Earnings Call: Q4 2018

Feb 5, 2019

Ladies and gentlemen, thank you for standing by. Welcome to the Lennox International 4th Quarter 2018 Earnings Conference Call. At the request of your host, all lines are in a listen only mode. There will be a question and answer session at the end of the presentation. As a reminder, this call is being recorded. I would now like to turn the conference over to Steve Harrison, Vice President of Investor Relations. Please go ahead. Good morning. Thank you for joining us for this review of Lennox International's financial performance for the Q4 and full year 2018. Here today with Chairman and CEO, Todd Bluedorn and CFO, Joe Reitmeier. Todd will review key points for the quarter year, and Joe will take you through the company's financial performance and outlook. To give everyone time to ask questions during the Q and A, please limit yourself to a couple of questions or follow ups and re queue 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 atwww.lennoxinternational.com. The webcast will also be archived on the site for replay. I'd like to remind everyone that in the course of this call, to give you a better understanding of our operations, we will be making certain forward looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Lennox International's publicly available filings with the SEC. The company disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information, future events or otherwise. Now let me turn the call over to Chairman and CEO, Todd Bluedorn. Thanks, Steve. Good morning, everyone, and thanks for joining us. Let me start with a review of 2018 overall and then discuss some Q4 highlights and then thoughts on 2019. Lennox International posted another record year in 2018 as the company set new highs for revenue, operating margin, profit and cash generation. While working through the challenges from the tornado damage at our manufacturing facility in Iowa and continuing to focus our business portfolio with the divestitures of Australia, Asia and South America Refrigeration businesses. The GAAP financials we discuss today have the impact from the divestitures in the numbers. Adjusted financials have the impact out of the numbers to present a clearer view on our remaining Refrigeration businesses in North America and Europe. Company revenues for 2018 on a GAAP basis was a record $3,880,000,000 up 1%, including the impact from the divestitures in the tornado. On an adjusted basis for 2018, revenue was up 4%. The tornado had a negative 3% impact on revenue growth for the full year. GAAP operating income rose 3% to a record 510,000,000 dollars GAAP EPS from continuing operations was up 22% to a record 8.77 dollars On an adjusted basis, total segment profit rose 6% to a record $540,000,000 and total segment margin expanded 30 basis points to a new high of 14.2%. Adjusted Adjusted EPS from continuing operations was up 20% to a record 9 point segments for the year. Residential established new highs for revenue, margin and profit. Segment revenue rose 4%, including a negative 6% impact from the tornado. Segment profit rose 7%, including a negative 11% net impact from the tornado, and segment margin expanded 50 basis points to 18%, including a negative 70 basis points of net impact from the tornado. Our commercial business set new records for revenue and profit for the year. Commercial revenue rose 7%, profit was up 1% and segment margin was down 90 basis points to 15.3%, impacted by labor inefficiencies and lower factory productivity as well as other product costs. We expect these factors to be largely behind us in the Q1 of 2019 and margins to expand in 2019. 19. In North America, commercial equipment revenue was up high single digits. Replacement revenue was up high single digits and new construction was up mid single digits at constant currency. Looking at the business another way, revenue from regional and local business was up low double digits. National accounts national account equipment revenue was up mid single digits for the year, and the company won 25 new national account customers across diverse verticals in 2018. On the service side, Lennox national account service revenue was up more than 20% for the year. In Europe, commercial HVAC revenue was down low double digits at constant currency. Turning to Refrigeration. Before I get into the financials, let me talk about the planned divestiture of our KysorWarren business. We are well along in the process and expect the sale to close in the Q1 of this year. As was the case with our other divestitures, this enables us to focus on Refrigeration businesses where we have strong market positions and that fit our growth profiles. The businesses that remain are our Heatcraft business in North America and our European Refrigeration business. In 2019, this segment will also include our Europe Commercial HVAC business as we manage that in the Europe Refrigeration together in the region. These are all strong businesses for us, and they are well positioned to capitalize on opportunities in respective markets. On our website, we have posted reclassified Commercial and Refrigeration segment revenue and profit for 2018 by quarter to reflect these changes so you can adjust your models accordingly. Regarding Refrigeration Financials, adjusted revenue was up 1% for the year. Segment margin was down 30 