Earnings Call: Q2 2018

Jul 23, 2018

Ladies and gentlemen, thank you for standing by. Welcome to the Lennox International Second 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 Q2 of 2018. 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 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 unless otherwise noted. You can find a direct link to the webcast of today's conference call on our website at www.lennoxinternational.com. The webcast will also 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 risks and uncertainties that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Lennox International's publicly available filings with the SEC. The company disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information, future events or otherwise. Now let me turn the call over to Chairman and CEO, Todd Bluedorn. Thanks, Steve. Good morning, everyone, and thank you all for joining us. Lennox International posted a record quarter in the Q2 of 2018 with new highs set for revenue, total segment margin and profit and adjusted EPS from continuing operations. Revenue on a GAAP basis was a record of $1,180,000,000 up 7%. On an adjusted basis, excluding non core refrigeration businesses in Australia, Asia and South America that are being divested in 2018, revenue was up 9% to a record $1,160,000,000 Foreign exchange was a 1% benefit to revenue. On a GAAP basis, operating income was a record $195,000,000 in the 2nd quarter, up 11%. GAAP EPS from continuing operations was a record $3.39 up 25%. On an adjusted basis, total segment profit rose 13 percent to a record $206,000,000 Total segment margin expanded 50 basis points to a record 17.8%, and adjusted EPS from continuing operations rose 30% to a record $3.67 Turning to the key points on our business segments for the Q2. Residential set new records for revenue and profit. At constant currency, revenue was up 9%, revenue from replacement business was up 10% and new construction was up high single digits. Residential segment profit rose 9% and segment margin remained at the record level of 21.5% of a year ago. Turning to Commercial. Revenue and profit also hit new highs in the 2nd quarter. Commercial revenue was up 12% at constant currency. Segment profit was up 18% as margin expanded 70 basis points to 18%. In North America, at constant currency, commercial equipment revenue was up low double digits for the quarter, replacement revenue was up high single digits and new construction revenue was up high teens. Looking at the equipment business another way, national account revenue was up low double digits and regional and local revenue was up high teens. On service side, Lennox National Account Service revenue was up more than 25%. In Europe, commercial HVAC revenue is down mid teens constant currency. Turning to our core refrigeration business, revenue was up 1% at constant currency. In North America, constant currency revenue was down low single digits. In Europe, at constant currency, revenue was up more than 20% on the strength in both food and non food refrigeration business. Refrigeration profit was up 5% in the 2nd quarter and segment margin expanded 40 basis points to 14.9%. To update you on the sale of our non core refrigeration businesses. In the Q2, we closed on the sale of our Australia and Asia business to Asia Reef as expected. We also closed on the sale of the Sydney area real estate associated with our former operation in Australia. We booked a $24,000,000 $24,000,000 gain from the sale in the 2nd quarter, which has now been included in our GAAP guidance with that transaction completed. We're still on track to close on the sale of our South America business in the second half of the year with LGEN, a privately held Brazilian company, subject to Brazilian antitrust approval. With a total of approximately $115,000,000 in net proceeds from these transactions, we have increased our stock repurchase guidance for the year from $350,000,000 to 450,000,000 dollars Joe will talk about each point in our guidance in a moment, but high level, we are raising guidance adjusted revenue and EPS from continuing operations with a strong first half performance and start to the Q3. Following the 2nd round of price increases this year effective mid June, we now expect a total price benefit of $75,000,000 for 2018, up from the prior guidance of $50,000,000 The $75,000,000 of price for the year $50,000,000 of headwind from steel, copper and aluminum, dollars 20,000,000 of headwind from freight and $5,000,000 of headwind from the Section 301 tariffs that are currently effective and proposed. Beyond price, we are also attacking freight and tariff headwinds with sourcing strategies as you would expect. One last point related to developments late last week. As you may have seen in our press release on Friday, a residential factory in Marshalltown, Iowa was damaged by a tornado on Thursday, July 19. We are in the process of fully assessing the extent of the damage. Thankfully, there have been no reported injuries to our employees, and that is our first priority. 