Lennox International Inc (LII) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Lennox International second-quarter 2015 earnings conference call.

(Operator Instructions) As a reminder, this call is being recorded.

I'd now like to turn the conference over to 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 2015.

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

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

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.

Financial results reflect sold businesses and discontinued operations.

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 for replay.

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

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

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

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

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

Thanks, Steve.

Good morning, everyone, and thank you for joining us.

With margin expansion across all three business segments, Lennox International set new highs for total segment margin and profit on strong revenue growth in the second quarter.

Total Company revenue was up 6% at constant currency, with growth in all three businesses.

Total segment margin for the Company exceeded 120 basis points to a record 13.5%, and adjusted EPS from continuing operations rose 22% to a record $1.84.

In our residential business, we set new highs for revenue, margin, and profit.

Revenue was up 6% at constant currency, with mid-single-digit growth in both replacement and new construction business.

Residential margins expanded 190 basis points to a new high of 18%.

Residential profit was up 18% to a record $100 million.

In the quarter, the impact from weather was uneven across North America.

While warmer in general, we saw some negative impact from weather in key markets.

The upper Midwest, an important swing market for us, was cooler than last year.

And in Texas, another large market, we saw a record rain and flooding in May.

Overall in June, which is about half the quarter for us, the first week started off slow from cooler weather.

Subsequent weeks warmed up, and we closed the quarter strong.

While residential shipments were lower than expected for the second quarter, mix tracked better than expected.

14C and above air conditioners and heat pumps were 51% of cooling product shipments in the quarter, up 14 points from the second quarter last year, obviously driven by the regulatory transition to 14 SEER air conditioners in the South and Southwest regions of the United States and for heat pumps nationally.

This transition continues to play out as expected.

The industry appears to have adequate pre-built 13 SEER inventory this summer season for smooth transition, and 14 SEER pricing has been disciplined.

On the operational front, we opened the seven new Lennox PartsPlus stores in the second quarter.

We now have 170 stores across North America, on our way to 186 stores by the end of this year and 250 stores by the end of 2017.

Turning to our commercial business, revenue was up 10% at constant currency in the second quarter.

Commercial margins expanded 80 basis points to 17%.

We set record -- we set second-quarter records for revenue and margin.

Segment profit was up 10% to set a new Ohio $43 million.

As expected come our commercial business saw national account growth resume in the second quarter, with equipment revenue up high single digits.

A good second quarter, but the retail sales environment continues to be tepid in general.

So we remain cautious on national accounts as we enter the second half of the year.

Regarding new national accounts, Lennox continues to win in the marketplace with our high-efficiency systems and advanced controls bringing 9 new national account customers on board.

And non-national account business revenue was up midteens at constant currency in the second quarter.

The broad commercial recovery continues, and we continue to win share in emergency replacement.

In Europe, commercial HVAC revenue was up mid-single digits at constant currency in the second quarter.

On the operational front, we continue to expand commercial distribution, which is a key element of our growth strategy in emerging replacement market.

We opened 2 additional commercial distribution centers in North America in the second quarter to bring the total to 43 locations.

We also continue to expand the number of Lennox PartsPlus stores carrying commercial equipment.

In refrigeration, revenue was up 4% at constant currency, led by high single-digit growth in North America.

South America was up low double digits, Europe was up low single digits and Asia-Pacific was down high single digits.

Refrigeration margin picked up 10 basis points to 7.2% against headwinds from the repeal of the carbon tax on refrigerant in Australia, foreign exchange and North America's supermarket mix.

Excluding the negative impact from Australia refrigerant, margin was up 160 basis points from the prior-year quarter.

So, good progress operationally in the refrigeration segment.

Looking ahead, the second quarter -- looking ahead, the second half will benefit from some recently implemented restructuring activities in our Australian and Kysor/Warren businesses., having year-over-year comparison Australia refrigerant now behind us and a strong top-line growth in North America.

We continue to expect refrigeration margins to be up in the second half of the year and up 50 basis points or so for 2015 overall.

Looking at guidance for the Company overall, we are trimming the high end of revenue guidance by 1 point to a range of 4% to 7% growth at constant currency.

And we are narrowing adjusted EPS from continuing operations up $0.05 on the low end and down $0.10 on the high end for a new range of $5.25 to $5.50, up from $4.38 last year.

Fine tuning the guidance, residential market volume was lighter than expected in the second quarter, driven by some unfavorable weather, although residential mix has been better than expected.

We are also reflecting some caution in commercial HVAC national account business due to the tepid retail sales environment so far this year.

In summary, overall for 2015 we expect another record year for Lennox International with strong revenue growth and new highs for total segment margin and profit.

We expect to have a strong cash generation year and continue to invest in the business for future growth while also returning cash to shareholders through increased dividends and stock repurchases.