basis points to 12% and profit was down 1%. Regionally, at constant currency, North America revenue was low down low single digits. Revenue from Kaiser Warren, the business being divested, was down, while our Heatcraft business in North America was up mid single digits. Europe Refrigeration revenue was up mid teens for the year. Turning to the Q4. Company revenue on a GAAP and adjusted basis was $844,000,000 GAAP revenue at constant currency was down 4%, including the impact from divestitures in the tornado. Adjusted revenue, excluding the impact from divestitures, was up 1% at constant currency. The tornado had a negative 8% impact on revenue growth in the quarter. GAAP operating income rose 12% to a 4th quarter record $116,000,000 GAAP EPS from continuing operations was up 82% to 4th quarter record of $1.86 On an adjusted basis, total segment profit rose 7% to a 4th quarter record of 110,000,000 dollars Total segment margin expanded 70 basis points to a new 4th quarter high of 13%. Adjusted EPS from continuing operations rose 18% to a 4th quarter record of $1.93 Looking at our business segments for the 4th quarter. Residential revenue was down 3%, including a negative 14% impact from the tornado. Segment profit rose 7%, including a negative 17% net impact from the tornado. And segment margin expanded 170 basis points to 4th quarter record 17.7%, including a negative 10 basis points of net impact from the tornado. In commercial for the 4th quarter, revenue set a new 4th quarter record and was up 9% atconstantcurrency on strong and broad growth in North America. Segment profit was down 7% as margins declined 2 40 basis points to 15% due to the timing of other product costs in the quarter as well as labor inefficiencies and lower factory productivity. North America commercial equipment revenue was up high single digits. Replacement revenue was up high single digits. New construction was up low double digits at constant currency. Looking at the business another way, revenue from regional and local business was up high single digits, National account revenue was up low double digits in the quarter. On the service side, Lennox National account services revenue was up more than 20%. In Europe, commercial HVAC revenue was down mid single digits at constant currency. In Refrigeration for the 4th quarter, revenue was up 1% at constant currency. Regionally, North America revenue was down low single digits with Kaiser Warren revenue down and Heatcraft revenue up high single digits. Europe Refrigeration revenue was up midteens for the quarter at constant currency. Refrigeration profit was down 25%, and segment margin declined 300 basis points to 9.2% in the quarter as we had some unfavorable mix within our Heatcraft and Europe businesses as well as the timing of certain expenses and other product in the quarter. We expect organic margin expansion to resume in 2019 and to be up for the year. Looking ahead for the company overall in 2019, we are reiterating our revenue and EPS guidance. The first quarter is off to a solid start, and the cold weather certainly has helped. We remain on track to meet to either meet or exceed the tornado recovery plan discussed at our Investment Community Meeting in October. Across our 3 residential factories, we are back to full production capability for cooling products as we enter 2019 and expect to be there for heating products in the Q1. We are working aggressively to fully refill our distribution channel and are taking back share that was borrowed from us last year. Our current view on the tornado financial impact does not move much from what we talked about in December, but let me provide an update for the Q4 actuals and what is currently expected for 2019. First big picture, we now expect total insurance proceeds of approximately $356,000,000 up from $347,000,000 previously. We received $124,000,000 of that in 2018 and expect approximately $232,000,000 in 2019. The non core gain expected for the difference in book value and replacement value of assets is now $120,000,000 compared to $132,000,000 previously due to lower estimated construction costs. From a core perspective in the 4th quarter, the tornado impact on revenue was $69,000,000 dollars 4,000,000 more than estimated, and the tornado impact on segment profit was $40,000,000 $2,000,000 more than estimated, which we will recover from insurance in 2019. From a core perspective for 2019, the negative tornado impact is still expected to be $85,000,000 on revenue and the negative impact on profit is now expected to be $43,000,000 up from $35,000,000 previously. Insurance recovery is now expected to be $83,000,000 up from $73,000,000 and the net profit is now expected to be $40,000,000 up from $38,000,000 A lot there. Looking at the tornado by quarter in 2019, for the $85,000,000 of revenue and $43,000,000 of profit impact, we expect approximately 50% of that in the 1st quarter, 25% in the second quarter and 25% in the third quarter. We have posted a tornado financial update chart on our website with the details reflecting the prior estimates and the current view. 