2nd is our commitment to serving our customers. An advantage of owning our own distribution network across North America is that we have supplied more than 40 days of equipment and more than 2 35 distribution centers and stores ready to support our customers in the field. Beyond that, more than 75% of our North America residential equipment units are manufactured at our facilities in Mexico and South Carolina, and those teams are stepping up as Marshalltown recovers. We are enacting recovery and operational contingency plans and have great teams in place to address the challenges. We will keep you updated on our status and progress. Now let me turn it over to Joe to talk in more detail about the Q2 performance and the full year outlook. Thank you, Todd. Good morning, everyone. I'll provide some additional comments and financial details on the business segments for the quarter, starting with Residential Heating and Cooling. In the Q2, revenue from Residential Heating and Cooling was a record $716,000,000 up 10%. Volume was up 8%, price was up 2% and mix was down 1%. Foreign exchange had a positive 1% impact on revenue. Residential profit was a record $154,000,000 up 9%. Segment margin remained at a record 21 point 5% level. Segment profit was positively impacted by higher volume, higher price, sourcing and engineering led cost reductions, lower SG and A expenses and favorable foreign exchange. Offsets included unfavorable mix, higher commodity and freight costs, distribution investments and higher other product costs. Residential also had a smaller favorable annual warranty adjustment this quarter than in the prior quarter prior year quarter, which resulted in a $2,000,000 headwind year over year. Now turning to our commercial heating and cooling business. Commercial revenue was a record $292,000,000 up 13%. Volume was up 10%, price was up 2% and mix was flat. Foreign exchange had a positive 1% impact on revenue. North American commercial HVAC equipment revenue was up mid teens. National account services revenue was up more than 25%. Europe commercial HVAC revenue was down mid single digits. Commercial segment profit was a record $53,000,000 up 18%. Segment margin was 18%, up 70 basis points. Segment profit was positively impacted by higher volume, higher price, sourcing and engineering led cost reductions and favorable warranty adjustment. Partial offsets included unfavorable mix, higher commodity and freight costs and higher other product costs. In our Refrigeration segment, which excludes the non core businesses in Australia, Asia and South America being divested in 2018, revenue in the second quarter was $150,000,000 up 2%. Volume was up 1%, price was up 1% and mix was down 1% with foreign exchange having a positive 1% impact on revenue. By region, on a reported basis at actual currency, North America was down mid single digits and Europe was up more than 30%. Refrigeration segment profit was $22,000,000 up 5%. Segment margin was 14.9%, up 40 basis points. Segment profit was impacted by higher volume, higher price, engineering led cost reductions and sourcing benefits, including selling refrigerant allocations in Europe and favorable foreign exchange. Partial offsets included unfavorable mix and higher commodity freight and other product costs. Overall for the company on an adjusted basis, the 2nd quarter had a net after tax charges of $11,300,000 This included a $31,400,000 asset write down related to the refrigeration divestitures, a net gain of $18,000,000 from the sale of Australia and Asia businesses in Sand Sydney area real estate and a net gain of $2,100,000 for various other items. Corporate expenses were $23,000,000 in the 2nd quarter, down from $24,000,000 in the prior year quarter. Overall, SG and A on a GAAP basis was $161,000,000 in the 2nd quarter or 13.7 percent of revenue, down from 15.3% in the prior year quarter. On an adjusted basis, SG and A as a percent of revenue was 13.5% in the 2nd quarter, down from 14.7% in the prior year quarter. Net cash from operations in the 2nd quarter was $49,000,000 compared to $59,000,000 in the Q2 a year ago. Capital expenditures were $21,000,000 compared to $19,000,000 in the prior year quarter. Free cash flow was $28,000,000 compared to approximately $41,000,000 in the Q2 a year ago. Total debt was $1,350,000,000 at the end of the second quarter and we ended June with a debt to EBITDA ratio of 2.2. Cash and cash equivalents were $39,000,000 at the end of June. The company paid $21,000,000 in dividends $200,000,000 for stock repurchases in the 2nd quarter. Now before I turn it over to Q and A, I'll review our outlook for 2018. Our market assumptions for 2018 are unchanged. For the industry overall, we expect North America 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 America refrigeration shipments to be up low single digits. Looking at revenue guidance on a GAAP basis, we now expect 4% to 6% growth factoring in the timing of the Refrigeration divestitures and neutral foreign exchange. On an adjusted basis, given our underlying market assumptions, our targets for market share gains and the company's first half performance, we are raising our range from 4% to 8% with a positive 1% benefit from foreign exchange to 6% to 8% with Nutra foreign exchange. GAAP EPS guidance from continuing operations for 2018 moves from a range of $8.79 to $9.39 to a new range of $9.43 to $9.83 after 2nd quarter results and incorporating the gain from the Sydney Real Estate into our guidance with the completion of that transaction. We are raising adjusted EPS from continuing operations guidance for this year from $9.75 to $10.35 to a new