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Lennox International Inc (NYSE:LII)
Q3 2019 Earnings Call
Oct 21, 2019, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Lennox International Third Quarter 2019 Earnings Call. [Operator Instructions] There will be a question-and-answer session at the end of the presentation. [Operator Instructions]

I would now like to turn the conference over to Steve Harrison, Vice President of Investor Relations. Please go ahead.

Steve L. Harrison -- Vice President of Investor Relations

Good morning. Thank you for joining us for this review of Lennox International's financial performance for the Third Quarter of 2019. 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.

To give everyone time to ask questions during the Q&A, please limit yourself to a couple of questions or follow-ups and requeue for any additional questions. In the earnings release we issued this morning, we have included the necessary reconciliation of the non-GAAP financial measures, that will be discussed to GAAP measures. All comparisons mentioned today are against the prior year period. You can find a direct link to the webcast of today's conference call on our website at www.lennoxinternational.com. The webcast will be archived on the 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 risk 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.

Before I turn the call over to Todd, I would like to announce the date of our Annual Investment Community Meeting, the event will be held the morning of Wednesday, December 18, in New York City. Please mark your calendars, invitations in more details will follow. The meeting will also be webcast.

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

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Thanks, Steve. Good morning, and thank you for joining us. Let me start with an overview on the third quarter. Our view on the rest of the year and provide some thoughts on 2020. For the Company overall in the third quarter, GAAP and adjusted revenue was $1.03 billion. GAAP revenue was up slightly, including 7% of headwind from the tornado and divestitures; 2% from the tornado and 5% from divestitures. Excluding the impact from divestitures, adjusted revenue was up 6%, including a 2% of negative impact from the tornado and set a new third quarter high. Foreign exchange was neutral to both GAAP and adjusted revenue.

GAAP operating income was $157 million, up 8%. GAAP EPS from continuing operations rose 11% to a third quarter record $2.94. On an adjusted basis, total segment profit was up 15% to a third quarter record $175 million and segment margin expanded 140 basis points to a third quarter record, up 17%. Adjusted EPS from continuing operations was up 26% to a third quarter record $3.34. In our Residential business revenue hit a new third quarter high of $638 million. Revenue was up 7% from the third quarter a year ago and which a tornado damaged a major manufacturing facility and disrupted our high-end business.

Revenue from the replacement business was up high-single digits, and revenue from new construction is up mid-single digits. Residential segment margin expanded 80 basis points to a third quarter record 19.8% and segment profit rose 12% to a third quarter record of $127 million. Residential business in the third quarter continue to face adverse weather conditions with cooler weather than last year in key swing regions and for the U.S. overall. This was a significant headwind to residential performance from the cooler and winter [Phonetic] weather of the second quarter.

Residential revenue was negatively impacted $23 million or 4% from business not recovered following the tornado. Segment profit was negatively impacted $12 million, offset by $16 million of insurance recovery for lost profits. The net $4 million benefit to segment profit was $3 million below our guidance. For the full year of 2019 we continue to expect $99 million of negative tornado impact to Residential revenue, a negative $54 million impact to segment profit, and insurance recovery for lost profits of $94 million. The resulting $40 million of net benefit to Residential segment profit in 2019 is unchanged.

For the fourth quarter we continue to expect an impact of approximately $14 million to revenue. We expect an $8 million negative impact on segment profit, offset by approximately $20 million of insurance recovery for lost profits, for net benefit to segment profit of $12 million in the quarter.

Taking a step back and looking at the big picture for both core and non-core related to the tornado, we continue to expect total insurance proceeds of approximately $372 million. We have received $262 million of that as of the end of third quarter, and we are working toward receiving a remainder by the end of 2019. The 2019 non-core gain expected for the difference in book value and replacement value of assets remains approximately $91 million or a benefit of approximately $1.73 per share to GAAP EPS. A tornado financial chart is posted on the front page of the Company website summarizing the guidance I just discussed.

Turning to Commercial in the third quarter, revenue was up 7% to $253 million. Commercial profit was up 5% to $47 million and segment margin was down 30 basis points to 18.6%. Commercial revenue in the third quarter was led by double-digit growth in National Account equipment business. We want 13 new National Account customers in the quarter across medical, fitness, entertainment, education, hospitality and retail end markets. Regional and local equipment revenue was up mid-single digits.

Breaking out the business in another way, commercial new construction revenue was up high-teens at constant currency and replacement revenue was up low-single digits, both planned and emergency replacement revenue were up low-single digits. Our VRF business was up double-digits in the third quarter. On the service side, Lennox National Account Service revenue was up mid-single digits. And Refrigeration for the third quarter adjusted revenue was flat at constant currency. North America revenue was up mid-single digits and Europe was down in single digits. Adjusted segment profit was down 10% to $20 million and margin was down 130 basis points to 13.9%.

Looking at the end of 2019, we're now in the heating season, and the fourth quarter is off to a nice start. We continue to expect top line growth of margin expansion year-over-year across each of our businesses to exit the year with strong momentum heading into 2020.

For 2020, a few thoughts. Setting aside the adverse weather impact, we saw in the summer months of 2019, underlying market conditions look solid, led by residential and then commercial. We have regained about 85% to 90% of the business impacted by the tornado, and now -- have now pivoted back to Company initiatives to win new market share in 2020 in the coming years. Many of the cost headwinds, we saw in 2019, flip the tailwinds in 2020.

We expect commodities to reverse from $20 million headwind this year to a benefit next year. Likewise, we expect freight to move from a $50 million headwind this year to a tailwind next year. As it stands today, we expect tariffs to still be a headwind in 2020, but less than a $10 million impact that we saw in 2019. We continue to take mitigating actions as well as -- as well to offset the tariff impact with price. Just as we capture price in 2019 for a 2% yield to full year, we plan to capture additional price in 2020. We will continue to make investments in distribution, expansion as well as information technology and research and development, but certainly plan to benefit from leveraging SG&A next year. And we will continue to drive our sourcing and engineering led cost reduction initiatives for similar order of magnitude savings as in prior years.

Finally, we plant stock repurchases to maintain our debt to EBITDA ratio of 1.5 to two times on a normalized basis. We will put numbers to all these elements for 2020 in our investment community meeting this December, but this provide some color on our current views of 2020.

Now let me turn it over to Joe.

Joseph W. Reitmeier -- Executive Vice President and Chief Financial Officer

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 third quarter, revenue from Residential Heating and Cooling was up 7% to a third quarter record $638 million. Volume was up 6%, price was up 1% and mix was flat. Foreign exchange was neutral. Residential profit was up 12% to a third quarter record $127 million. Segment margin expanded 80 basis points to a third quarter record 19.8%.