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 full year, starting with Residential Heating and Cooling. In the Q4, revenue from residential heating and cooling was $461,000,000 down 3%. Volume was down 4%, price was up 3% and mix was down 2%, with foreign exchange neutral to revenue. Residential profit was $82,000,000 up 7%. Segment margin was a 4th quarter record 17.7%, up 170 basis points. Segment profit was favorably impacted by $27,000,000 of tornado insurance proceeds for the Q3 loss profits, favorable price, sourcing and engineering led cost reductions and factory productivity. Partial offsets include $40,000,000 of negative tornado impact from the 4th quarter, lower volume, unfavorable mix, unfavorable foreign exchange, higher commodity, tariff, freight and other product costs, distribution investments and higher SG and A. For the full year, residential segment revenue was a record $2,230,000,000 up 4%. Volume was up 2%, price was up 2% and mix was flat. Foreign exchange was neutral to revenue. Residential profit was a record $399,000,000 up 7%. Segment margin was a record 18%, up 50 basis points. Now turning to our commercial heating and cooling business. Commercial revenue was a 4th quarter record $270,000,000 up 8%. Volume was up 4%, price was up 1% and mix was up 4%. Foreign exchange had a negative 1% impact on revenue. Commercial segment profit was $41,000,000 down 7%. Segment margin was 15%, down 2 40 basis points. Segment profit was impacted by lower factory productivity and higher other product costs, higher commodity and freight costs and higher SG and A. Partial offsets included higher volume, favorable price and mix and sourcing and engineering led cost reductions. For the full year, commercial revenue was a record $1,040,000,000 up 7%. Volume was up 5%, price was up 1% and mix was up 1%. Foreign exchange was neutral to revenue. Segment profit was a record $160,000,000 up 1%, and segment margin was 15.3%, down 90 basis points. In our Refrigeration segment, revenue was flat in the 4th quarter at $113,000,000 Volume was up 3%, price was up 2% and mix was down 4%. Foreign exchange had a negative 1% impact on revenue. Refrigeration segment profit was $10,000,000 down 25%. Segment margin was 9.2%, down 3 10 basis points. Segment profit was impacted by unfavorable mix, higher commodity, freight, distribution and other product costs, along with higher SG and A. Partial offsets include higher volume, favorable price and sourcing and engineering led cost reductions. For the full year, revenue was $545,000,000 up 1%. Volume was up 2%, price was up 1% and mix was down 3%. Foreign exchange had a positive 1% impact. Segment profit was $66,000,000 down 1%. Segment profit margin was 12%, down 30 basis points. Regarding special items in the 4th quarter, the company had net after tax charges totaling $2,600,000 and they included a charge of $10,500,000 for tax items related to divestitures, a net charge of $4,400,000 for restructuring and various other items and a gain of $8,400,000 from insurance recoveries, net of losses incurred and a benefit of $3,900,000 for excess tax benefits from share based compensation. For the full year, the company had net after tax special charges of $25,600,000 This included a net loss of $26,000,000 on the sale of businesses and related property, a net charge of $5,800,000 for tax items related to divestitures, a net charge of $12,500,000 for restructuring and various other items a benefit of $10,500,000 for excess tax benefits from share based compensation and a gain of $8,200,000 for insurance recoveries, net of loss incurred. Corporate expenses were $23,000,000 in the 4th quarter $84,000,000 for the full year. Overall, SG and A was $142,000,000 in the 4th quarter or 16.8 percent of revenue, down from 17.7% in the prior year quarter. For 2018, overall, SG and A was $608,000,000 or 15.7 percent of revenue, down from 16.6% in the prior year. For 2018, the company had cash from operations of $496,000,000 compared to $325,000,000 in the prior year. Capital expenditures were $95,000,000 for the full year compared to $98,000,000 in the prior year, and free cash flow was $411,000,000 for 2018 compared to $227,000,000 in the prior year. In 2018, the company paid $94,000,000 in dividends and repurchased $450,000,000 of company stock. Total debt was $1,040,000,000 at the end of the 4th quarter, and we ended the year with a debt to EBITDA ratio of 1.7. Cash and cash equivalents were $46,000,000 at the end of the year. Now before I turn it over to Q and A, I'll review our outlook for 2019. Our underlying market assumptions for the year are unchanged. For the industry overall, we expect North American Residential HVAC shipments to be up mid single digits. We expect North America Commercial unitary shipments to be up low single digits, and we expect North American refrigeration shipments to be relatively flat. The company's guidance for 2019 remains the same that we presented at the December Investment Community Meeting. We continue to expect revenue growth of 3% to 7% with neutral foreign exchange. We still expect GAAP EPS from continuing operations in a range of $14.30 to $14.90 And we still expect adjusted EPS from continuing operations in a range of $12 to $12.60 Now let me run through the other key points in our guidance assumptions and the puts and takes for 2019, all of which are unchanged. We expect to capture $80,000,000 of additional price for the year. We are planning for a $25,000,000 benefit from sourcing and engineering lead cost reductions and an $8,000,000 benefit from residential factory