range of $9.95 to $10.35 Now let me run through some of the key points in our guidance assumptions and the puts and takes for 2018. First, the guidance points that are changing. As Todd highlighted earlier, we are raising our guidance for the year from $50,000,000 to 75,000,000 We are raising our price guidance for the year from $50,000,000 to $75,000,000 which will offset the headwind we see from commodities, freight and tariffs. And of course, we are attacking all those headwinds with sourcing strategies as well. Foreign exchange is now expected to be neutral for the year versus prior guidance of a $5,000,000 benefit. We are raising our stock repurchase guidance for this year following $150,000,000 of purchases in the Q1 $200,000,000 in the 2nd quarter. We now plan to repurchase $450,000,000 of shares in total for the year, up from prior year guidance of $350,000,000 Accordingly, our weighted average diluted share count for the year moves from a range of 41,000,000 to 42,000,000 shares to approximately 41,000,000 shares. Now for the guidance points that are unchanged. We continue to expect $35,000,000 in savings from our sourcing and engineering led cost reduction programs. We still see $7,000,000 in savings from our residential factories as we focus on automation at our U. S. Plants and other productivity initiatives. Investments in distribution will still be a $10,000,000 headwind this year and we still expect SG and A to be a $10,000,000 headwind as well. A few other guidance points. Corporate expenses are still targeted at $85,000,000 this year. Net interest expense is still expected to be approximately $35,000,000 for the full year. Tax rate guidance remains 22% to 24% on an adjusted basis for the full year. Capital expenditures are still planned to be approximately $100,000,000 in 2018 $395,000,000 in free cash flow is targeted for the full year. And with that, operator, let's now go to Q and A. And our first question will come from the line of Jeff Hammond with KeyBanc Capital Markets. Your line is open. Hey, good morning, guys. Hey, Jeff. Hey, Jeff. Hey, just a couple of questions on residential. 1, did you see any pre buy in your Allied Brands? And 2, can you just speak to the negative mix dynamic? On the pre buy, it's always hard to know, but our guess is $0,000,000 to $10,000,000 of pre buy across all the brands. On the residential margins, as we said in the call, it's $21,500,000 at record levels. Our first price increase that we put in at the end of last year was to offset the headwind from commodities, and we did that in the quarter. But in Q2, residential also had $4,000,000 of headwind from freight rate increases. The mid June price increase will offset the headwind from both commodities and freight, and we'll be better positioned for margin expansion in the second half of the year residential. Okay. And then can you just the so it seems like the incremental costs are really freight and then this tariff dynamic. Can you speak what are you seeing on the tariffs specifically? Is that sourcing of motors, etcetera? Yes. Short answer is yes. It's the 301, the one that came out that's already been implemented plus our best understanding of the $236,000,000,000 or $34,000,000,000 that's already been implemented and then $200,000,000,000 that's going to be implemented are sort of best understanding of the future one plus our current understanding of the one that's already been implemented for this year about $5,000,000 headwind. And yes, it's primarily motors and electronics and to a lesser degree some of our controls from China. Okay. Thanks guys. I'll get back in queue. Thank you. Our next question comes from the line of Tim Wojs with Baird. Your line is open. Hey guys, good morning. Nice job. Thank you. Hey, so just on mix in residential, it looked like the new construction and R and R markets grew kind of similar rates. So just kind of curious what you're seeing in terms of mix. Are you seeing any sort of trade down kind of within R and R around the price increases? No, no. I mean, we continue to see within each of the segments sort of the natural mix up and that continues to be the case. And so no, we haven't the sort of the opposite when people know that a price increase is happening, they'll do the preload plans that we put in place and those tend to be a richer mix. So no, I mean we haven't seen any pushback on the price. Okay. And then just on raw materials, I know you're mostly hedged for this year, but any flexibility to hedge more now that copper and aluminum have moved lower just as you look into 2019? We have a I think the right word will be thoughtful hedge strategy where we have a band and we can either be in the middle of the band, the high end or the low end of the band and we have rules in place that we react to it. So we're not commodity speculators, but we try and react to drops in the market. Okay, great. Good luck on the rest of the year. Thanks. Thank you. Our next question comes from the line of Ryan Merkel with William Blair. Your line is open. Hey, thanks. Good morning, everyone. Hey, Ryan. So first on incremental margins, I think you put up 23% this quarter adjusted. I think we were talking about 30% for the year, but are we is that still in the cards and why or why not? I think you take the midpoint of our guide, we're a little bit below 30%. And I think the thing that we've seen is first half of the year, we were chasing freight and chasing the tariffs, and we've now put in place a price increase, I think second half of the year will probably be closer to 30 on a full year basis, we'll probably be a little bit below it. Okay. And then secondly on price cost, it sounds like the second half you expect the spread to be a little bit better, but just clarify that for me if you would. I think what we're saying again to repeat is and what we saw in Q2 was, if you added freight of $6,000,000 to the commodity increase year over year, it was greater than what we got with price because the first price increase was really focused on just offsetting commodities. 