Now I'll turn it over to Joe.

Thank you, Todd, and good morning, everyone.

I'll provide some additional comments and financial details on the business segments for the quarter starting with residential heating and cooling.

In the second quarter, revenue from residential heating and cooling was a record $555 million, up 5%.

Foreign exchange had a negative 1% impact on revenue.

Volume was up 2%, and price and mix combined up 4%.

Residential profit in the second quarter was a record $100 million, up 18% from the prior-year quarter.

Segment profit margin was a record 18%, up 190 basis points.

Segment profit was positively impacted by higher volume, favorable price and mix and lower material costs, with partial offsets from negative foreign exchange and investments in SG&A and distribution expansion.

Now, turning to our commercial heating and cooling business.

In the second quarter, commercial revenue was a second-quarter record $254 million, up 5%.

Foreign exchange had a negatve 5% impact on revenue.

Volume was up 10%, and price and mix combined was flat.

North American commercial HVAC equipment and service revenue was up low double digits.

Europe HVAC revenue was down midteens, including the negative foreign exchange impact, although up mid-single digits at constant currency, as Todd mentioned.

Commercial segment profit in the second quarter was a record $43 million, up 10% from the prior-year quarter.

Segment profit margin was a record -- was a second-quarter record 17%, up 80 basis points.

Segment profit was positively impacted by higher volume and lower material costs, with partial offsets from negative mix, unfavorable foreign exchange and higher SG&A, including investments to support commercial distribution expansion and growth in the VRF market.

In refrigeration, revenue in the second quarter was $184 million, down 4%, although foreign exchange had a negative 8% impact on revenue.

Volume was up 6%; price and mix combined was down 2%, including the negative 3% impact from Australian refrigerant.

From a regional perspective, Todd already addressed revenue in constant currency.

On a reported basis, with the negative impact from currency, North America was up high single digits, South America and Europe were both down high teens, and Asia-Pacific was down more than 20%.

Refrigeration segment profit was $13 million, relatively flat with the prior-year quarter.

Segment profit margin was 7.2%, which was up 10 basis points.

Segment profit was positively impacted by higher volume, higher factor productivity and lower material costs.

Partial offsets included lower Australian refrigerant profitability, negative mix in the North American supermarket business and unfavorable foreign exchange.

Regarding special items in the second quarter, the Company had after-tax charges of $2.3 million, including $1.3 million for restructuring activities in Australia and $1 million for other items net.

Corporate expenses were $22 million in the second quarter, compared to $19 million in the same period a year ago.

Overall, SG&A was $153 million in the second quarter, compared to $149 million in the prior year quarter.

Cash from operations in the second quarter was $70 million, which was up $52 million from the prior-year quarter.

As previously discussed in the fourth quarter of 2014, we strategically built inventory to support the customers in the minimum efficiency regulatory transition that took effect for certain products at the start of 2015.

The special inventory build at that time amounted to $77 million, and we expect most of this to be monetized as we progress through the year.

Capital spending was $15 million in the second quarter, compared to $24 million in the quarter a year ago.

Free cash flow was $55 million for the second quarter, compared to $28 million in the prior-year quarter.

Cash and cash equivalents were $48 million at the end of June.

Our debt-to-EBITDA ratio was 2.6 ending the quarter, which is higher than our targeted range of 1 to 2 times debt to EBITDA due to the accelerated share repurchase program.

The second half is our seasonally strongest cash generation period, and we expect to be back within our targeted debt-to-EBITDA range as we progress through 2015.

Total debt was $1.06 billion ending the quarter.

Now I'll turn to our outlook for the balance of 2015.

For the residential market in North America, we continue to expect HVAC shipments to be up mid-single digits.

For commercial unitary market in North America, we still expect HVAC shipments to be up low single digits.

And for the refrigeration market in North America, we revised our view on the market in late May from being up low single digits to being down low single digits for the year.

And as Todd mentioned, we expect to do this -- we expect to do significantly better on the strength of specific national account business.

With these underlying market assumptions and the first half of the year in the books, we now expect revenue growth of 4% to 7% for the Company this year versus our prior guidance of 4% to 8%.

We continue to expect a negative 3-point impact from foreign exchange for revenue growth guidance now of 1% to 4% at actual currency for the full year.

We are narrowing our guidance for adjusted EPS from continuing operations for the full year from $5.20 to $5.60 to a range of $5.25 to $5.50.

Incorporating this change and $0.05 more of special charges in the second quarter, guidance for GAAP EPS from continuing operations moves to a range of $5.14 to $5.39 for the full year.

Now looking at the headwinds for 2015, we continue to expect foreign exchange to have a $20 million negative impact on earnings net of specific price increases that we have enacted to help mitigate the unfavorable FX.