Segment profit was favorably impacted by a $4 million -- by a net $4 million of benefit from insurance proceeds for lost profits relative to negative tornado impact in the quarter, which was $3 million less than our guidance. Segment profit benefited from higher volume, favorable price, lower material costs, favorable warranty and tariff rebates for prior periods. Partial offsets included cooler weather, the tornado impact, lower factory efficiency and higher other product costs, unfavorable mix and higher distribution, freight and SG&A expenses.

Turning to our Commercial Heating and Cooling business, commercial revenue was up 7% to $253 million. Volume was up 4%, price was up 1% and mix was up 2% on the strength of national account growth. Foreign exchange was neutral to revenue. Commercial segment profit rose 5% to $47 million. Segment margin was down 30 basis points to 18.6%. Segment profit was favorably impacted by higher volume, favorable price and mix and sourcing and engineering led cost reductions. Offsets included higher commodity and other product costs, tariffs, lower factory efficiency and higher distribution, freight and SG&A expenses.

In the Refrigeration segment, adjusted revenue was $142 million down 2%. Foreign exchange had a negative 2% impact on revenue. Volume was up 1%, price was up 1% and mix was down 2%. Adjusted segment profit was $20 million down 10% and margin was 13.9%, down 130 basis points. Adjusted segment profit was impacted by lower factory efficiency, unfavorable mix, higher commodity and other product costs, tariffs at higher SG&A expenses. Partial offsets include higher volume, favorable price, sourcing and engineering led cost reductions and lower freight costs.

Regarding special items in the third quarter, the Company had net after-tax charges totaling $15.3 million, this included $5.9 million for the partial advance in the second quarter of 2019 of insurance recoveries related to lost profits. $4.8 million for restructuring activities, $2.7 million for other tax items and a net charge of $1.9 million for various other items. Corporate expenses were $18 million in the third quarter compared to $28 million in the prior year quarter. Overall, SG&A on an adjusted basis was $143 million flat with the prior year quarter.

Adjusted SG&A was 13.9% of adjusted revenue, down from 14.7% in the third quarter a year ago. Net cash from operations in the third quarter was approximately $235 million compared to $266 million in the prior year quarter. Capital expenditures, proceeds from the disposal of PP&E and proceeds of property damage totaled $24 million compared to $13 million in the prior year quarter. Free cash flow was $211 million compared to $253 million in the prior year quarter. The Company repurchased $150 million of stock and paid $30 million in dividends in the third quarter. Total debt was $1.45 billion at the end of September, and we ended the quarter with a debt to EBITDA ratio of $2.2 million. Cash and cash equivalents were $46 million ending the quarter.

Now turning to our guidance for the Company, overall for 2019, we're updating guidance for adjusted revenue growth from a range of 2% to 5% to a new range of 2% to 4%. We are updating GAAP EPS from continuing operations from a range of $11.91 to $12.51 to a new range of $10.65 to $10.95. This includes a non-cash pension settlement charge of approximately $28.9 million after-tax or approximately $0.73 a share that we expect to recognize in the fourth quarter of 2019. Similar to what we did in the second quarter, this pension settlement charge relates to an agreement we entered into with Pacific Life Insurance Company in October to annuitize $78 million of our defined benefit pension obligation. As part of this transaction, we also transferred $75 million in pension assets to Pacific Life. This event required a remeasurement of the pension plan and resulted in a non-cash $28.9 million after-tax settlement charge, we expect in the fourth quarter to write-off the related accumulated actuarial losses.

We continue to expect a pre-tax gain of $91 million in 2019 related to factory reconstruction cost and the associated gain from replacement value above book value. For adjusted EPS from continuing operations we are updating guidance from a range of $11.30 to $11.90 to a new range of $11.15 to $11.45.

Now, let me run through the other key points in our guidance assumptions and the puts and takes for 2019. First, the guidance elements we are updating. For price, we still expect a 2% yield for the full year, but with lower volumes through the summer season is now equates to $75 million versus the prior guidance of $80 million. Corporate expense is now expected to be approximately $85 million, down from our prior guidance of $90 million, primarily due to lower variable compensation. Free cash flow is now expected to be approximately $320 million for the year compared to guidance of $390 million. The change is due to approximately $15 million of lower earnings and $55 million of inventory.

Given the tight labor market for manufacturing employees, instead of reducing direct labor as is typical for a core summer, we decided to be more level loaded -- we decided to more level load production from the Iowa factory and pre-build some product for 2020, which will burn-off over the course of the year.

For the 2019 guidance elements that remain the same. We still expect a $25 million benefit from sourcing and engineering led cost reductions. We continue to expect $20 million -- a $20 million headwind on a full year basis from commodities. We still expect $15 million of headwind from freight and $10 million from tariffs. We continue to expect headwinds of $15 million for distribution investment and $15 million from SG&A. Net interest expense is still expected to be approximately $45 million, and we still expect an effective tax rate in the range of 22% to 23% on a adjusted basis for the full year, most likely on the low-end of that range. The weighted average diluted share count for the full year is still expected to be between $39 million to $40 million shares, which incorporates the $400 million of stock we repurchased this year. And finally we still look -- still plan approximately $155 million of capital expenditures, with $55 million of that funded from insurance proceeds.

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

Questions and Answers:

Operator

[Operator Instructions] And our first question is from the line of Julian Mitchell with Barclays. Please go ahead.

Julian Mitchell -- Barclays -- Analyst

Hi, good morning.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Hi, Julian.

Julian Mitchell -- Barclays -- Analyst

Hi. Maybe just a first question on the Residential business. Just give us some updates Todd on how happy you are with the commercial side of things, in terms of sales and market share traction and also within resi any updated thoughts on incremental margins over the next 12 or 18 months? You've got perhaps more efficient refreshed operations now in Marshalltown and some tailwinds or normalized cost environment. So just wanted how will that roll together, so overall resi incrementals?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

On the small sea commercial side, I think we're satisfied where we're at is, I'd put it. I think we're happy with the end markets, I mean the consumer still feel -- still strong adjusting for the tornado impact, while revenue in resi was up seven and we had negative four of tornado impacts, up 11, if you adjust for that. So I think the end markets still feel strong -- consumer still feel strong. And then what we guided at last call of recovering 85% to 90% of the tornado impact, that's still where we're at, that's where we'll end the year at in fourth quarter, we are a little less than that in third quarter if you go through all the math, more like 75% and we'll end the year at 85% to 90% of it recovered.

In terms of the drop through, I think everything you said is true. I think the numbers will be clouded by the fact that the $40 million of net insurance recovery was a one-time item in '19. But if you strip that off, the things you talked about are true. And then I'd lay on top of that, given some of the softness because of weather and second and third quarter we've taken some action on the SG&A side and cost containment as we go into 2020. And so I think that will help the margin drop through also.