2nd price increase will help us offset the freight. And so for the balance of the year, while we're guiding or on a full year basis, we're guiding $75,000,000 of price, headwind of $50,000,000 from commodities, dollars 20,000,000 from freight and $5,000,000 from tariffs. So on a full year basis, we'll offset everything. First half of the year, we weren't able to offset freight. So second half of the year, it should be positive. Got it. And then just lastly, you mentioned July is off to a good start. Can we just get a few more details in terms of the growth rate and any segment color? Yes. I'm not going to give the exact growth rate. It's just, I mean, you all can read a weather map. And when it's just hot, it helps us quite a bit. So it's early, but July is off to a nice start. We also had nice backlog in our commercial businesses, both commercial HVAC and Refrigeration in North America. And for the quarter for Q3 July August, they're about 30% of shipments in each. And then September is just under 40%. So we still have a lot of work still in front of us. Thanks, Todd. I'll pass it on. Thanks. Thank you. Our next question comes from the line of Wadhim Khanna with Cowen and Company. Your line is open. Yes, thanks. Good morning, guys. Good morning, Adam. How are you? Well, thanks. I wanted to follow-up. I thought I heard this right that national account service was up 25% plus and that was on a, if I recall, a big comp from last year, right? So what's going on there? Can you We have a really good team there. And it's when things start to kick in on a business model, you get a really positive flywheel effect. And so all the work that we've done on our national account equipment business tied into our service business. And then increasingly, what we're trying to do with our controls business, with our ICON controls, we've put together a nice package. We think we have the right cost structure to go after these large national accounts who want service from us. And so it's a reflection of a multiyear strategy. We've been showing charts for 4 or 5 years saying that this is a good business for us. We want to grow it and the second quarter was a nice quarter for us. And so presumably the momentum should continue into Q3 despite the tough comps? I think it continues. I'm not sure we grow 25% a year or 25% each quarter. But we said we're going to grow double digits, mid teens in this business, and that's what we've done the last 4 or 5 years, and that's what we expect to continue to do. Okay. I wanted to also know if you could calibrate us on Q3 given last year had some weather the hurricane disruptions. Just how should we think about the incremental margins in Q3 given the price that you mentioned to the price actions? Plus, I don't know if you ever had a chance to quantify what the negative drag last year was in Q3 from the hurricane disruptions? Yes. I think we've been reasonably balanced around that. I don't think we've bitched too much about it in Q3 and then we haven't promised too much coming out of it. So I mean it had some impact in Houston and Florida, but I don't think it had a major impact. What we've said for the second half of the year is that we have price to offset commodities and freight, and we should expect a better drop through second half of the year than we saw first half of the year. Okay. Last one for me, if you will. You upped the buyback a little bit now with the proceeds from the divestitures. Could you talk a little bit about the M and A pipeline if there's been any change there? No. I mean, M and A pipeline, we've been we have the luxury of growing organically both with end markets that are growing and gaining share. We've been pretty clear that we'd want to consolidate North America HVAC, unitary HVAC market, but others would have to decide they wanted to exit. We've said that the right acquisition in Europe might make sense, but that's not a priority for us. And so I guess that's consistent with what we've said in the past and that's still true today. Thanks. Great results. Congratulations. Thanks. Thank you. Our next question comes from the line of Nigel Coe with Wolfe Research. Your line is open. Thanks. Good morning. Just a couple of quick questions. We've got a lot of ground here. You mentioned the Marshalltown facility and first of all, apologies to all affected. What occasions you mentioned very clearly in your PR that you've got countermeasures in place, but what does this do to factory loading in 3Q in Mexico and South Carolina? And what the I'm assuming there'll be some freight costs accelerating as you rebalance the manufacturing. Would you exclude those costs from 