Most of this headwind is coming from the Canadian dollar, with some coming from the Australian dollar as well.

The mid-2014 repeal of the carbon tax in Australia had a negative $10 million impact on us in the first half of 2015, including $2 million more than previously guided for the second quarter.

We now expect corporate expenses to be $80 million for the full year, up from our prior guidance of $75 million.

This really reflects our continued investments in the business.

A headwind of $3 million is still expected from investments in VRF for the year, and we have strong -- and we have ongoing investments in the expansion of our residential and commercial distribution network across North America as well.

Now we'll look at the tailwinds for 2015.

On the commodities front, we are continuing to see a $15 million benefit to earnings.

This includes the benefits we expect to see in 2015 from lower metal prices, copper steel and aluminum, as well as lower fuel costs.

We are raising guidance for savings from our sourcing and engineering-led cost reduction programs from $35 million to $40 million for 2015.

We continue to expect $10 million of incremental price for the full year.

This is separate from the price we were capturing specifically to help offset negative foreign exchange.

We are on track for about $4 million of incremental savings this year from our second plant in Mexico.

And we now expect residential mix to be a $5 million benefit in 2015, up from our prior assumption for it to be flat this year.

Just a few more guidance points.

We still expect net interest expense for the year of about $25 million.

Our effective tax rate guidance remains 34% to 35% on a full-year basis.

We continue to expect the weighted average diluted share count for the full year to be approximately 45 million shares.

Capital expenditures are now expected to be $80 million for the year, down from prior guidance of $85 million, and we are still targeting free cash flow of about $265 million for 2015.

With that, let's go to Q&A.

(Operator Instructions) Steve Tusa, JPMorgan.

First, just on the revenue front can you just clarify -- I think you said volumes were up low single digits there.

What was the benefit from pure price and then mix broken out?

We lumped them together, and we said price and mix was a positive full 4 points for the (multiple speakers).

Okay.

So I assume mix is the -- with that kind of 14-point swing there, I assume the mix is a pretty significant percentage of that.

Yes, in order of magnitude I think it's a bit -- the mix is greater piece in the price for that piece.

But, again, sort of on the guide points, we raised the guidance for flat for resi mix to plus-5, so that reflects it.

Maybe let me go a little bit on our -- a little digression on the 14-points improvement in the mix, which is a big number.

The vast majority, as you can expect, of that mix improvement is homeowners and homebuilders moving from 13 SEER to 14 SEER.

So, a small step up that crosses a threshold on how we historically report this.

In prior periods, when we quoted SEER mix up of a couple of percentage points or so, a larger slice of that move was made up of people moving to our premium products, our Dave Lennox signature series, our 16, 18 and even up to 26 SEER.

All that being said, I think it's good news.

We had some concerns as we went into this transition in the South.

And we said if things went as we expected or hoped that we'd have some mix upside, and that's what we are seeing.

It's going as expected.

We prebuilt an appropriate level of 13 SEER to support our customers this year, and we think others have done the same.

Pricing has been rational, and we are seeing a relatively smooth transition from the 13 to 14 SEER in the South and Southwest.

Obviously, we'll know more as we go through the rest of July, August, and early September, but so far so good.

And why the -- is there anything specific that underlies the caution around -- you know, around commercial and the retail accounts?

Is that just a -- you make it sound like it's a macro call on retail sales.

Is that it, or is it something around your visibility on your backlog being led there?

It's both is the short answer.

And let me again sort of step back and talk about the commercial business overall because we had a really good quarter.

But let's talk about both sides of the business.

Half of what we do is non-national accounts.

Revenue in that was up double digits in the first half of first and second quarter, and the momentum continues.

That reflects a broad recovery in the commercial market and that we are gaining share in emergency replacement.

The other half of our business is in national accounts.

We were down 20% in first quarter.

We are now up high single digits in the second quarter.

But we are cautious on the macro environment, and not only the tepid retail sales that everybody sees but just conversations with our customers.

Commercial HVAC national account third-quarter backlog is down year over year.

So to directly answer your question, we see backlog and it's down.

But we have two-thirds of the backlog coverage for our revenue target in Q3.

And so, we reflected all of this in our updated guidance.

In first quarter, to be very clear about all this, in the first quarter we were surprised.

We now think we have a perspective on what's going to happen in the balance of the year, and we've rolled it into our guidance.

Okay.

And then one last question just on refrigeration.

One of your key, I guess, customers/competitors out there has really kind of continued to see weakness in your business.

I think you are taking some share.

But there are some claims you guys are doing this by price, which may make a little sense.

The margin entitlement for the industry seems to be a lot higher than where you are.

So why not show margin improvement -- you guys can show margin improvement and still be a little bit more aggressive in your approach to providing value to the customer.

Is this a one-off?

A, is it -- is this your approach?