Julian Mitchell -- Barclays -- Analyst

Thanks. And then my second and last question just around the Commercial segment capital we see, it lowered the end market outlook a touch for North America back on the last earnings call. Good revenue numbers today in commercial, I think particularly in the new construction or OE side. So maybe just give any updates about different verticals? We surprised by what's happening in Commercial, any color on backlogs?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Going into fourth quarter our backlogs up slightly in the Commercial segment. I mean we had a really good third quarter, but it was chunkiness of some large national accounts, as you saw in the script that it was driven more by new construction and replacement on growth, and again that just timing year-over-year differences. So pleasantly surprised in third quarter, again the verticals that are hanging in their most for us, believe it or not continue to be retail. It's a both build and replace small office buildings, so entertainment, theaters and light healthcare. So there is verticals continued to stand up and we were pleasantly surprised in the quarter.

Julian Mitchell -- Barclays -- Analyst

Great. Thank you.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Thanks.

Operator

Next we'll go to Jeff Hammond with KeyBanc Capital. Please go ahead.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Hey, good morning guys.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Hey, Jeff.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Just going back, I'm kind of the moving pieces with insurance recovery in the lost EBIT. So I guess of the $54 million of lost EBIT in '19 -- just given some of the share recapture that you're not getting, how much of that do you expect to get back ultimately and with some of the mix dynamics?

Joseph W. Reitmeier -- Executive Vice President and Chief Financial Officer

I would pausing to make sure I have thought about it that right way. I would -- out of the 54 for lost profits, I'm going to sort of fire from the hip and say I will look over a two-year period. So I look at what we lost in '18 and what we lost in '19 and we're going to get 70% [Phonetic]. We're going to get 85% to 90% of that back both on revenue and on profit. So I wouldn't look narrowly at the 54, I'd have to look at sort of the two years combined and say, we're going to get 75% or 85% to 90% of that back. That's average Steve?

Steve L. Harrison -- Vice President of Investor Relations

Yeah.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Okay. There is no mix dynamic from that being higher mix share that you're not getting fully back or...

Todd M. Bluedorn -- Chairman and Chief Executive Officer

No, I think over the longer term, the mix will be fine. I mean, we've got it all in 2020. I think there is some absorption and productivity issues that were buried in that 54, that may not come back, but it will be absence of bad and this is good, and this is one way to think about it.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Okay. And then just a couple on Refrigeration, one maybe just give us a view of the demand outlook into 2020? And I think you mentioned so manufacturing and efficiency just talk about what's going on there? Thanks.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Yes, I mean and Refrigeration on an end market, we were flat, and revenue was flat in third quarter. What we're seeing in North America as the market continues to be hanging in there, low-single digits, we were up mid-single digits for the quarter. Europe, we're seeing some slow down, specifically in Germany, where we have a process Cooling business where auto is a large vertical, and as everyone understands that slowing down. And even in our commercial HVAC business, which is predominantly France and Spain, we've seen some slowdown. So this continues to bubble along in North America, slowing down in Europe. And then I think there was a question about factory productivity. The issue that we're seeing in Resident and Refrigeration, and then also quite frankly in Commercial, is a very tight labor market where our factories are located at and Refrigeration in North America, it's Georgia, and Commercial, it's Arkansas. And in the product, the lack of improved efficiency year-over-year in the factory in large parts, driven by the labor scarcity, it's hard to find and hold on the folks and that's impacting what we can do in the factories around productivity.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Okay. Thanks, Todd.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Thanks, Jeff.

Operator

Next we'll go to the line of Ryan Merkel with William Blair. Please go ahead.

Ryan Merkel -- William Blair -- Analyst

Thanks. A couple of questions. So first, I just want to understand the resi profit performance a little bit better, since it's missed my model. So is the story simply lower absorption and unfavorable mix and that was offset by positive price cost? Is there anything else to think about?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

No, I mean, I have the Q&A here and you answered it. But I'll -- I'll rattle through its everybody here is attractive for me, I mean that the margins being down 300 basis points adjusted for the tornado, really two major drivers, you hit them, one is mix down year-over-year and a big driver of that is our entry level Allied business that has lower margins, was up over 20% in Q3, much less impacted by the tornado than what our Lennox business was and also some mix down quite frankly with some customers. And the second was factory productivity due to lack of absorption. Joe talked about on the cash side that we allowed the Marshalltown, Iowa factory to continue to throttle level load. But our other North America factories, we had to take down production because of Q2 and Q3, and we had pretty significant negative absorption that impacted margins, and those are the two major drivers.

Ryan Merkel -- William Blair -- Analyst

Got it. All right. Well, you sort of answered my next question. So we should be looking at the unfavorable mix as sort of a one-off this quarter? We wouldn't extrapolate that into 2020?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

I wouldn't extrapolate it into 2020. I think what we'll do is we're going to snap a new baseline and we'll move forward, and I think mix will improve, in fact our guide will be from mix to improve next year.

Ryan Merkel -- William Blair -- Analyst

Perfect. And then just lastly, maybe just a little color by geography would be helpful. I'm most interested in the Midwest and Southeast, if you can give us anything?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Yeah. The key swing regions where we saw the most impact from weather was the Northeast in the upper Midwest. And if you look at degree cooling days and swine August, where it really mattered, it was down about 10%, and that's sort of the swing areas Chicago up to Pennsylvania through Ohio up into the Northeast and those were down and had an impact on our revenue -- sort of on the flip side, you look at a state like Texas cooling degree days were up 9% in Q3 and our revenue was up 10%. So again, just like in second quarter where it's core revenue was down, unfortunately, we're more skewed toward the north and others and where we had warm weather -- revenue was up significantly.

Ryan Merkel -- William Blair -- Analyst

Perfect. Thanks.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Thanks.

Operator

Next is the line of Steve Tusa with J.P. Morgan. Please go ahead.

Stephen Tusa -- J.P. Morgan Securities -- Analyst

Hey guys, good morning.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Hey, Steve.

