Earnings Call: Q1 2018

Apr 23, 2018

Ladies and gentlemen, thank you for standing by. Welcome to the Lennox International First 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 Q1 of 2018. 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 and 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 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 also will be archived on that site for replay. I would like to remind everyone that in the course of this call to give you a better understanding of our operations, we will be making certain forward looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Lennox International's publicly available filings with the SEC. The company disclaims any intention or obligation to update or revise any forward looking statements whether as a result of new information, future events or otherwise. Now let me turn the call over to Chairman and CEO, Todd Fludorn. Thanks, Steve. Good morning, everyone, and thanks for joining us. In the Q1 of 2018, Lennox International posted strong revenue and profit growth to set new first quarter highs for revenue, total segment margin and profit and adjusted EPS from continuing operations. Revenue on a GAAP basis was a 1st quarter record $835,000,000 up 5%. On an adjusted basis, excluding non core refrigeration businesses in Australia, Asia and South America that we are in the process of divesting, as previously announced, revenue was up 6% to a record 788,000,000 dollars At constant currency, revenue in both cases was up 4%. On a GAAP basis, operating income was $53,000,000 in the 1st quarter, including $13,000,000 in pretax charges for the write down of assets and divestiture costs associated with the Australia and Asia transaction. GAAP EPS from continuing operations was $0.90 including $0.30 in charges for the write down of assets and divestiture costs associated with Australia and Asia transaction. On an adjusted basis, total segment profit rose 12% to a 1st quarter record $69,000,000 Total segment margin expanded 50 basis points for a 1st quarter record 8.8 percent, and adjusted EPS from continuing operations rose 33% to a 1st quarter record of $1.13 Turning to the key points on our business segments for the Q1. Residential established new first quarter highs for revenue, segment margin and profit. Revenue was up 8% with replacement business up high single digits and new construction up mid single digits. Residential had strong price performance and a richer mix than a year ago with replacement business growing faster than new construction. Residential segment profit rose 21% and segment margin expanded 100 and 20 basis points to 11.3%. Turning to commercial in the Q1. Revenue and profit hit new first quarter highs. Revenue was up 3% at constant currency and segment profit was up 2%. Segment margin of 9.5% was up 30 basis points from the record Q1 level a year ago. In North America, commercial equipment revenue was up low single digits for the quarter. Replacement revenue was up mid single digits and new construction revenue was down mid single digits. Looking at the equipment business another way, national revenue was flat national account revenue was flat in the quarter and regional and local revenue was up mid single digits. On the service side, national account service revenue was up a strong mid-twenty percent rate. In Europe, commercial HVAC revenue was down mid teens at constant currency. In our core refrigeration business, revenue was down 5% at constant currency. In North America, refrigeration system revenue was relatively flat. Refrigerated display case revenue was down high teens from a year ago. In Europe, revenue was up mid teens at constant currency on strength in both food and non food refrigeration business. Refrigeration segment profit was down 14% and segment margin was down 100 basis points to 7.4 percent. To update you on the sale of our non core refrigeration businesses, as announced in March, we signed a binding agreement for the sale of our Australia and Asia business to BejaRef. We expect the sale to close in the Q2. As I mentioned earlier, in the Q1, we had a $13,000,000 pretax charge or $0.30 to GAAP EPS for the write down of assets and divestiture costs associated with the transaction. In April, we signed a binding agreement for the sale of our South America business to Elgin, a privately held Brazilian company. We expect the sale to close later this year. Subject to Brazilian antitrust approval in the Q2, we expect to take approximately $30,000,000 in non cash charges associated with the transaction, which is approximately $0.73 factored in to GAAP EPS guidance. We're also in the process of selling real estate in the Sydney metro area that was formerly related to Australia operations and would expect that to be concluded before the end of the year. Given the low book value of the property and the strong Sydney real estate market, we would expect a sizable gain on the sale. As previously announced, we are broadly estimating total net proceeds from these transactions of approximately $110,000,000 which we expect to receive over the course of the year as the sales are closed. We are excited about the streamlining our refrigeration portfolio to focus on our strong market position in North America and Europe and the market opportunities in these regions. Overall for the company in 2018, we will continue to invest in our core businesses, grow the dividend and repurchase stock. We