And then, B, is this a one-off with a couple of particular customers, or is this something that you see the opportunity to kind of continue to hammer away at into 2016 as well?

I think I'll broaden the answer and not directly respond to the question.

And what I'd say about this, I think we've demonstrated at Lennox International we know how to price.

We know how to sell premium product.

We know how to get price and mix in the marketplace, and we want to do the same thing with our refrigeration business.

There are some times with certain customers that you bite off volume when you know you are going to be able to take your costs down over time.

And for the life of the contract, it can be a positive contract for you even if upfront it's some aggressive pricing.

But, look, we have aggressive margin targets for the Corporation and for refrigeration.

We are not in the business of bottom feeding.

Sure.

And, sorry, the life of this particular contract, is this going to 2016 and 2017?

It is a multi-year agreement.

Okay, great.

Thanks a lot, guys.

Jeff Hammond, KeyBanc Capital Markets.

So great margin progression in residential.

Can you just speak about -- I think you had 50% incrementals.

Can you just speak to how you think about that into the second half?

It seems like price cost if anything should get better.

I don't know if we do quite 50% for the balance of the year, but we are seeing very good momentum in the residential business.

It's reflecting the mix up that we saw in the summertime and reflecting the $5 million increase in resi mix.

I think the majority of that is going to be in the second quarter, a little bit in third quarter.

And then when we get into furnace season second half of third quarter and the fourth quarter, you won't see all that benefit as we go from 13 SEER to 14 SEER on air conditioners.

It reflects what we're doing in Mexico, and it reflects the continued material cost reduction.

And then our resi business, maybe second quarter is our big volume quarter, and so that's where we saw some of the biggest hits on the MCR.

Okay.

And then you said the transition is kind of playing out as you thought, with maybe a little bit of mix upside.

So can you maybe just speak to where your 13-SEER inventories sit in the Sun Belt and what you're hearing about the competitive landscape and how that kind of plays into the second half?

We are going to have plenty of inventory as we see it today.

I'd like to -- maybe we won't if it gets really -- continues hot.

But short answer is we plan to have inventory to last us through the -- at least last us through the summer selling season.

Again, since we own distribution I'm not overly concerned if we have too much because we can reposition it as needed.

What we are hearing from the marketplace is our major competitors are in pretty good shape.

But I think we'll know -- there's a hot spell right now.

I think we'll know more as we get through the end of July.

We've heard on a micro level that some distributors may be short, but it's unclear to me how much the OEMs have in reserve.

But so far, it's playing out as we hoped.

And then just real quick on the July comment in the hot spell, have you seen at least your unit shipments normalize here into the third quarter?

We've seen -- so far, we are off to a solid start in third quarter that the heat is now hitting in the upper Midwest.

And I live in Dallas, and it's been 100 degrees for the last week.

And we still expect residential shipments to be up for the industry mid-single digits and volume normalize second half of the year.

So I think that's a long answer to say yes.

Okay.

Thanks, guys.

Rich Kwas, Wells Fargo Securities.

So just on residential, Todd, the incremental caution.

It sounds like with May coming in weaker in some key areas, that's really it.

But as you think about what happened in June and here in the first part of July, would you say that there's -- how cautious is that outlook?

Because it seems like maybe there is some room for upside on the residential side if the heat sticks with us.

Let me de-couple the comments I made in the script because I think there's two caution flags or sort of two things that I waved, one on resi.

I think you have it spot-on in the sense of it's reflecting what happened in May.

So that's sort of a rearview-mirror point of view that says for a full-year number -- the full-year of our revenue guidance always, if it's just a hot summer beginning to end, then we do great.

And so lowering the high end is reflecting that once you miss (technical difficulty) move on.

The forward-looking caution is around national accounts.

And what I was signaling there is we are down 20% first quarter, we are up close to 10% in second quarter in national accounts.

It's a bit of a rocky ride right now in our national accounts and our commercial HVAC business.

And I just wanted to send a signal that people shouldn't bake 10% in third and fourth quarter in their model for national accounts because we're not sure that's going to happen.

All that being said, it's in our new guide, and we have accounted for both of those cautions in our new numbers.

So relative to comments you discussed back in the middle of June around national accounts and whatnot, with potentially some incremental caution, it sounds like June came in better than expected, but maybe there's some push-out that's more likely to occur or could occur in Q3.

That's really around the caution here.

Yes, you got it.

Okay.

All right.

And then commodities, so you are keeping the $15 million -- it seems like -- how would you characterize -- I know you are covered on a lot of the copper and whatnot, but steel is down pretty significantly.

There may be some benefit here in 2015.

How would you characterize how there's some upside potentially there?

How comfortable are you with the $15 million?

And then as we think about next year, it seems like there should be some potential upside to metals in terms of your costs and whatnot.