Stephen Tusa -- J.P. Morgan Securities -- Analyst

So I just want to kind of be clear on this resi margin dynamic. You're saying that there are things that will flip -- or at least turn next year, I mean, it sounds though like, it would have been worse, if you didn't run your factories and kind of level load over time. So shouldn't that be somewhat of a material headwind next year? So, I mean are we talking about more of a -- OK, this will improve off of a lower base, but not necessarily flip next year? Just trying to kind of understand what are the -- what are the kind of one-time items and on a kind of a net basis how should we think about this? Maybe just some color around, hey this on a net basis it should have been the margins would have been 50 basis points higher or something like that to give us some idea, given all the moving parts here for next year?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

So let me directly answer the absorption point. We did one factory that's accounts for about 25% of our hours and we level-loaded it -- more level loaded when we normally do. I would also tell you that, it's sort of it came down, it just didn't come down as much as the volume would have -- better stated, production was down year-over-year, but it wasn't down as much as the volume or the demand that we do it. And then the other 75%, which is our other three factories in North America, we took those down. And so sort of on a year-over-year basis, it's going to be more sort of avoidance of bad news and it's going to be having a tough comp year-over-year, if that makes sense. And then I think if I understood your question and I probably won't give you as much granularity as you might want, but if order magnitude -- if our margins were down 300 basis points in resi, year-over-year adjusting for tornado, order of magnitude about 40% -- 45% of that was mix, about 40%, 45% of that was factory productivity and then there were sort of nits and nats of other things that I won't bother to call out.

Stephen Tusa -- J.P. Morgan Securities -- Analyst

Got it. Okay, that's helpful. I guess when we kind of why are we -- have we kind of anniversaried the tornado comp? I mean, why are we still calling out kind of like lost profits and lost sales from this at this stage of the game?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Well, I mean, because we got it for 2019. We thought it would be sort of chicken shit halfway through the year to quit talking about it. So we want to talk about it going into 2020, but we gave full-year guidance we thought it was appropriate to continue to guide through the year.

Stephen Tusa -- J.P. Morgan Securities -- Analyst

Got it.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

That's number one. And number one -- number two is sort of the impact of the tornado then follow a calendar that 12 months afterwards, everything was completely gone. We guided at the beginning of the year or when the tornado happened that there was just going to be, order of magnitude and 18 month recovery and that's sort of the guidance that we're giving.

Stephen Tusa -- J.P. Morgan Securities -- Analyst

Okay. Any update on the consolidation dynamics over the next 12 months? Any update there on how you're viewing that or no real change?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

No real change.

Stephen Tusa -- J.P. Morgan Securities -- Analyst

HVAC consolidation?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Yeah, I mean, as you know I think the industry could benefit from consolidation, we'd love to participate and it's going to require others to sort of make a similar calculation, but we'd love to participate.

Stephen Tusa -- J.P. Morgan Securities -- Analyst

Got it. Okay. I appreciate the color. Thanks.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Thanks.

Operator

Next we'll go to Robert McCarthy with Stephens. Please go ahead.

Robert McCarthy -- Stephens Inc. -- Analyst

Good morning. Can you hear me?

Yeah, I can. Hi Rob.

Good. Well, I guess moving on from chicken shit, let's start with the fourth quarter dynamics were actually -- it might be doubling down. Could you talk maybe -- you talked about the strength in the fourth quarter and then also some of the dynamics around the season in terms of obviously anecdotally, I think cooling degree or excuse me heating degree days should probably be up given some of these episodic, that's we've been seeing so far in the month? And then also obviously the compare in association with the disruption last year? Can you talk about kind of the factors and how that's shaping up at least qualitatively for the fourth quarter in your residential business?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Yeah, I mean high level it's the elements that you talked about, I said we're off to a nice start, which is a calibrated word that we're halfway into the first month and things look good. But when you think about the months in the quarter, it's an essence a third a third and the third this year between October, November and December for us. And so there is still a lot of work to do. I think the important thing to get through in October, is this sort of bridge period. And what I mean by that is, it's not really cool enough for dealers to rush out by furnaces. So in some ways, they're buying on faith and sentiment, and the fact that we're off to a nice start. In the case of those dealers we're still confident and feel good about things as they go into the furnace selling season. And then as we get deeper into the furnace selling furnace selling season, November and certainly December, then it's more about the weather driving demand. But yeah, we feel pretty good about things, but there is still a long way to go for the quarter.

Robert McCarthy -- Stephens Inc. -- Analyst

As a follow-up, I mean you said some tantalizing things about obviously rise in growth Allied and obviously some of that's due to comps, tornado disruption. But you did cite anecdotally some trade-down there. Obviously the cycle still looks good because excluding kind of the tornado impact you're kind of comping to close to double digits. But are you seeing anything on the horizon, that's getting you incrementally nervous about consumer replacement as a whole?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

No, and I wouldn't. The Allied point was to mathematically -- explained the mix down. It's not to make a point that overall the consumers mixing down, it just explains our math, I mean, our growth in Allied's across the Board a great story. We're converting distributors from our competitors sort of all the noise of some of our competitors about investments that you're making, as the business going to be sold. How is it going to be handled, allows us to convert this distributors from others, competitors over to our business and that's all good news for us. It's just -- we don't sell Dave Lennox signature series, we don't sell 26 year in Allied sort of all the high-end products. But net-net it's incremental to our margins or EBIT margins and very good business for us and we're just doing very well there.

Robert McCarthy -- Stephens Inc. -- Analyst

So actually, it's more of a share story given the disruption we're seeing with some of your competitors, what these...

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Yeah, I mean yes, that's exactly. So we have the tornado overhang on Lennox, but our Allied business doesn't have that, and so all the initiatives that we've talked about are paying off there and we're gaining share.

Robert McCarthy -- Stephens Inc. -- Analyst

All right. The last question, I don't want to delve too much into political views, because probably not particularly helpful on a call for a variety of reasons. But given the fact that we could be seeing perhaps some more progressive administration and policies over the next, with the next election cycle, is there anything that's been on the drawing board for energy efficiency or increased standards of global warming being accelerated anything around code standards of practices that could be very stimulative to your business across the Board, or anything you'd cite?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

No. I think the point I'd make, and again, in the spirit of being a political is as a business person and certainly in our industry, having clarity and advance warning on regulations is critical. And so quite frankly you tell us the rule book can give us enough advance warning, we'll play by it and make -- make good money off it. The dangers when things change quickly and swing one way or another that causes problems. And so I would expect whatever new policies could put in place whoever wins the election. I would hope we'd have advanced warning and clarity of what the changes are going to be.

Robert McCarthy -- Stephens Inc. -- Analyst

Thanks for your time.

Prakash Bedapudi -- Executive Vice President and Chief Technology Officer

Thanks.

Operator

Next, we go to the line of Robert Barry with Buckingham Research. Please go ahead.

Robert Barry -- Buckingham Research -- Analyst

Hey guys, good morning.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Good morning.

Robert Barry -- Buckingham Research -- Analyst

I just wanted to follow up on a few earlier things. First you touched on the weather helping some places, hurting others. Was there a kind of net estimate for what it impacted you buy in the resi segment in the quarter?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

It's hard to know, Robert. We didn't even do that. So I don't think we did that in second quarter, net-net, it was degree cooling days were down about 5% or so for the quarter and especially the swing areas that that's where it hurt us.