3Q? To just be clear about it, we're still fully accessing the extent of the damage. The manufacturing facility in Marshalltown sustained damage to sections of the roofs and the walls and portions of the manufacturing floor. Our distribution center that's located there wasn't damaged at all. So a lot of the finished good products ready to ship. As you said in the call, we're enacting and recovering operational contingency plans. It's very early. And so I understand your questions, but honest answer is we're not sure internally exactly how we're going to handle this and what we're going to do, except for the point that we made in the press release that we're committed to taking care of customers. And one of the luxuries of owning your own distribution is we have a lot of product in the field more than 40 days. And for some of the product we produce in Marshalltown, significantly more than 40 days is out in the distribution network. And so we're going to work through it, and we'll keep investors updated as we finalize the status and progress of how we're going to respond. Thank you. And then just quickly a quick one on Europe. And I know you're not Europe's not a big market for you, but we saw strong trends in refrigeration. We saw weak trends in commercial HVAC. There's a little bit of noise around European trends. But just from your perspective, from your perch, what are you seeing in Europe? And would you expect that market to weaken over the balance of the year? Our HVAC business was down just because of the lumpiness of a couple of major customers. So significant piece of business that we did last year didn't repeat this year. Our Refrigeration business is up nicely. We think Western Europe is where we play predominantly. France, Spain, Germany, we think it's going to be up low single digits and we think that will remain for the balance of the year. But again, I always use the phrase that we just have a small pea hole on this market. We serve portions of it and but the portions we're serving, we're cautiously optimistic for the balance of the year. That's great. Thanks, Bob. Thanks. Thank you. Our next question will come from the line of Julian Mitchell with Barclays. Your line is open. Hi, good morning. Maybe just a question, Todd, for you sort of drawing on your long experience in this industry. Looking out beyond the sort of price cost gyrations week to week this year, when you're thinking about the typical period after you've had a lot of input cost inflation and price reaction by the HVAC manufacturers, how much of a carryover does that tend to be in terms of a tailwind for HVAC margins in the subsequent period once that cost inflation dies down? If you think back sort of historic cycles and any reasons why say next year might be different versus history? Well, if I understand the question right, I'd answer it this way is once we get price, we don't give it back. And so we get price to offset commodities. And then if commodities go down, then margins go up, and we had several years where that was the case. And so I would think about it as the price increases that we are getting in June, we'll have rounding half a year impact this year and then there'll be carryover in the next year. And if commodities continue to rise, then we'll pass on additional price. So I think that's how I think about it. We get price, you never give it back. Commodities go up and down. And the competitive dynamic is pretty similar now. Have you seen any changes there in recent months or quarters? We've seen all our competitors announce similar price increases. And our best sense in the field is that they're implementing them. And I think you can see by our results that we're certainly not losing share. My guess is we're gaining share through the first half of the year, both in res and in commercial. And so we're not giving up any market share position by implementing prices. And I think our competitors are doing the same thing, not gaining share, but I think our competitors are passing on price. Thanks. And then lastly, the gross margins were down in Q2, having been up in the Q1. Do you think we should see them coming back in Q3 or it's more towards the end of the year you'll get the gross margins up again? I think I'll take it on the round and say we think gross margins will be up second half of the year. And so what we saw in the Q2 was for the corporation, we had about a $6,000,000 headwind from freight that wasn't offset by price. But the June price increase, we now will be able to cover that plus commodities. So we think second half of the year on gross margins will start to grow again. Great. Thank you very much. Thanks. Thank you. Our next question will come from the line of Rich Kwas with Wells Fargo Securities. Your line is open. Hey, good morning, everyone. Hey, guys. Hey, just on the freight thing. So with regards I mean, it doesn't seem like that's going to slow down anytime soon. So as we think about 2019, will you have to put an incremental price increase to cover what could happen as we think about 'nineteen? There's a couple sort of what ifs in there. I think I just directly answered it. We'll keep our eyes on commodity, freight and tariffs. And just like we've priced we second half of the year to offset those as we go into 'nineteen, we'll price to offset them, too. Similar to commodities, our