productivity. We still expect a $30,000,000 headwind from commodities, $15,000,000 from freight and $10,000,000 from tariffs. Other investments in other headwinds include $15,000,000 for distribution investments and $15,000,000 from SG and A. Net interest expense is expected to be approximately $45,000,000 up from $38,000,000 last year. And a few other guidance points. Corporate expenses are targeted at $90,000,000 for 20.19. We expect an effective tax rate in the range of 22% to 23% on an adjusted basis for the full year. Capital expenditures are still planned to be approximately $215,000,000 including $115,000,000 in 2019 to complete the reconstruction of the Iowa manufacturing facility funded by insurance proceeds. And finally, we continue to expect the weighted average diluted share count for the full year to be between 39,000,000 and 40,000,000 shares, which incorporates our plans to repurchase $350,000,000 of stock this year. And with that, let's go to Q and A. 1st, we'll go to the line of Julian Mitchell with Barclays. Please go ahead. Hi, good morning. Hey, Julien. Hi. Maybe just the first question around the unchanged cost headwind guidance you talked about, the $30,000,000 €15,000,000 €10,000,000 There seems to be some different commentary from your peers about the phasing as they see it of the cost headwinds through this year, something they're level loaded, something they're very front half loaded. Maybe just characterize how you see those cost pieces as we look half on half or quarterly through this year? I think the way we see them right now, they're probably more front end loaded than back end loaded. And if I was going to do a model, I might do sixty-forty between the front and the back end. Understood. And price fairly level loaded with volumes moving, I guess? Correct. And then thank you. And then my second question, maybe just give us a little bit of context around the Kaiser Warren divestment? Maybe just talk through a couple of points on why you're keeping what you're keeping in Refrigeration versus obviously what you're divesting, having owned the business for sort of 7 or 8 years? Yes. I mean, it's the same logic that we've had as we've looked at the other businesses that we've sold. We wanted to focus on the businesses where we had a strong market position and it fit our growth profile. And we just made the decision the Kaiser 1 didn't fit that. The structure of the industry is a tough business. And so we made the decision to exit. And as I said on the call, we're well on the way of that transaction. We expect to close by the end of the Q1. We like the businesses that we have left. And you never say never, but at least for right now, the team we have on the field is our team. We like it. We think we have good growth profile, good growth potential, and we're focused on it. Great. Thank you. Thanks. Next question is from Tim Wojs with Baird. Please go ahead. Hey guys, good morning. Hey Tim. Just wanted to focus a little bit on mix in resi. I think it was down 2% for the quarter. How much of that do you think was driven by the impact of the tornado? I'm just trying to understand, I don't think you're seeing any sort of trade down in the business. I just want to make sure that's the case. Yes. I think it was exclusively the tornado. I mean, because where we were impact, as you note, I'm just saying it for the record, everybody else is where we were impacted on the Marshalltown facility is where we make premium furnaces. And so we were able to start to ramp it back up, but we didn't get the full production and certainly didn't get the full inventory levels. And so the mix down is due to the tornado impact. Okay. Okay. And then as you look at recovering the share, I mean, have you I know you're pretty close to your dealers, but I mean, have you talked to your dealers? Are there any sort of, I don't know, agreements that maybe we don't see that you guys see that give you confidence in that share recovery ramp? The direct answer is there aren't annual agreements to tie people in. I think what ties them in is the service, the capability, the digital support, the product, the relationships we have at the local levels that we do business with thousands of very loyal Lennox dealers. And as we start to refill, we expect it to come back. We're confident as we go into 2019 on the operational side. We're either going to meet or exceed the tornado recovery plan that we discussed with investors back in December. Across 3 residential factories, we're back to full production capability for cooling products as we enter 2019, and we expect to be there for heating products in Q1. And we're working aggressively to fully refill our distribution channel. And we're taking back market share now that was borrowed from us last year. And we expect that share take back to accelerate as we go through the year. Great. And then just based on your intel, just kind of unit plus price, what did you think the resi market grew in the Q4? I think we have some AHRI data we're going to dig up, and I'll give you a specific answer. It was high single digits, I'm going to say 8% or 9%, but I'll turn to somebody with Steve. Yes, we've got the units. I'm just curious with the price. Yes. We got 2% of price. So I assume others got something similar. And so if units are up 8% and a couple of points of price, revenue