How do we think about that or start to think about it?

I think on 2015, I think you captured it right.

We sort of forecast what we think steel is going to do, and we roll that into our guide.

$15 million is sort of our best point of view right now.

And if steel is lower than what we have in our forecast, then we have some upside.

2016, we have a running head start because of copper, and we'll guide all that in December.

But we are now halfway through 2015, so we are already hedging for 2016.

And so when you are hedging at $2.55, $2.60 a pound of copper, which is what it has been recently, that's going to be lower than our average purchase price in 2015.

So, yes, short answer is we've got a running start on commodities in 2016.

Okay.

Great.

And then just last one on the mix.

So just to clarify, the mix -- you got the benefit on the RNC with the shift of 13 to 14 SEER.

But I might've missed -- what -- if you strip that out, what's the replacement activity in terms of mix?

That sounds like it's a positive or a greater positive than expected.

Yes, I mean, we didn't call out mix by segment, as you are asking it.

But the short answer is on AOR -- add-on and replacement, we had sort of thought there was going to be neutral mix, and we are seeing positive mix up.

Okay, all right.

Great.

Thank you.

Jeff Sprague, Vertical Research.

Just back to kind of the 13, 14 SEER, is there anything to glean here about kind of price elasticity and what the retail customer will take?

In other words, it sounds like maybe we all overbuilt 2013.

Right?

There's a push to 2014 is easier than we thought.

And you are not going to be stuck with the 13, but in retrospect maybe the industry needed a little less.

You know, I understand the question.

I think there has always been price elasticity with the consumer.

Right?

Because they buy a unit once every 12 years, and equipment only accounts for half the total ticket price.

It's always been how do the OEMs play and how do the dealers play it against each other.

I think the important thing has been there is this smooth transition.

And if the smooth transition could've taken place a different way that, would've been fine.

But it's a little bit of a prisoner -- prisoner's dilemma: we didn't want to be the only guy who didn't have 13 SEER if others did.

And so we needed to make sure we had it.

You always want to have the low-cost solution, and we have the low-cost solution and we feel good about it.

Great.

And then on non-national accounts, Todd, is there any particular vertical in there that's driving the business?

You know, Jeff, it's pretty broad recovery for us in the verticals we play in unitary.

So, like manufacturing, even schools are up year over year.

Low-rise office buildings.

And then sort of coming at it not from an end-market vertical but more sort of how we go to market, the emergency replacement initiative and all the investments we've made there in the new products and the same-day delivery, it's all paying dividends.

And we continue to -- we think we are gaining share.

We don't think -- the non-national account market is growing midteens, but that's what we are growing.

All right.

Thanks a lot.

Keith Hughes, SunTrust.

Just shifting back to commercial real quick, you talked about some of your backlog numbers early in the call.

Is some of the up-and-down that we see in the first half, is that driven more by units going to new construction of retail, or is this deferment or something to do with the normal replacement cycle that you would see?

It's more about planned replacement, Keith.

On the new construction side, as you well know, I'll say it for others on the call, we have longer visibility to that.

And once they -- for lack of a more eloquent phrase, once they are baked on the land and the construction starts, they don't really wave those off.

Where you sort of have in the ups and downs is planned replacement.

Okay.

And refrigeration, starting in the third quarter, we will have fully anniversaried all the issues in Australia with the [tax].

Is that correct?

Correct.

I'm hoping the words Australia refrigerant doesn't leave my mouth on the third-quarter call.

All right.

Congratulations on a good quarter.

Thanks.

Robert Barry, Susquehanna.

I'm sorry if I missed it, but the 2% volume in resi, did you break that out between the performance and the ALR and the RNC?

No, we didn't break volume out.

What we said was revenue in both businesses were up mid-single digits -- or both sides of the business were up mid-single digits.

Did you see a bounce-back in the RNC piece?

I know it was weighed down in the first quarter by weather.

We saw it bounce back some, but still below our overall 10% guide for the year.

So what we are counting on and expecting is -- and I think you see it in the builder confidence numbers is a big second half of the year.

And from permitting and from starts, I think we've seen the preconditions for that to happen.

Yes.

How you thinking about the pent-up demand equation given that kind of low volume number?

Especially given we are near record consumer confidence levels?

Well, I think pent-up demand is still the case.

I think there was some -- in Texas, which is a big market for us and for the industry, it rained the entire month of May.

And even beginning of June, it was still wet.

And the upper Midwest, which is a real swing area -- because it always gets hot in North Carolina.

The question isn't does it get hot in Chicago, does it get hot in Wisconsin.

And those places have just turned hot the last few weeks.

And so I step back and say if you had told me this weather pattern in a normal year without pent-up demand, I would've said all volume is going to be down, especially given the year we had last year.