directed $150,000,000 of stock repurchases in the Q1 and have announced plans for a total of $350,000,000 of stock repurchases for the full year. The Q1 was a record start to the year, and as we enter our largest seasonal period, we continue to expect strong growth and profitability on our way to another record year in 2018. Now I'll turn it over to Joe. Thank you, Todd, and good morning, everyone. I'll provide some additional comments and financial details on the business segments for the quarter, starting with Residential Heating and Cooling. In the Q1, revenue from Residential Heating and Cooling was a 1st quarter record $454,000,000 up 8%. Volume was up 5%, price was up 2% and mix was up 1%. Foreign exchange was neutral to revenue. Residential profit was a 1st quarter record $51,000,000 up 21%. Segment margin was a 1st quarter record 11.3%, up 120 basis points. Segment profit was positively impacted by higher volume and factory productivity, favorable price and mix and sourcing and engineering led cost reductions. Partial offsets included higher commodity and freight costs, higher SG and A and distribution investments. Now turning to our commercial heating and cooling business. Commercial revenue was a 1st quarter record $206,000,000 up 5%. Volume was up 3%, price was up 1% and mix was down 1%. Foreign exchange had a positive 2% impact on revenue. North America commercial HVAC equipment revenue was up low single digits. National account services revenue was up at a mid-twenty percent rate. European Commercial HVAC revenue was down low single digits. Commercial segment profit was a 1st quarter record $20,000,000 up 2%. Segment profit margin was 9.5%, up 30 basis points from the 1st quarter record level a year ago. Segment profit was positively impacted by higher volume, higher price, sourcing and engineering led cost reductions, lower other product costs and lower SG and A. Partial offsets included unfavorable mix, higher commodity and freight costs and distribution investments. In our Refrigeration segment, which now excludes the non core businesses in Australia, Asia and South America that we are divesting, revenue in the Q1 was $129,000,000 down 2%. Volume was down 6%, price was up 1% and mix was flat. Foreign exchange had a positive 3% impact on revenue. By region and actual currency on a reported basis, North America was down high single digits and Europe was up 30%. Refrigeration segment profit was $10,000,000 down 14%. Segment margin was 7.4%, down 100 basis points. Segment profit was impacted by lower volume and factory absorption and higher commodity costs. Partial offsets include higher price, sourcing and engineering led cost reductions and lower other product costs and lower SG and A. Overall for the company on an adjusted basis, the Q1 had net after tax charges of $9,400,000 This included $10,300,000 for the asset write down and $1,900,000 charge for the divestiture costs associated with the Australia and Asia transaction, dollars 1,500,000 for asbestos related litigation and a net total of $1,300,000 for various other items. As partial offsets, we had a benefit of $4,300,000 for excess tax benefits from share based compensation and profit of $1,300,000 for non core business results. Corporate expenses were $11,000,000 in the first quarter, flat with the prior year quarter. Overall, SG and A was $155,000,000 or 18.6 percent of revenue, down from 19.2% in the prior year quarter. Net cash used in operations in the Q1 was $83,000,000 compared to $180,000,000 in the Q1 a year ago. Capital spending was $23,000,000 compared to $25,000,000 in the prior year quarter. With respect to free cash flow, we used approximately $106,000,000 in the first quarter compared to a use of $132,000,000 in the prior year quarter. Due to the seasonal nature of our business, the company uses cash in the first half of the year and generates cash in the second half of the year. We continue to target $395,000,000 of free cash flow for 2018 overall. Total debt was $1,290,000,000 at the end of the Q1, and we ended March with a debt to EBITDA ratio of 2.2. Cash and cash equivalents were $57,000,000 at the end of March and the company paid approximately $21,000,000 in dividends and $150,000,000 for share repurchases in the Q1. 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 American Residential HVAC shipments to be up mid single digits. We expect North America commercial unitary shipments to be up low single digits. Based on this underlying market environment and our targets for market share gains, adjusted revenue growth guidance for Lennox International is 4% to 8%, including a positive 1% benefit from foreign exchange. Our prior guidance was 3% to 7% growth with a minimal impact from foreign exchange. GAAP EPS guidance from continuing operations for 2018 moves from a range of $9.75 to $10.35 to a new range of $8.79 to $9.39 after incorporating first quarter results and the expected 2nd quarter charges associated with the divestiture of the South American business. As Todd mentioned, we expect a sizable gain on the sale of our Sydney real estate and this is not factored into our GAAP guidance for the year. For adjusted EPS from continuing operations guidance for 2018, we are reiterating our range of $9.75 to $10.35 Now let me run through some of the other key points in our guidance assumptions and the puts and takes for 2018. We continue to expect $50,000,000 of headwind from commodities in 2018, which includes Section 232 tariff impact on steel and aluminum and are confident in offsetting that with $50,000,000 of price increases for the year. 