was probably up 10% and I don't know what mixed it. Okay, great. Well, good luck on 2019. Thanks guys. Next, we're on the line of Steve Tusa with JPMorgan. Please go ahead. Hey, guys. Good morning. Hey, Steve. Just on the kind of segment changes, am I looking at that right? The basically Europe HVAC, while kind of small, I guess, dollars 150,000,000 something like that, is operating at kind of a very, very low single digit margin type of number? Yes. So is that are those businesses core? Or is that something that and I guess you're going to kind of look to fix that. I would assume that's kind of an unacceptable margin for you guys. What's kind of the longer term strategic potential with kind of the new European structure? We had a tough year in HVAC in 2018, and we talked about it where revenue was down significantly because of regulatory change that added 15% cost to the rooftops, which is our primary product line, and that led to 2 or 3 quarters where revenue has been down double digits in that business. And that had significant impact on the profitability. If you go back a few years, we made not great money there, but not to our corporate average, but significantly better operating margins than what we had in 2018. So fundamentally, the business is better than what it showed in 2018. It doesn't mean there isn't a lot of work there, and that's what we're focused on, about expanding the product line, growing the top line to be able to absorb the fixed costs that we have there. And it's always in Europe playing creative ways to lower our costs. So yes, our Europe business is a keeper. We just need to find how to grow it and make it more profitable. And then just on Kaiser, I didn't quite understand the footnote. Are you now stripping I mean, you said Kaiser is going to be closed before the end of the Q1. Can you just remind us of sales, EBITDA? And then I would assume that given the state of the industry right now that the multiples around these businesses can't be that great. Maybe if you could just and then also beyond that, what do you expect to do with the with whatever proceeds you're going to get? So just a little bit to help us on color around how much you're going to get and then what you're going to do with it and what you're losing. Yes. The order of magnitude, it's 100 and $50,000,000 of revenue, and we lost $3,000,000 of EBIT in 2018 because you're going to be able to back that out. So that's sort of what it is. And we're in the process of selling it, and we, again, expect to have it closed by in the Q1. The proceeds, so the normal mantra that you'd expect me to say around targeting at the debt to EBITDA, but in lieu of anything else in the any acquisition or that some reason CapEx needs to go up, you'd expect it to flow into share buyback. Okay. So you are from here on out, you're going to basically that business will obviously it's not part of guidance today essentially, the Zolugo 0 anyway? Yes, I'm sorry about that. Yes, it's not part of guidance and it won't be in the adjusted core numbers. Okay. And then one last quick one for you. How exactly do you calculate the kind of 14% impact from tornado? Is that just what who bought from you last year and then who didn't buy from you this year? I mean, how do you actually get to that number in the Q4 on sales? Yes. I mean, we do it a couple of ways. One is, we know what the market did. We know what our market share and gains have been historically and what our actual results were. And so the difference is a tornado impact. So high level, if we're being in a quarter of a point or half a point or three quarters of a point, we sort of know we know what the market was up 8% units. We know what our actual unit volume did. And so that delta between where the market was and where we would have been versus where we were is the top level way we do. And the way we come from the bottom is on a micro level, we can look at customers and we know who we turned off and who bought less and then we sort of add it up from the bottom and compare the two numbers, they're relatively the same number and that's what we talk about publicly and that's also what we're talking with the insurance companies about. Right. And the impact in the Q3 of 25%, the lingering impact is not is basically just the wood you have to chop to kind of gain some of those guys back even though your production will be up and running by the Q2? I'm not sure I understood the 25%. Well, you said 25% of the impact is going to linger in the Q3, but you sound like you're going to be fully operational by 2nd quarter. Correct. Yes. Okay. Got it. Yes, exactly. All right. Thanks, guys. Appreciate it. Next question is from Jeff Hammond with KeyBanc Capital Markets. Please go ahead. Hey, good morning guys. Hey Jeff. Hey, just back to the Europe HVAC business, can you give us a sense of kind of where that business you think structurally can be from a margin perspective once you do some restructuring and maybe recover some of the regulatory? And then also just should we think of these 2021 targets for the segments any differently with the reclass? I guess, particularly commercial seems a lot more profitable standalone. Thanks. Yes. I'll answer the second one because that's a little easier to answer because that's straightforward. Residential doesn't change. So we ended sort of ignoring