Robert Barry -- Buckingham Research -- Analyst

Got it. And I know you -- I think touched on this briefly earlier, but the price in resi kind of stepping down from what was four last quarter to just one this quarter, what was driving that?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

I think that's just lapping on the price increase. We had a mid-year price increase last year, but we sort of jammed it hard and we lap that. And so now we're just, if you will comping against the beginning of the year price increase, which is a more traditional yield of 1, 1.5.

Robert Barry -- Buckingham Research -- Analyst

Got it. So when we think about price for 2020 you seem confident, you'll get some, but it sounds like that should be a pretty modest expectation, is that fair?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Well, I think, I go back two years where we had significant commodity deflation and the markets were strong. We still got a half a point of price. And so my expectations would be that's absolutely the floor, but I think we'll do better than that.

Robert Barry -- Buckingham Research -- Analyst

Got it. And then I just wanted to clarify how to read the comments about the $23 million impact from the tornado? On the resi revenue is that, how much you are still down since before the tornado?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Correct. I'm turning to people making sure that's the answer, yes.

Robert Barry -- Buckingham Research -- Analyst

So I think like last year you had a headwind of 50, you've clawed back an implicit 27, so you're still down 23?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Correct.

Robert Barry -- Buckingham Research -- Analyst

Got it. And so that 27 versus the 50 implies about just over 50% recovery?

Joseph W. Reitmeier -- Executive Vice President and Chief Financial Officer

I think if you add the two years together. I'm looking at the data, to make sure I got it right. I'm sorry, I don't have that...

Robert Barry -- Buckingham Research -- Analyst

This is the first year of the recovery?

Joseph W. Reitmeier -- Executive Vice President and Chief Financial Officer

Yeah, when I did the math on the third quarter and I added the two together, I got about 65%, so I'll double check the math and we'll make sure we gave it to you right.

Robert Barry -- Buckingham Research -- Analyst

Thanks. Well, just to clarify, when you say you expect to get 85% to 90% back over, how much time is that?

Joseph W. Reitmeier -- Executive Vice President and Chief Financial Officer

We're expecting as we go in the fourth quarter when you do the math, over two-year period. You look what we lost fourth quarter last year, what we lost fourth quarter of this year. And then, and then how much of it we clawed back, it will be about 85% to 90%.

Robert Barry -- Buckingham Research -- Analyst

Got it. And this $23 million, sorry for all the questions on this. The $23 million that is kind of the second year of lost impact here, is that going to be covered by insurance...

Joseph W. Reitmeier -- Executive Vice President and Chief Financial Officer

Yes.

Robert Barry -- Buckingham Research -- Analyst

Or at what point? Okay. So if next year you're still down 10%, 15%, like where do you just kind of snap the-line and it's just the insurance won't recover, won't pay, is that still up for debate?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Yeah. We're expecting to have full insurance recovery by the end of the year and we're in negotiations with them about what's transpired so far and then what we're projecting will happen in the future, and that's sort of all in the guide that we've given. Now -- so we'll look that through with our insurance providers who I assume are listening. In terms of our guidance, going into 2020 and Steve and I sort of talked a little bit about that, when we go in 2020, we're not going to talk about tornado anymore, we'll snap the line at the end of '19 on public guidance. And so we'll give revenue and we'll give EBIT and we'll talk about misses and over achievements and tornado won't come up after the end of the year.

Robert Barry -- Buckingham Research -- Analyst

Got it. And sorry, just one more. Do you know what year-to-date you're kind of ex tornado margin is -- in resi, I'm calculating like just above '18, but...

Todd M. Bluedorn -- Chairman and Chief Executive Officer

I'm turning the guys, we can get to that answer, Robert, I don't have that math right in front of me.

Robert Barry -- Buckingham Research -- Analyst

Yeah. Though I was just curious if your expectation would be that next year, whatever that number is, would that be up flat or down?

Joseph W. Reitmeier -- Executive Vice President and Chief Financial Officer

Our sense is, it should be up year-over-year.

Robert Barry -- Buckingham Research -- Analyst

All right. All right. Thanks a lot.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Okay. Thanks.

Operator

Next, we go to good Gautam Khanna from Cowen and Company. Please go ahead.

Gautam Khanna -- Cowen and Company -- Analyst

Hey, thanks. Good morning guys.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Good morning.

Joseph W. Reitmeier -- Executive Vice President and Chief Financial Officer

Good morning.

Gautam Khanna -- Cowen and Company -- Analyst

The couple of questions. First, I was wondering on parts plus rollouts, what's the expectation for the number, how many we done this year and what do you expect in next year?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Turning to some of the mix, I got the right number for this year. So on a year-to-date basis, we've done a handful this year sort of relatively flat, that we've opened a couple of stores, closed a couple of stores. As we go into 2020 we're still finalizing what we want to do for new store build. I think majority of new stores, next year most likely will be second half of the year. We're also aggressively just looking at, now that we're up to 200, how many stores we have to be...

Steve L. Harrison -- Vice President of Investor Relations

336.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Now they were up to -- around 240 store -- 240 stores were also sort of looking at what we should prune and what we should get out of and we've identified some stores that were that we're closing between now and the end of the year, because we're just not covering or not a handful stores, so there will be some sort of net eliminations and then some additional stores added.

Gautam Khanna -- Cowen and Company -- Analyst

Okay. In terms of the national account business in Commercial, what sort of is the pipeline of opportunity, there is still as robust as appear to have been going into the third quarter? Just curious like, what are the core indicators there?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Yeah, I mean as I called out earlier backlogs up slightly in our Commercial business when we entered the quarter it was up from memory, high single-digits. Customer is still strong, they're still spending money. I think it's -- I don't think I know this time of year, we do some business mostly planned replacement at this point, very little new construction -- far less new -- excuse me new construction. And they're looking toward the Christmas, many of our retail customers toward the Christmas selling season decide what they're going to do. So I think net-net it's still solid. I think it's less solid maybe than it was a year ago. I don't know about quarter-over-quarter because of the macroeconomic uncertainty. And so there is some risk there, but customers still feel pretty solid.

Gautam Khanna -- Cowen and Company -- Analyst

Okay. And just to round out your comment on pricing, getting some net price next year in resi, have you seen or do you anticipate any change in competitive behavior with Ingersoll splitting with Carrier, splitting what have you, just anything that you've seen or that you are starting to be concerned about incrementally?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

No, haven't seen any changes. Don't expect any changes on that dimension, I mean the people who -- maybe a part of a larger conglomerate or not, they understand that they need the price to offset commodity increases and labor shortages and all the thing, freight and tariffs and all the things we have to price for. And so -- we're confident, we're going to get price and I don't think the industry dynamics are going to change.