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 on our U. S. Plants and other productivity initiatives. We continue to expect a 5,000,000 dollars benefit from foreign exchange for the full year and investments in distribution will still be a $10,000,000 headwind this year and SG and A growth will be another $10,000,000 headwind. Now just a few more guidance points. Corporate expenses are still targeted at $85,000,000 for this year. Net interest expense is now expected to be approximately $35,000,000 for the full year, up from prior guidance of $32,000,000 Tax rate guidance remains 22% to 24% on an adjusted basis for the full year. We are planning for capital expenditures of approximately $100,000,000 for 2018 and the expected average diluted share count for the full year is still expected to be 41,000,000 to 42,000,000 shares, which includes our plans to repurchase $350,000,000 of stock this year and $395,000,000 in free cash flow is still targeted for the full year. And with that, let's go to Q 1st, we'll go to the line of Jeff Hammond with KeyBanc Capital Markets. Please go ahead. Hey, good morning guys. Hey, Jeff. Hey, so just on price, it sounds like you guys are as it moves up, you're covering it. We heard chatter in the channel about June price increase. Is that something you're contemplating? Would that be additive? Maybe just a little more color there. Yes. I mean, first, just let me reiterate the facts, Jeff, that We said it in the script, but I'll just reiterate it. We got $11,000,000 of price in 1st quarter, 2% of revenue of price in residential where you get priced earliest and 1.5% for LII overall. And I think that's as strong as I've seen since I've been here. We had $9,000,000 of commodity headwind in Q1. For the full year, we're confident we're going to get $50,000,000 of price to offset the $50,000,000 of commodity, maybe even better given the traction that we got in Q1. And as you know, it's both the announcing of price increases, but it's the yield you get on what you announce. And so we watch what our competitors do in terms of announcing an official next price increase. But sort of the clear message is we're getting price in the marketplace, we're going to continue to get price in the marketplace. If commodity costs were to move up again, we would get additional price to offset that. Okay. And then Refrigeration, I think you're still saying the market's low single digit, but you did come out of the gate here weak, and it seems like more on the display side. Just what gives you confidence that you start to see better trends there? And then just maybe update us on margin traction expectations for Refrigeration, just given that you started the year in the whole? Thanks. The North America Refrigeration market, we expect the industry, I think, we're a little bit more conservative than what you said. We expect it to be up low single digits, and we expect our business to be up a little bit better than that. The softness in KysorWarren is just a reflection of the lumpiness of the grocery business, which is a large part of what they do on the display case side. And there was some lumpiness that had impact both on factory absorption and the volume impact. In terms of margins, we've driven nice margin improvement in Refrigeration in the last couple of years, and there's more to come in 2018. And 2016 margins were up a couple of 100 basis points, and last year, they were up about 50 basis points. And while we sort of had a were down in Q1, we're still expecting our margins to be up 50 to 100 basis points full year within our Refrigeration segment. Again, adjusted for the businesses that we're disposing of sort of an apples to apples, we think it's going to be up 50 to 100 basis points. Okay. Thanks guys. Thanks guys. Our next question is from Steve Tusa with JPMorgan. Please go ahead. Hey, guys. Good morning. Good morning, Steve. Hey, to further delve into the price cost hysteria out there. But on the refrigeration side, specifically, did you guys say what price cost would be there? I'm just looking at some notes to make sure. We offset commodities with price in the first quarter in all three segments, including Refrigeration. Okay. So going forward here, over the course of the year, you're optimistic you can get price in that channel? Yes. That's a short answer. Okay. And are you seeing on the resi side, are you seeing everybody behave relatively well? Any holdouts so far? I know there have been, as Jeff said, a few of your peers have kind of gone out with letters, but maybe there is a couple of guys missing there. Have you seen everybody kind of move forward? I think I'd answer it this way. I'd say we had strong revenue growth in the quarter. I think we outpaced the market and we got price. So that means we gained share raising price. That implies in an industry structure, others are doing the same thing. And then as I've always said, our competitors have the same cost structure we do and they hedge the same way we do and they got to pass on commodities just like we do. So at any given point, if I talk to sales guys, there's a city where somebody is being irrational on pricing. But across the board, the industry structure is a good one and we all know we have to go get price. Okay. That's fair. And then one last thing. What