the tornado, we ended, which I wish I could do, ignore the tornado. But ignoring the tornado, we're about 18 0.5% operating margins, and the 3 year target is 19% to 21%. Commercial, the new commercial segment ended 18% at 17.5%, and our new 3 year target is 19% to 21%. And then Refrigeration ended 2018, the new segment at 13.1%, and the new target is 15% or the target is 15% to 17%. And overall, for the corporation, it's now $4,300,000,000 of revenue, which is a 16% or excuse me, a 6% CAGR off of where we ended 'eighteen with that 18% EBIT margin, which is up 50 basis points from what we guided in December. So that's sort of the new 3 year targets. And in terms of Europe HVAC, just structurally Europe for most businesses, including HVAC, is structurally less profitable than it is in North America. I think this is a double digit Ross business and if we're really high performing better than that, and obviously, we have a ways to go to get to that. But I think we clearly have line of sight to get it to double digits, Now we'll see what we have to do to get it higher than that. Okay. And then just a housekeeping on the tornado. I don't know if I missed this, but do you know the insurance proceeds for 1Q at this point that would be included in that residential op profit number? Yes. The way I would we talked about the impacts on the core of $85,000,000 of revenue and $43,000,000 of profit, and we said 50% in Q1, 25% in Q2, 25% in Q3. And then for the $83,000,000 of insurance proceeds that we're now expecting in 2019 to offset the $43,000,000 in 'nineteen plus the $40,000,000 in Q4, which is I think what you're asking about. For modeling purposes, I would tell you to have the total proceeds of $83,000,000 spread it equally over the 4 quarters in 2019. We're obviously working with the insurance company. We're confident we're going to get it all. The timing is still a bit questionable. So for modeling purposes, I take the $83,000,000 and spread it out over the 4 quarters. Next question is from John Walsh with Credit Suisse. So I guess just kind of going back to recapturing the borrowed market share, can you talk about the tools you're using to do that? I assume some of it's like joint marketing and how some of those early campaigns are going? It seems to be pretty successful. And maybe just also given how specific you are with numbers around who's been turned off, how should we expect you to communicate that going forward to us that we know you're reclaiming that loss captured share? Would it be a dollar amount of the reclaimed or a percentage? Or will it just be we'll have to look at how you're outgrowing relative to the market? Any help on that would be appreciated. I think it's going to be the last answer. I mean, we'll see what clarity we have to bring. But I think it will be clear when you have a quarter like we did in Q4 and we're saying our revenue was down, but adjusting for the tornado would be up 14 percent more. That 14% will shrink, shrink, shrink and eventually go away. And then that way, you'll know that we had no tornado impact. And our revenue growth is greater than our the industry data or our competitors and you know we're gaining it back. I mean high level, you'd expect that really to happen second half of the year. First half of the year, we had no tornado impact. Second half of the year, we had it. And so second half of the year is when we should start to outgrow the market in a significant way. That was the first second part of the question. Remind me of the first part? Just the tools you're using to win back that borrower. Yes. The tools we're using, I think, are the things you'd expect us to do. Again, we have granular detail. We know who we have to go to. We know what we have to bring. We have sort of a full toolkit of the things we always have to do to sell to our customers, the digitization, the marketing programs, the advertising programs, the equipment. And then we're incenting our sales guys to go get it. I was at our national sales meeting last week, and I'll tell you, we spent a lot of time talking about it. Sales folks are fired up. And when sales folks get paid for something, they usually go do it, and we're ready to go get it. Yes, Jim. And maybe just a quick follow-up here on thinking about commercial unitary market share. I mean, when we were down at AHR, clearly, there's a lot of new product being launched, particularly from the market leader in that space to kind of no longer give up market share? I mean, how do you think about your ability to kind of continue to take share in that commercial unitary rooftop market? We have lots of confidence. I mean, I know they're I assume that's Carrier, but they're talking about so they're making investment in products. Although I think a lot of their investments have been skewed towards the Applied segment, less the sort of unitary where we play, sort of entry level stuff. And we're aggressively focused on that. You saw our numbers were strong in Q4 in commercial. We talked about focusing on the local and regional segment when we were with you in December, and we were up 20% or so in that segment. And so we're focused, and we're confident that we'll continue to grow share. Next, we'll go to Rich Kwas with Wells Fargo Securities. Good morning. This is Deepa Raghavan for Rich Kwas. Couple of questions to meet