Gautam Khanna -- Cowen and Company -- Analyst

Okay. Joe one last one, Q4 tax rate?

Joseph W. Reitmeier -- Executive Vice President and Chief Financial Officer

Yes.

Gautam Khanna -- Cowen and Company -- Analyst

I'm just making sure we're confirming what do you guys implying there?

Joseph W. Reitmeier -- Executive Vice President and Chief Financial Officer

Yeah, for the full year, I think we'll be slightly above the 22% rate, but for the full year it will be closer to 22%. So that's what I would expect in the fourth quarter.

Gautam Khanna -- Cowen and Company -- Analyst

Thank you, guys. Appreciate it.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Thanks.

Operator

Next, we go to the line of Deepa Raghavan with Wells Fargo Securities. Please go ahead.

Deepa Raghavan -- Wells Fargo Securities -- Analyst

Hey, good morning. Couple of questions for me. So still a pretty wide range coming into Q4, especially since it's a nice start. Just curious what's embedded in the high-end versus low end, especially for residential growth? I mean your resi mix margins should get better, you're going into the seasonally margin in a higher margin furnace sales season. I guess where I'm trying to go this is -- is there any scenario where you might have lost some furnace demand because of the limited pre-buy that happened in spring? And also maybe you have this lower overall dealer recapture? Any impact, how do I think about the lower end versus higher end given your range?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Hi. Short answer to the back end of the question, no, we don't think we've lost, other than the tornado impact that we publicly called out over and over again. We're not losing furnace share, in fact, when we look at the numbers the public numbers in July and August we think, we think we're doing well and it's sort of tracking the way we'd expect it to. So I don't -- I don't think there is any concern there. I think the range on the high end, it's, we -- residential markets -- we start revenues a little stronger than what we think it might be or could be better stated the midpoint of our guidance adjusted. And so I think the real swing -- residential revenue, it's not really mix, it's residential revenue.

Deepa Raghavan -- Wells Fargo Securities -- Analyst

Got it. That's helpful. My follow-up is, Todd, how do we think about your market share gains going forward, just given your experience with this dealer recapture coming in slightly below expectation. Is the 50 bps of share gain, still what you're planning albeit from the lower base? Just curious if that's the case, what would -- what drives that confidence now and especially as you're lapping all these stronger market share gains that cumulatively you have accumulated cumulatively over the years? Thank you.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Yeah. Our guide will be half a point of market share. And I get confidence because of strategies that we focused on, continue to work, I think building out distribution, we've taken a pause for that and I suggested we'll take a bit more of a pause as we go into beginning of 2020, but that's still a strategy that works. The significant investments we're making on supporting our dealer network through e-commerce and prognosis and diagnostics with our iComfort controllers, all our abilities to support the deal are on our Lennox pros portal, all those things are still working, and all the investments we make in significant having to put the best product lines. So the strategy still work and we're making significant investments to growth and even in this tornado year, we've continued to make investments and we'll see those benefits in 2020. And so, there is a certain. And also just quite frankly, we've done our best, even though the numbers have sort of moved around the bit to be a bit of a doc right.

So what we publicly show is every -- you know -- or the sailings clear and we are gliding, but underneath the team has been pedaling very hard and pedaling very hard and going lots of work to offset the tornado, to take care of customers and work through compliance and manage inventory levels to get the right product to the right people and handle a lot of negative phone calls. All that's now goes away because we have the product we can support, everybody, and all of a sudden you snap a line and you're back on the offense, rather than on the defense and that's now behind us and so we're doing all the work now, quite frankly with many of our customers to convert new dealers to win in 2020, and we're focused on doing that. Thanks.

Operator

Next we'll go to Nicole DeBlase with Deutsche Bank. Please go ahead.

Nicole DeBlase -- Deutsche Bank -- Analyst

Yeah. Thanks good morning.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Hey, Nicole.

Nicole DeBlase -- Deutsche Bank -- Analyst

Hey. So I guess just two questions around margins into 4Q. On the Commercial segment, I think the expectation was for a return to year-on-year expansion in 3Q, you kind of talked about the reasons why we didn't see that. But can we see commercial return to year on year margin expansion in the fourth quarter? And then, similar question with Refrigeration since the comp gets so easy?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Yeah, we expect both commercial and refrigeration margins to be up year-over-year in fourth quarter.

Nicole DeBlase -- Deutsche Bank -- Analyst

Okay, got it. That's helpful. And then around price cost, I think you guys had a, like a $17 million positive impact in the second quarter and you expected that to be a high watermark, can you just give us a sense of what the price cost impact to us for 3Q and whether it steps down or remain similar in the fourth quarter?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

I don't have that number handy, so I'm turning to Steve, to see if he has it. I think the short answer is, the price element or price cost will be roughly the same in the third quarter -- third and fourth quarter. And then the impact from commodities continues to trail-off in fourth quarter. So my guess is, we might even be a little bit more positive price cost in fourth quarter, than what we were in third quarter.

Nicole DeBlase -- Deutsche Bank -- Analyst

Okay, got it. Thanks, I'll pass it on.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Okay.

Operator

Next, we go to line of Jeff Sprague with Vertical Research Partners. Please go ahead.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Thank you. Good morning, guys.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Hi, Jeff.

Joseph W. Reitmeier -- Executive Vice President and Chief Financial Officer

Good morning, Jeff.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Hey, just two quick ones from me. First I appreciate kind of moving on from the tornado, but if you end up having residual insurance recoveries, kind of just cleaning up the loose ends, will you disclose what those, what is know what those are in 2020?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Absolutely. Yes, I mean we're going to be completely transparent on the insurance, we won't pad our number of insurance, we'll let you know.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Great. I appreciate that. And then just on the free cash flow, $70 million cut on tenant and a $10 million net income kind of the midpoint, is that $60 million all the inventory we're talking about or is there something else going on there?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Yeah, I mean when we -- we lowered the cash guide from $390 million to $320 million as Joe said in his call, I think he said this in his call it's $15 million of that is from lower earnings. So just we're making less money because the earnings went down, and then $55 million was from the inventory and then as Joe talked about that's tied to the tight labor market, it's having more level loaded production of Marshalltown or Iowa factory. And then -- because typically what we would have done would have been or the plate the textbook if you manage just purely for working capital would have been -- we would have throttle down in August, and then we would have had to throttle back up in January -- December, January it start getting ready for the cooling season, to union workforce and its tight labor market. And so the thought and it's fragile because we just got everything up and running -- the thought of ramping down, having everyone bid out on new jobs reshuffling everybody. And then three months later ramping back up, finding workers reshuffling all the union jobs again, just seems so disruptive to the business. And so the -- and we're not making latest, and so everything we're building -- we're just building a three or four months early. So one way to think about this is everything being equaled. Cash -- because of inventory will go down by $55 million in '19, but everything being equal, whatever you had in your model will go up by $55 million in 2020 as we burn-off that inventory.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

