half the rate of sales.

I think year to date it's actually down even though you've had a lot of growth investment.

Or maybe some of that is the incentive comp.

How should we think about the way that's been tracking and how it will track, just given it's generally targeted at half the rate of sales?

I think this year I'd model it to be down half the rate, is what you suggested.

As you recall, last quarter I think we were down $8 million or $9 million in corporate expenses versus the last year.

And that was SG&A, and that was incentive comp.

And we said our total corporate expenses will be down $18 million full year, and a large piece of that is incentive comp.

So, the short answer is I think modeling at half the rate of growth is probably the right number.

For the back half?

So it will start to tick up?

Yes, it will tick up, largely associated with the timing of incentive compensation and the profit curve that we use to report and record those costs.

Okay.

Great.

Thank you.

Nigel Coe, Morgan Stanley.

Yes, hi, guys.

It's Drew on for Nigel.

I just wanted to dig into the inventory a little bit.

I know you had mentioned last quarter that if there was a pre-build in advance of the SEER standard change, that it would come in the fourth quarter.

But have you seen any of that yet or able to quantify it?

The answer is, the regulations around enforcement are still up in the air.

So, we're still waiting for some clarity there.

We're meeting with our distribution partners and our dealer customers, and we're fine-tuning what we're going to do.

We'll bring more clarity to that most likely on the third-quarter call.

Okay.

And then in Commercial, now that you're in the market on the VRF, should we assume that all of the investment headwind is now through, and that it was the full $5 million?

We got it last time between $3 million to $5 million.

We're still in investment mode second half of the year.

While we started selling, it's a long lead time to get the business closed.

So I think about it as I'd spread it over the full year, broadly speaking, linear.

And then next year front end will still be investment mode, second half we'll start making money.

And next year I think about it as being neutral.

And then we start making money in 2016.

That's how I think about it.

Okay.

Got it.

That's helpful.

And then on Resi, you brought up the market growth estimate.

Are you able to quantify what your share gains are at this point or at least maybe year to date?

We don't publicly quantify.

AHRI numbers are public about what the industry's doing, and we give our number and we let you calculate it.

Okay.

Got it.

Thanks

Walter Liptak, Global Hunter.

Hi, thanks, guys.

Just a couple of follow-ups.

First on that last question with the pre-builds in the fourth quarter, so, you're saying that if there were to be a pre-build that, that would be incremental to the guidance -- that right now there is no pre-build in your formula.

I think about pre-build, as the way it will impact guidance, will be on cash flow.

So, if we're building inventory that we're then going to sell in 2015, we just carry more inventory going into the end of the year.

Okay.

Got it.

And then in the Refrigeration market you called out some investment into feature growth.

I wonder if you can provide some more color.

And is that new to the guidance or was that something that was already in for 2014?

It's business that we won during the year, and the customer is Walmart.

And, so, we're expanding the factory, adding people, getting ready to handle the business.

Okay.

Thanks very much.

Mark Douglass, Longbow Research.

Hi, good morning, gentlemen.

In Commercial, can you talk a little more broadly about what the market is doing?

Your place was good for you, but that's relatively new.

But you said new construction was up mid teens.

Is it something regional that you're seeing that maybe benefits you?

Or is it that just real broadly you're seeing a nice pickup and you expect that to really continue the non-resi construction pickup that everybody's been talking about is hopefully coming?

I'm not trying to make a call on the broader macro call of non-resi, which implies a lot of verticals we don't play in.

What we're saying is in unitary North America where we play, which half our business is retail -- theaters, schools -- we were up double-digits in new construction.

So, I think that's more a reflection on the verticals that we play than necessarily a broader non-resi call.

Okay.

But retail was up in new construction for you.

We were up double-digits in new construction, and half our businesses is with retail.

The industry year to date is up low single-digits.

I think we're winning share and outperforming the industry.

Okay.

Great.

And then just one last question, with the Saltillo coming online, what do you have as far as expected net benefit in 2014?

You talked about the overall savings you expect by 2016.

Is there much coming in the second half?

No.

It's a net expense for us.

It's about a $5 million headwind.

As you can imagine, we staff up and build a factory, and it takes time to ramp up, so we're under-absorbing.

It takes a while and so it's a headwind that's always been in our guidance.