But the fact that our unit volume is up a couple of points and we got strong price in mix and revenue is up mid-single digits, I think all of that is good news.

Got you.

And then maybe just lastly, I just wanted to check in on the share count guidance.

45 million weighted average -- I assume you will end the year then significantly below that number?

Actually, I think it will be slightly below that number, but for the full year will be approximately 45 million shares.

Right.

But the ending share count number, though, will be below 45.

Yes.

That's correct.

Short answer will be below -- sort of the math is right on our ASR, we got [70%] upfront.

We'll hit 30% when we settle out.

And then we'll also issue shares for incentive programs at the end of the year, and so that's sort of the high-level of that.

And the settling out, is that happening kind of evenly between 3Q and 4Q, or is it weighted?

They don't give us visibility to that.

It's just a requirement.

But what we will expect that it will be probably late third quarter, early fourth quarter when it's all settled.

Got you.

And what's a normal level of annual issuance to model?

Like, share issuance as an offset?

For dilution from share-based comp?

Yes.

I don't have the number off the top of my head.

We are drawing a blank.

We have too many other numbers in our head.

We'll get back to you with the number.

Okay.

Thanks, guys.

Sam Eisner, Goldman Sachs.

Just a quick question on the residential business.

You commented obviously about the Texas issues as well as the upper Midwest.

Can you talk about how much that was a headwind for you guys in the quarter maybe on a -- talking about days that you were able to be open throughout the course of the quarter or even just the year-on-year decrease in volume?

If I knew, I'd tell you.

It's sort of a tough one to quantify in a direct way.

You just know it's a headwind, and you track the order rates and you know sort of how you are down in these big markets.

And our -- we have a large, independent distributor that we sell through our allied brands in Texas, and they were down year over year.

And we see those kind of performances, you know weather had a big impact.

Got it.

And then regarding the $5 million of incremental mix, was any of that recognized in the first half of the year, or is that all second-half weighted?

We called out for residential that the mix was up 4%.

Excuse me -- price and mix was up 4%.

And we said the majority of that was mix, and a piece of that was that $5 million.

So short -- long way around the barn, more of the $5 million was in second -- more than half of the $5 million was in second quarter.

All right.

Great.

Thanks.

I'll hop back in queue.

Mark Douglass, Longbow Research.

Todd, you were talking about the mix in resi in the 13 to 14.

In prior quarters, a lot of it was in the premiums.

Are you still seeing the move into premium, it just got dwarfed by the 13 to 14?

I think that's true.

I also think part of the issue was -- or part of the point was last -- or last two years -- certainly last year, we came out with our ultimate home comfort system.

26-SEER unit, new control system, and really sort of pushed that hard.

I think we got a big bump last year, more than a normal-sized bump last year, on what our guys refer to as raising the ceiling of the mix, where second quarter this year was more about raising the floor of the mix.

And on mix on commercial, the negative (technical difficulty) negative mix to margins, is that mostly from the national accounts?

Is that how we think about that, or what drove the negative mix in commercial?

I think what drove the negative mix in commercial is sort of in the details of customers and what type of boxes they buy and what type of product that they buy.

And that's sort of code words for we sold as a percentage basis less of our sort of very high-end, highest-efficiency product line and more of our more standard-type units.

It wasn't an effect of VRF?

No.

VRF would be to December the side.

Thank you for taking my questions.

Shannon O'Callaghan, UBS.

Just on this planned replacement, the swinging around of this, the down 20% in the first quarter, the second quarter sounded like even month-to-month was pretty choppy and must have finished strong.

Is this different than the way you are used to that business operating?

Is there -- are the customers sort of waiting until the very end of the quarter or something to do things?

Or is that anything you've learned about kind of the current psychology around that that's leading to these kind of big swings?

Well, I think I'd say this.

I'd say commercial has always been highly cyclical.

When the market turns like it did in 2008, it's a marble fallng off the table.

So there is huge cyclicality in the business because planned replacement, they can defer.

I think what it reflects right now is sort of month-to-month thinking of some of these big retailers given the uncertainty of that segment of our economy.

And they and we know that these lower their operating costs and are good things for them to do if you have a two- or three-year horizon.

But some of these retailers are sort of pulling it back in, and I think that's what this reflects.

In terms of the end of the quarter, the way our business I think is similar to how their business and how people spend money, we tend to have a rush at the end of quarters, and we got some good news this quarter.

Okay.

And then on the restructuring and refrigeration, what's -- how does that benefit ramp in the back half, and then what's the carryover there in 2016?

Well, again, it's all in the guide.

But we have $2 million or $3 million of benefit this year from the restructuring actions we took in refrigeration and order of magnitude.

On an annualized basis, it's twice that.

So sort of another incremental $2 million or $3 million next year, year over year.

Okay.

All right.

Thanks, guys.