And just thinking about kind of the rebuilt footprint, if you will. I mean you're -- your inventory turns were drifting down a little bit before we got the tornado, obviously they're lower now, on all this disruption. But where do you think you can get your turns to -- once we kind of stabilize everything?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Well, we're going to continue to focus on it, I mean, I haven't publicly given an inventory target or a return target. I think it's, I tend to think about it more as -- it's a competitive weapon for us to build our distribution, to build our part stores. We want to keep our turns relatively flat or slightly improving, we certainly don't want them deteriorating like they have been over the last year because it's tornado. But when the cost of debt is so cheap, if we can gain, if it's a driver of gaining half a point of market share and we can built when new customers with inventory as a distributor product business, we're going to focus on that. So short answer is, we haven't publicly given the target. But, and we think about it, but I think -- more in the whole context of total shareholder return.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Great. Thanks for the color.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Thanks.

Operator

Next, we go to Joe Ritchie with Goldman Sachs. Please go ahead.

Joseph Ritchie -- Goldman Sachs -- Analyst

Thanks. Good morning guys.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Good morning.

Joseph Ritchie -- Goldman Sachs -- Analyst

So my first question is just on the commodity tailwind that you alluded to earlier in your prepared comments, Todd. So just any color that you can provide us on how much of the -- how much of your commodity tailwind next year is going to be copper and whether you're locking in a certain percentage of that this year?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

When the commodities that we buy in order of importance of steel, copper and aluminum, and steel we have some fixed pricing, but most of it's variable, tied to market pricing during the prior quarter that we think at a discount on. Copper and then aluminum we hedge or tactically use forward contracts. And 12 months out, we're about 50% hedged, and so we're -- I don't know the exact number, but above 50% hedged. I think at this point for 2020, that we're locking in some of the benefits already.

Joseph Ritchie -- Goldman Sachs -- Analyst

Got it. Okay, that's helpful. And then just maybe touching on freight a little bit, any qualitative comments you can talk about on obviously a $15 million headwind this year, but what you're seeing in the freight market and how that could swing potentially next year?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

A couple of things, one is, we made some system investments in our freight transportation to have better visibility on freight, and I think that's going to help us. I think more fundamental is a softening in the freight market overall, and I think we'll be beneficiaries of that as others aren't. So the thinking is, we're in a process and in negotiating rates for next year. And so we'll know more as we negotiate those rates. But we look at spot pricing, what's happening in the marketplace where it was a year ago, it reflects to slowdown in some segments of the economy, auto, for example, which is a major driver of freight rates in North America, and we think we'll be a beneficiary of that.

Joseph Ritchie -- Goldman Sachs -- Analyst

And could you just quickly remind us how much of your freight cost is spot versus contracted?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

I don't think I've ever publicly said that, if I had -- guess I'd say, it's 75% contract, 25% spot. But that's a bit of a wild-ass guess.

Joseph Ritchie -- Goldman Sachs -- Analyst

Okay. Thanks for the color.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

I feel like President Trump has sworn twice in a conference call.

Joseph Ritchie -- Goldman Sachs -- Analyst

I'll get back in queue. Thanks again.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Thanks.

Operator

Next, we go to Josh Pokrzywinski with Morgan Stanley. Please go ahead.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Hi, good morning guys.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Hi, Josh.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

I was wondering if you could help out a little bit with the sequential dynamic on mix and resi. So I understand whether kind of played a role in both quarters, obviously at a little bit more time to get your feet underneath you? But anything specifically that we should read into kind of the 2Q to 3Q margin progression? Anything about the market that was heavier on the mix side or would have shown up in one quarter versus another? And maybe help kind of triangulate that dynamic?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

You know, I mean I think we had some mix headwinds last quarter or two. And so I don't, I don't think it was, we had positive mix last year. I don't think we had -- I think we had negative mix last quarter also similar dynamics. It just didn't rise to the level that we spent a whole lot of time talking about it. So, no, I think the other piece would be the part that I called out, that Allied growth was dramatic this quarter and that's just a timing of new distributors that they signed on and when they got the business. And so I think it's, I think it's more about Allied than anything that was happening in Lennox.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Got it. And would price cost have been better sequentially, I know you probably don't want to begin it to have the long-term. Just I would imagine directionally though, that was probably better?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

I think price cost is better in second quarter than third quarter, because we hadn't lap the mid year price increase, yet. So I think costs were better in third quarter than second quarter, but from memory, we had 4% of price in resi last quarter and we have a little bit over 1% this quarter on a year-over-year basis.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Got it. And then just one last one from me. I mean we hear a lot about good amount of inventory being out there in the channel, more competitively than necessarily something specific to Lennox, but has that it at all kind of impair the ability to regain share that maybe there is just too much inventory to go after folks this quarter and should that normalize in the next year and make the work easier?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

I would broaden semantically, I'll agree with you but I'll broaden the answer a little bit just say, it's always tougher to gain share in a soft market, than a more robust market. And so certainly even more so in second quarter than in third quarter, that hindered some of the gaining back some of the customer business, because of this tougher to do that, in a down market, because the other guys is focused, as you are hanging on the things. And again as Robert, I went back and forth, I mean, where we're not to the 85% yet, but our guide is that in fourth quarter we back to have 85% and 90% of the lost revenue gain back and they were all in the 2020.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Understood. Appreciate the color.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Thanks, Josh.

Operator

Next, we go to the line of John Walsh with Credit Suisse. Please go ahead.

John Walsh -- Credit Suisse -- Analyst

Hi, good morning. So a lot of ground covered just maybe finer points on a few questions. As we think about the free cash flow bridge into next year. I just want to make sure we're understanding it or I'm understanding it correctly. But we're going to have -- we had from last quarter some push out of capex that went from '19 into '20. And then we're going to have this kind of inventory dynamic from this quarter, anything else to be mindful -- were those the two big moving pieces of the bridge?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

I think those are the two moving pieces of the bridge, I'm looking at Joe to make some -- those are the big pieces you got.

John Walsh -- Credit Suisse -- Analyst

Okay. And then I guess also around the earlier question about refrigeration margins, you do have the easy comp, anymore finer point you can put on that? Should we think about normal sequential decrementals or do you want to kind of throw a range out there just to help with the modeling because it can move around?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

For Refrigeration?

John Walsh -- Credit Suisse -- Analyst

Correct, yeah, for Q4.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Yeah. No, it's the short answer, sorry, John. Again, I think as you said, we had a tough -- we have a much easier comp or we have an easy comp over last year. And we think the margins are going to be up in fourth quarter even on relatively flat revenue.