you. Hi, Rich. Hi. So the weather has been pretty choppy, at least in some parts of the U. S. Here, just ranging from extreme cold to mid-50s on some days in some parts at least. Just curious, is that enough to drive this trend in the quarter? Or is there a more than seasonal adjustment we should be thinking about this quarter? The weather certainly helps. And when it's minus 20 in Chicago, we're selling furnaces. And so that's helpful. And so but it's 25% to 30% of the quarter revenues in January, and March can be as high as half the quarter. So it's still as we get into March, it's still going to be the transitioning to the cooling season, stocking dealers preparing for the summer that's yet to come. So cold weather helps. Hot weather will allow you to make 2nd quarter. Cold weather very seldom allows you to make 1st quarter, and that's going to be the case. Got it. My follow-up would be, so are you looks like you're expecting full recovery of the 3% sales last year to tornado. Is that contemplated at the midpoint of your 3% to 7% revenue growth outlooks? And within that 3% to 7%, the second part of that is, what sort of a housing slowdown or can you put it to starts or something that you can consider? I mean, if you could give us something that we could put it to, that would be pretty helpful. Thank you. Our revenue guidance sort of anticipates what we're going to do in the residential business, yes. In terms of new housing, the last 2 or 3 years, we've sort of baked into our numbers as we started the year, double digit, 10% or so new housing starts. In 2019, we're thinking it's more going to be mid single digits, 5 Yes. I mean, when we think about our new construction growth, we sort of bake it tie it to housing starts. Okay, got it. So mid single digits from growth we can start. And next we go to Robert Barry with Buckingham Research. Please go ahead. Hey guys, good morning. Hey Robert. Just a few follow ups here. The inefficiencies you were highlighting in commercial, is that what we had last quarter or 2? I think it was confined to Europe. The issues with margins in the quarter, I mentioned lower factory productivity. That was part of it. That was the lesser part of it. But the lower factory productivity we talked about, I think I talked about it in December was or on the last earnings call was really tied to labor constraints in our Stuttgart Arkansas factory, not being able to hire enough workers and temporary workers and keeping the lines fully up and running and handling all the absenteeism that we were seeing. We've made some adjustments on how we're hiring and handling people. And I think to a large degree, that's now behind us. It takes a while for the good news to flow through the P and L given we do LIFO accounting, but we're pretty confident operationally it's behind us. The other issue for the quarter was just the timing of other costs. I hate to get into the accounting of things, but last year, we have good news in Q4 and this year, we had bad news around different elements. And so it was just sort of the timing of the other costs. But so we're still confident we're going to have the right margin trajectory for commercial in 2019. And direct answer to your question is, if I was anticipating your question, we think the factory issues are to a large part behind us at this point. Got it. Got it. I mean should we just assume that the first half or the first quarter continues to be a little weaker there in terms of cadence? Yes. Given what I was saying, I was trying to shed that. Yes, I would sort of build my model second half clear margin expansion first half, a bit more choppy. Got it. And following up on the pricing cadence, I mean, I think during 'eighteen, the pricing was building through the year. So on a year over year basis, I would think that you'd see much better contribution to growth from price in the first half. Is that accurate? I think that's broadly correct. I think our the only caveat would be sort of the we didn't get as much price as we would have most likely got in second half of this year, certainly Q4 this year and resi because of the tornado issues, right? And so when I think about our ability to sort of go out and really capture and stick the price increase, we'll get a better yield from the price increase we're doing this year second half than we did this year second half. Got it. Got it. Okay. Just finally, on commodities, I mean, I think copper has picked up a little bit recently, but net net year over year, it's still, I think, down pretty nicely. I think you do start to hedge about 18 months out. So maybe too early to get into 2020. But just directionally, are you starting to kind of hedge in some nice tailwinds on the commodities front at this point for next year? For 2020? Yes. And my head was so full of tornado numbers, Robert. The answer is we're hedging for 2020, and they're rolling in lower than the hedges that we're taking All right. Thanks. Thank you. Thanks. Next, we'll go to Robert McCarthy with Stephens. Please go ahead. Todd, I expect you to send me over an espresso machine, so I can it can aid me in my modeling over the next week. COD, of course. In any event, obviously, math isn't my strong suit, so I'll ask 2 very high level vanilla questions. The first is just talking about the prevailing environment and what the macro headlines seen. Have