Julian Mitchell, Credit Suisse.

Thanks a lot.

There have been a lot of questions on US mix and so on.

So maybe just switching to Europe, a bunch of the Company's reporting last week seemed to be seeing better trends there.

Your own commercial business, I think, organically seems to have picked up a little bit as well.

Any more color you can provide?

Yes.

We are seeing what you referred to.

About 40%, 45% of what we do is in Europe is in France, and that market has appeared to rebound somewhat.

So we were up mid-single digits in constant FX.

We also saw some growth on a year-over-year basis in some of our North African and Turkey markets.

And so again, from a very tough 2014, we saw some pick-up.

But really the improvement has been in France.

Thanks.

And then just within your gross margin, you had a very good improvement in Q2.

Q1 had been down and last year was flat.

So I guess when you're looking forwards from here, do you think that that gross margin performance can be replicated or even improved upon?

I think the initiatives that we are taking around material cost reduction, around the factory benefits in Mexico, I think all those continue to provide fuel in the engine.

I think the swing will always (technical difficulty) commodities because sometimes commodities go the other way on you.

But when you have a quarter like we did this time where everything is in the right direction, you get a nice pop in gross margin.

Thanks.

And then lastly, the refrigeration restructuring effort, maybe talk a little bit about not so much the financial benefit or what have you, but the motive behind it.

I mean, I understand short-term those issues, but have you taken any slightly different view on the medium-term growth outlook assumption, and that's one reason why you've done this restructuring?

I don't think too much should be read into it in terms of longer-term views on the business.

We've had -- the Australian economy is -- we always talk about the Australian refrigerant because that's a big headline that we had to talk about.

But the underlying economy has been soft.

It's driven in big part by minerals and mining, and so it's been under pressure and we just needed to right-size the business.

And we came to the conclusion that we needed to do that, and we did.

Kysor/Warren, again, similar points that while we continue to grow in revenue there was some pruning that needed to be done there to help drive the profitability of the business, and we did it.

So I wouldn't read too much into it other than sort of normal corporate managing of the cost structure to have it be in line with profitability and revenue growth.

Great.

Thank you.

Walter Liptak, Global Hunter.

I wanted to go back to the SEER 14 mix again and just make sure that I'm understanding this right.

You know, I guess as you go into the third quarter in the upper Midwest, which I think is more of like a SEER 13 region, that's where you'll have some lower margins flowing through and that mix of SEER 14 plus coming back down a little bit.

Yes, I mean, I wasn't so much trying to -- I think that's probably true, but I wasn't trying to lead with that point.

I was just trying to lead with the peak of the summer selling season is where you get the cleanest read of what's happening with the SEER mix improvement.

And as you go into the furnace season, you're just selling fewer air conditioners, and it's, quite frankly, a less important metric.

Okay.

Yes, I get that.

But the regions that were hot in the second quarter sound like they were SEER 14 regions anyways, and that's probably a part of the reason why you had this -- the significant improvement in SEER 14 mix.

I think that's fair.

But just sort of parenthetically, you can -- we make decent money off 13 SEERs in Wisconsin and Chicago, and some of the Southern markets tend to be very competitive.

So I'm not worried about that we are going to have negative mix because we are selling air conditioners in Wisconsin; I hope we can sell as many there as we can.

Okay, all right.

Fair enough.

Just a question about the CapEx, you brought that down $5 million for 2015.

Was there a program that was lowered?

Or how should we think about that?

I think it just reflects operational execution, and things are taking little longer than we sort of had put in our plan.

And we just wanted to reflect it in the guidance.

But all the things are going to happen.

It's just some of the expense CapEx will be in January/February rather than November/December.

Okay.

Thank you.

Josh Pokrzywinski, Buckingham Research.

So, Todd, if you had to characterize this mix environment right now in resi -- and clearly you are starting to see the benefit of that 14-SEER adoption -- can you say how much progress we've made to what the market will look like on an underlying basis in 2016 and beyond?

Are we halfway there today?

Are we two-thirds of the way there today?

I guess it looks like it's clearly happening earlier.

I'm just trying to figure out how much of this we've kind of pulled from 2016 into 2015 in terms of the step-up.

Yes, well, I don't -- short answer is I'm not sure.

I think that's sort of tied to the question of how much 13 SEER is still in the channel and how much all of us still have between now and the end of the year.

But, what will happen in 2016 is the metrics we give won't be 14 SEER and above; it will be 15 SEER and above because 14 SEER all of a sudden becomes the new sort of minimum number that you are talking to in many parts of the country.

I think the bigger question around how the future environment is going to look is where the 14-SEER pricing in the South and Southwest shakes out at and where it stays at.

And just how far does it go down now that it becomes a new battleground.