competitors will see freight just like we will and our competitors import the same motors and controls and electronics from China that we do. And so short answer is we'll price to offset inflationary headwinds that we see. And the current price increase that you just put through mid year, does that cover the incremental 5 on the tariff for next year? Okay. Sorry, the price increase we put in effect this year offsets the $5,000,000 we're going to see in 2018 for the tariffs. That's the guide I gave. All right. But so then there would have to be an incremental price increase at year end to get in to cover with flapover impact? Well, I think if you take a look of us guiding that from $50,000,000 to 75,000,000 dollars in price and additional $25,000,000 coming from a midyear price increase, I think you can sort of do the math that there's going to be, I don't know, significant, but carryover of that price increase that I think will offset some of the commodity increases that you're talking about or some of the tariff increases you're talking about. Right. But on the freight standpoint, it sounds like the likelihood of you being caught again as we go into 2019 is less. You're watching it more closely or We're certainly watching it more closely. I think it's similar to what commodities did to us last year 2017 as they start spiking up during the middle of the year. I mean we're going to keep our eye on it and see what happens. Unfortunately, I think tariffs and freight will move in opposite directions, right? So if tariffs goes up, maybe there won't be quite as many freight requirements. Right. And then 2 other quick ones. On the guide for the incremental for the second half, that does not include any potential negative impact from Marshalltown. Yes. I think it's trying to short answer, But we're going to sort of work through and try and minimize all that. Right, right, right. Understood. And then just it seems like in the field, one of your value oriented competitors still struggling on a fulfillment standpoint. So with the mix this quarter, was 13 SEER, 1314 SEER a bigger percentage of the mix? Were you able to pick up some share here this quarter? Was that clear or is that what are you seeing out there? No, I think the mix is about the same in the shares it was a year ago. And again, I think it reflects we're trying to gain share in multiple places. I think overall, we gained share and we're competing at the low end, but we're also ready to mix up. And as I talked about, when you have these price increases and you're sort of moving product out, you have a tendency to mix up. Okay. Thanks for the color, Todd. Appreciate it. Thanks. Thank you. And the final question will come from the line of Walter Liptak with Seaport Global. Your line is open. Hi, thanks. Good morning. I wanted to ask about the tariffs. And just wanted to clarify that in your view, all the discussion about tariff is more of a cost issue and not a supply issue. I guess what I'm trying to get at is, do you start to look at North American suppliers, especially U. S, more favorably with what's going on with kind of trade war with China? I think right now, it's just a cost issue. And the ground keeps moving. So we're constantly assessing what's going on, where we're at and what's the right play. So depending on what happens, maybe we change our supply chain. But right now, it's $5,000,000 a headwind. We have good suppliers in China and we're talking to our suppliers, as Joe mentioned and I mentioned in the script, about are there other options on where they can produce some of our components other than China that will be cost advantage to us or cost advantageous to us, and we continue to work through those strategies. Okay. And then just a last one. I don't think you talked too much about cold storage, but there's some discussion that tariffs are having an impact on meat inventories. And I wonder if that is it's too soon to start thinking about more cold storage going into the U. S? I don't I'm not sure we've seen that phenomenon sort of play out, the tariff impact more broadly. We had a little bit of slowdown in the first half of the year in our cold storage business, and you saw it a little bit in the revenue numbers in this quarter in North America where we were down in our Refrigeration business. But we have strong backlog going in the second half of the year. Cold storage has been a growth segment for us over the last 2 or 3 years. And after slowing down a little bit in first half, we're pretty optimistic second half. I don't think that has anything to do with tariff. I think that's just longer term macro trends around people wanting prepared food and fresh food either delivered to their homes or supported in their grocery stores, and we think we're in a good position to handle that market. Okay. Sounds good. Thank you. Thanks, Walt. And with that, speakers, I'd like to turn it back over to you for any closing comments. Thanks a lot, operator. To wrap up with record performance in the first half and a strong start to the Q3, we are raising our guidance for 2018 and look forward to continued strong growth and profitability in the second half of the year. Thank you all for joining us today. Thank you. And ladies and gentlemen, that does conclude your conference call for today. 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