you seen anything in your business in terms of your backlogs, in terms of on the retail side, in terms of anything across commercial or residential that gives you pause? And maybe you could just square the circle with some of the comments we've seen around the macro on the commercial side? And then on the residential side, what Watsco has referred to episodically over the past 6 months? I'll first talk about commercial. Short answer is no. We had a strong 4th quarter, both in national accounts and in our local and regional businesses. Equipment business is up, service business is up 20%. I agree, if you watch MSNBC or Fox, you're petrified. But I think on the ground, it continues to be solid, if not strong. In terms of Florida, we've talked about this in the past. I'll touch it again. Through the 1st 9 months of the year before we had any tornado impact, our Florida business was up 2%, 3% low single digits in unit volume. And so then with price and with mix up mid single digits. And so we hadn't seen any and then obviously we had the tornado impact, so it's hard to tell in Q4. I don't think it's the canary in the mine shaft. Okay. Fair enough. And then just a follow-up, I know you love talking about technology investments, particularly in distribution. But I guess in the context of the potential for share shift or share gain, given one of your larger competitors might strategically have its eye off the ball. And we've talked about that at a high level in the past, right? But specifically, do you think there's an opportunity to just basically make some investments in channel or in technology at a time when maybe some of your competitors do have their eye off the ball and take some share or set yourself up for taking shares? Or is that just not how things work? Is that not how the real world works? I understand the question. I'll sort of ramble a little bit and then maybe answer it directly. I mean, the way we think about these investments is we do them in good times and bad. We do them we've been doing it for 5, 6 years, both the digitization of the interface with distribution partner as well as automating our back offices to take out costs and drive efficiencies and effectiveness. And we're going to continue to do that. So the governor, quite frankly, doing it isn't sort of the that we can put on the accelerator in a year, do 3 years of work. I mean, it's about people and building the capability organizationally and quite frankly, knowing the right place to spend because technology is moving so fast. And so as you know, we've doubled our IT spend over the last 8 or 9 years. We now spend more on IT than we do R and D. That's going to continue. But I don't expect that we're going to double it over the next 6 months because UPC is spinning off CCF. Understood. Thanks for your time. Thanks. And we'll go to Gautam Khanna with Cowen. Please go ahead. Thanks. Good morning, guys. Good morning, John. How are you? Doing well. I was wondering if there is any dissynergy to the remaining business from separating Kaiser Warren, either with, I don't know, the customers that were buying things in a bundled way or stranded costs, anything you can point to that would have some bleed over? I think the strand certainly stranded costs, if you will, of corporate costs and segment costs that were being absorbed by that business and we're doing the things you'd expect us to do. We're taking those costs out just like we did when we sold the other businesses in the segment. In terms of customer synergies, it was part of our case when we bought it. And 7 years later, however long it's been, I have to hang my head and say, no, aren't many synergies that we're worried about. Okay. No, that's fair. I have to ask it because no one has, but just consolidation, What's your view? Do you think anything actually happens this year of size either with Lennox, finding some assets to acquire of in North American Resi or elsewhere or among others? Yes. I mean, you know what I'm going to say, but I'll say it. These things are lumpy and they happen or they don't happen. We don't have to do a deal, as you know, because we're at scale, but we think we could create value and we think we're the right people to run something if it became available. But it's other people's calls, not ours. So we stand ready and would want to do something, but it's going to be up to what others want to do. But just to be to put a finer point on it, it's not like you're seeing much in terms of your M and A pipeline come up. Well, again, it's M and A pipeline sort of the concept assumes lots of deals that you're talking about. This is a discrete number. I think we all know who they are. And I wouldn't comment on any activity whether it was happening or not, right? But it's the concept really isn't a pipeline. It's whether something breaks loose or not. Thank you. Appreciate it. Good. Thanks, Alex. Okay. Thank you. I think that's the last question. Operator? That's correct. Yes, please go ahead. Okay, good. So to wrap up, 2018 was a record year for Lennox with new highs for revenue, margin, profit and cash generation. The Q1 has seen some cold weather, and we're off to a solid start for 2019 and continue to expect another year of strong growth and profitability. Thanks, everyone, for joining us today. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.