Okay.

But the absorption will come in 2015?

Yes, I think about it as we've said 2016 is $15 million.

In 2015 it will be a positive number somewhere between negative $5 million and plus $15 million.

And we'll guide in December probably on what that number is.

And then in 2016 we enter the year at the full $15 million.

Okay.

Thank you.

Samuel Eisner, Goldman Sachs.

Good morning, everyone.

Just going back to Refrigeration, I think you said about $10 million year-on-year headwind in the back half of the year.

How is that split between the third and fourth quarter?

I'd broadly go, spread it linear.

Okay, great.

And then in terms of the mix headwinds that you talked about, moving away from systems into cases, did you quantify how much of a headwind that was on a year-on-year basis, either in dollar terms or on percentage basis?

We didn't but I would tell you it's $2 million or $3 million for the quarter.

Great.

Thanks.

And then I think, Todd, you mentioned that your backlog was up about double-digits or so in Refrigeration, presuming that reflects the Walmart order.

But just curious how the margins in the backlog are looking as it stands today, and what's the expectation for that backlog starting to hit the P&L?

Is that back half?

Is that 2015?

Just some more clarity on that would be great.

Our backlog was up both in our KW business, which is driven by Walmart, but also in our traditional, what we call, HRP -- Heatcraft Refrigeration Products -- in North America was up double-digits, which isn't Walmart business, it's broader business.

We think the margin of the business in North America will be better second half than it was first half.

Got you.

And then, just lastly, on just overall cost savings and margins, the Resi margin was really strong this quarter.

Curious how that carries into the back half of the year.

Should we continue to expect about 200-plus basis points of margin expansion?

And what's the view on sourcing savings coming forward?

We're still calling $30 million of sourcing savings.

Initially we called for it to be back half loaded.

We were able to accelerate some things and overperform first half and so we now think it's probably 50/50 first half/second half.

And we continue to have margin expansion opportunities in Residential.

I'm not sure we're going to be up 200 basis points every quarter like we were in second quarter.

We weren't in first quarter.

So, I think about, we expanded first half of the year, and that's probably a fair put to think about in the second half.

Great.

Thanks so much.

Glenn Wortman, Sidoti.

Good morning, guys On your Resi new construction business, given it's still relatively weak housing data out there, I was surprised on the strength you saw.

Do you think you outperformed the industry or was that snapback more market-based, in your view?

I think both are probably true.

As we've said, we have an outsized position with the big builders.

We thought weather had pushed some volume from first quarter to second quarter.

And then there's mixed data out there.

I know the starts were sobering, but also builder confidence is at record highs.

So, I think there's some conflicting data out there.

As the year started, we called for new construction to be up 10% on a full-year basis.

We still think that's probably the right number.

Okay.

And is that part of your business performing well into the third quarter?

It's early but momentum that we saw in second quarter we're seeing in third quarter across the business.

Okay.

Thanks for taking my questions.

Steve Tusa, JPMorgan

Hey, guys, just a follow-up.

The comment on weather in July, what are you guys seeing in July?

Is your business up around what you did in the first half?

Maybe some context around that?

Yes.

The short answer is it remains solid, and the momentum we saw first half of the year we are seeing in third quarter.

I'd just make the point that weather is 10% cooler and we'd rather have it be warm.

And to your point, throwing that out as a little bit of a warning.

But as I suggested, we're off to a solid start.

September is our biggest month of the quarter so we've got a lot of work still in front of us.

Right.

And pricing is holding up okay in the channel?

Correct.

Okay, great.

Thanks.

There are no further questions.

Great.

Thanks.

A few other guidance.

I'm reading the wrong script, let me get to the right script.

A few points to leave you with.

The Company had record profit on record total segment margin in the second quarter.

And we're on track for strong growth and record profitability for the full year.

Residential and Commercial are outperforming to the upside, while Refrigeration is choppy in 2014.

Overall, we are raising guidance for Company revenue growth of 5% to 7% this year, with 16% to 20% growth in adjusted EPS from continuing operations.

We look forward to the rest of the summer season and a strong second half of the season.

Thank you for joining us.

Ladies and gentlemen, that does conclude our conference today.

Thank you for your participation.

You may now disconnect.