John Walsh -- Credit Suisse -- Analyst

Got you. And then maybe just one last one here from a high level, as you think about the regulatory environment, a couple of questions earlier on that. I mean should we just think about it as kind of a steady drumbeat of kind of change pushing toward higher efficiency than really anything on the horizon that might be a step function change? Is that the correct way to think about it?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

I mean, that's how we think about it, I mean I think anything is possible. But certainly the way the industry has worked with a few minor exceptions over the last 30, 40 years has been a constant increase in efficiency, a constant improvement and the type of refrigerant that we use. And we typically have five, I think by large four years that we have to have advanced warning, and sometimes, oftentimes we have more than that. And again, as long as we know, we can work through the technology with our supplier partners to do what we need to do.

John Walsh -- Credit Suisse -- Analyst

All right. I appreciate it.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Yeah. Thanks.

John Walsh -- Credit Suisse -- Analyst

All right. Thank you.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Thanks.

Operator

Next we'll go to Nigel Coe with Wolfe Research. Please go ahead.

Nigel Coe -- Wolfe Research -- Analyst

Thanks guys. Good morning. Thanks for the question. Hey, so adjusted, I mean, I hate to use the word tornado again, I think we're already at record levels here. But adjusting for the lost market share in 3Q last year, 3Q this year. So roughly 3% like-for-like growth in residential. Number one, is that kind of like in line with what you're thinking? How does that compared to the markets and I'm not sure actually -- what you thought the actual market did. And if you did, I'm sorry for missing it, but how is that 3% compared to the market?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

I'm not sure what the market is going to do, I think that, I have some math down here somewhere. But when I think about the year, this sort of the two-year growth, it's about 4%, 5% revenue growth over a two-year period. And that I think that's obviously less than the market, but that reflects the share loss that we got because it's tornado.

Nigel Coe -- Wolfe Research -- Analyst

Okay, but you think, would you think 3% would be better than the market this quarter? I mean, I think most people would see this going to be factor down this quarter?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

I think we're going to see. Watsco announced earlier, we're certainly in line with them.

Nigel Coe -- Wolfe Research -- Analyst

Yeah. Okay.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

And then we'll see what the others do.

Nigel Coe -- Wolfe Research -- Analyst

When I just go back to the highlights, performance 20% up for highlights and it looks like the core Lennox was probably flattish, that differential between the two brands is that's what we've seen in the past, or I mean, again, just thinking about this potential mix shift with the consumer, but is that differential unusual in time?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Yeah, I mean, but again I think what -- I mean it reflects two things, it reflects the tornado impact primarily in the Lennox brand and sort of all the disruption associated with that. And then it shows the lumpiness of selling through independent distribution, and so when Allied gained shares because they have converted a large distributor and significant share accrues with that. And so being up 20% in the quarter just reflects the timing of converting distributors.

Nigel Coe -- Wolfe Research -- Analyst

Okay. And then a final one for me. The commercial markets is obviously a lot of bull, bear dues on -- on that market, more bears than bulls. What is your view as we go into 2020 on commercial construction and commercial HVAC? Flat backlogs you had an easy comp this quarter compared to last quarter, but how do you think about that market in 2020?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

We'll true everything up in December. I think it's, I think flat sort of the best scenario we can think off. But we'll give better guidance when we get closer to the -- at the December Analyst Day.

Nigel Coe -- Wolfe Research -- Analyst

Okay. Thank you very much.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Thanks.

Operator

And our final question is a follow-up from Steve Tusa with J.P. Morgan. Please go ahead.

Stephen Tusa -- J.P. Morgan Securities -- Analyst

Hi guys, sorry, sorry for the follow-up. I just listening to kind of all the puts and takes and just kind of like -- looking at the model a bit. With the insurance dynamics and then all the other kind of nits and nats that you highlighted. Can you guys -- do you think you'll be able to kind of grow earnings in 2020? I mean is that kind of a base case assumption that you will grow earnings in 2020?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Well, I mean, let me just refresh the math for others. For 2020, we've to adjust the $40 million net benefit for insurance recovery -- that was above lost profits for '19, so that means of operationally were $40 million better than, than we have flat profits year-over-year. Short answer is our targets to look to grow earnings, but we'll guide all that on the 2020 call.

Stephen Tusa -- J.P. Morgan Securities -- Analyst

Okay. And then one last one, just on resi, is an unreasonable way to look at it, to look at kind of the 2017 base? And then just kind of assume where we're going to -- where we're going to assume on growth for 2020? And then take those two and apply like a 30% to 35% incremental margin on that? Or is the business somehow meaningfully different? And there will be different headwinds and tailwinds on kind of that -- kind of just taking the tornado impacts out entirely? Is that a bad way to look at it?

Todd M. Bluedorn -- Chairman and Chief Executive Officer

I mean, the way I would build the model would -- I would do it that way. I would take out all the tornado stuff, I would look at '17 as a base case and then I would look at the 2020 revenue. I think, I might have a closer to 30% than 35%. But I would start there.

Stephen Tusa -- J.P. Morgan Securities -- Analyst

Excellent. All right. Thanks for the color guys. Appreciate it as always.

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Thanks.

Operator

And we'll be turning the conference back to you Mr. Harrison.

Steve L. Harrison -- Vice President of Investor Relations

Okay. That's my biggest compliment of this call as we call Steve Harrison, so thank you. To wrap up, as we move into the heating season, the fourth quarter is off to a solid start, and we look forward to a strong finish to the year. The residential market continues to look robust, weather aside, commodity costs are trending down for more price cost benefit moving forward. And the investments we have made in products and distribution set us up well for 2020. I want to thank everyone for joining us.

Operator

[Operator Closing Remarks]

Duration: 66 minutes

Call participants:

Steve L. Harrison -- Vice President of Investor Relations

Todd M. Bluedorn -- Chairman and Chief Executive Officer

Joseph W. Reitmeier -- Executive Vice President and Chief Financial Officer

Prakash Bedapudi -- Executive Vice President and Chief Technology Officer

Julian Mitchell -- Barclays -- Analyst

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Ryan Merkel -- William Blair -- Analyst

Stephen Tusa -- J.P. Morgan Securities -- Analyst

Robert McCarthy -- Stephens Inc. -- Analyst

Robert Barry -- Buckingham Research -- Analyst

Gautam Khanna -- Cowen and Company -- Analyst

Deepa Raghavan -- Wells Fargo Securities -- Analyst

Nicole DeBlase -- Deutsche Bank -- Analyst

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Joseph Ritchie -- Goldman Sachs -- Analyst

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

John Walsh -- Credit Suisse -- Analyst

Nigel Coe -- Wolfe Research -- Analyst

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