And it really hasn't been tested yet because 13 SEER still remains the battleground even in the South because when a deal gets tough -- where everyone who has 13 SEER is going to lead with 13 SEER because that's still the most competitive product we have.

I'm optimistic in the $5 million residential mix uptick that we guided to reflects that optimism.

That's all going to shake out, but I don't think we'll know until we get into 2016 how it's all finally going to settle down.

Is it fair to see that you are seeing a good level of voluntary adoption there, i.e., there's still inventory in the channel but maybe not that price down effect yet?

That we are getting a little bit of the good and maybe not all of the bad yet?

That's probably fair.

Okay.

And then just on the national accounts business -- not to beat a dead horse here, but I remember some [wall] or make-up business from the first quarter that you said was spaced out more or less evenly over the rest of the year.

Maybe a little back-half weighted.

Is that how it played out in the quarter?

You took a bite of that push-out business but didn't make all of it up?

Or was 2Q kind of a bigger make-up quarter in that than you would've expected?

I think Q2 is probably a bigger make-up quarter than what we would've expected, number one.

Number two is I think my sort of role in color commentary that changes as I talk about this reflects the role in color commentary that our customers are giving us.

So it may sound like I'm on the one hand on the other hand, but what it just reflects is a changing dynamic in conversation with customers.

Got you.

Okay, that's helpful.

And then on the caution that you guys are seeing, I've heard pent-up replacement -- planned replacement push-outs.

It sounds like new square footage growth is also a bit of an impediment.

Which one is the bigger issue?

Because I guess deferrals don't get deferred forever, but maybe Walmart doesn't wake up and decide they need to add 5% to their store count either.

So just trying to understand how much of each of those dynamics is at play here.

You know, sort of in the sort of quarter-to-quarter color, sort of this role in color commentary I'm giving you is more about the planned replacements being pushed out.

Sort of the new-store construction six months out, we have pretty good visibility on that, and customers don't change much.

And the tone on new store construction -- is it more healthy or maybe pulling back a bit?

I think it's a mixed bag.

It's a mixed bag.

Some of the big retailers -- Walmart has been very public about what they are doing and that, but that's always been reflected in our numbers from the beginning of the year.

The color commentary that I'm giving is more the incremental, ignoring Walmart, and our commercial HVAC is -- we know what they are doing, and they are sort of broadly sticking to it.

It's sort of the other pieces of the pie.

Got you; understood.

All right.

Thank you.

Steve Tusa, JPMorgan.

Sorry; a quick follow-up.

What are you hedged into copper this year?

We are probably 85%, 90% hedged at this point.

That's about right.

No, what price?

We don't give that.

We don't give that.

That's a great question, but we are about 80% hedged, though.

Okay.

So, you gave it for next year, but you are not --?

We didn't give it for next year.

I think all I said for next year was -- I said when copper is at $2.50 to $2.60 like it is today, you get a running head start for next year.

And then I said in December we'll guide to a commodity.

So I'm not suggesting, say, 100% of next year is going to be $2.50 to $2.60.

I'm just reading the thermometer of what it says today and reflecting that's good news.

Got it.

It got you.

And then one last question to Jeff's point around -- I guess if you use the term overstocked or whatever it was, what are the mechanics of that?

Can you just talk about to the extent that you have some -- I wouldn't really deem it as extra 13 SEER because there's still demand for 13 SEER out there.

So what are the mechanics of how that plays out?

And it doesn't seem to me there should be any material financial impact.

I mean, more mix is -- more 14 SEER is a good thing.

So I guess what are the mechanics of that fundamentally and financially?

Yes, you know, it's a danger of answering a theoretical, so I was just sort of rolling with Jeff's question.

I think his broader question was if you knew how everybody was going to behave could you all have just gone directly to 14 SEER?

And that's what I was trying to answer.

On the question of 13 SEER, zero concern.

We -- the details are, we can -- people can sell 13 SEER until July of 2016.

So there's a long way to go between now and July 2016 in the South and Southwest.

And if we get there and it's not where we want it to be, then we have by then probably 220 PartsPlus stores and 10 or 15 regional distribution centers.

We have a great logistic network.

We'll just move the product where it needs to be moved.

Right.

So it's not like there is a write-down or anything like that.

It's -- the inventory is still good.

Yes.

We're not selling lettuce.

So the 13 SEER we have in the South, we can sell to you in a home in Connecticut or New York.

Right, okay.

Thanks a lot.

Appreciate it.

Thanks operator.

A few points to leave everybody with.

The Company posted record profits in the second quarter, with margin expansion and revenue growth at constant currency across all three businesses, which was great to see.

We expect further success in second half of 2015 and are well-positioned for another year of record margin and profit on strong revenue growth.

Thanks to everyone for joining us today.

Ladies and gentlemen, that does conclude your conference.

Thank you for your participation.

You may now disconnect.