are you I know aluminum has kind of moved up here recently. Have you when you look at your commodity cost estimates, I assume that reflects kind of like what you know as of April 23 as opposed to March 31? Correct. It's our best guess right now. And again, I mean, look, 50 is a pretty round number. And so it's plus or minus that to be totally sincere. But $50,000,000 is sort of the number. And if it goes up or down a material amount, then we update it. But we feel I think the high level message I deliver and I know there's concern about this in the marketplace is we're confident we're going to offset commodities with price and we had a very good Q1 and demonstrate at least for 1 quarter we're doing it. It. Right. How are just curious, how are April volumes kind of starting off here in resi? Anytime the Cubs and the Mets are being snowed out, it's not a good sign for air conditioning sales. So the honest answer is that April started cooler than last year, but it's very early in the quarter, 80% of the quarters in May June, and we have plenty of time for the weather to warm up. But it's been cool the 1st couple of weeks of April, and that's and last year, you may recall, it got hot early. So we were hot in April and then cooled off at the end of the quarter. So we still have plenty of time for the heat to come, but soft a little bit of a slow start. Yes. We always say The The next question is from Tim Wojs with Baird. Please go ahead. Hey guys, good morning. Hey Tim. Maybe just thinking about residential and maybe the business more broadly too, but how are you guys thinking about mix in the context of just some of the price increases that you're seeing in residential? Anything that you've seen? I know the summer selling season is kind of ahead of us, but any context around any sort of trade down or anything like that you're seeing from a mix perspective or expecting? No. I mean, we had positive mix in the quarter in resi, in part because add on and replacement was up more than what new construction was and that leads to it. But even within our add on replacement, we continue to see mix up and that's all part of the strategy around the eye comfort and what we're doing with our DIG Lennox Signature Series. So no, again, we've sort of talked about this. At the end consumer level, 2% of price based on something they bought 15 years ago where the equipment is half the cost and labor installations the other half is to be unnoticeable. And so once you get it past the contractor or dealer to accept it, the homeowner is going to take the price increase. Okay. Okay, great. And then just in terms of the use of the cash proceeds on some of the refrigeration sales, is that incorporated into your guidance at this point? Or how would we kind of think about offsetting some of the dilution as you work through 'eighteen? I think it's not explicitly incorporated into the guidance. If you're sort of asking the question of are we anticipating a share buyback that we haven't announced to lower the share count to get to the GAAP or to get to the EPS guidance, That's not incorporated. But sort of the mantra is consistent of we'll be disciplined, we'll invest in the core business. We've sort of said what CapEx is going to be. We're going to have dividends, grow with earnings. And then what's left, we're going to do share buyback with. Great. Well, good luck on the rest of the year. Thanks. Thank you. Next, we'll go to Julian Mitchell with Barclays. Please go ahead. Hi, good morning. Thank you. Just a question maybe, you've talked a lot about commodity costs thus far. I just wondered on the freight costs. You called those out as headwinds in the residential and commercial businesses. Maybe any kind of sizing of how big a headwind that was in the quarter and how you're thinking about the subsequent impact over the balance of the year from freight costs in the guidance? Yes. For the quarter, it was a couple of million, dollars 2,000,000 or $3,000,000 And we've been able to offset that through distribution and transportation productivity and other areas as well as sort of broadly managing the cost of the business. Again, it's I would broadly say take that and multiply it times 3.5%, 4%, and I think you'd sort of get the full year impact of it. But again, we're offsetting it on other elements of cost on the P and L. Very helpful. And then my follow-up would be around the Commercial segment, in particular, how quickly you think we should see margins start to move up year on year, whether that's in the second quarter or we have to wait till the second half? And also whether you saw much impact from weather in the Q1 in terms of any kind of activity push outs or project delays, that kind of thing? No, there wasn't much there's always sort of push outs at the end of the quarter. So there wasn't anything weather driven. What we saw in Q1 for our commercial business is just the lumpiness of national account revenue. And national account revenue is more profitable for us than our regional and local business and our regional and local business grew faster than national accounts and that caused the mix down. We're focused on driving margin expansion in commercial. And again, it's sort of we had a strong 4th quarter. We had margins decrease in Q1, but we're committed to having them grow for the balance of the year. Great. Thank you. Thanks. Our next question is from Gautam Khanna with Cowen and Company. Please go ahead. Yes, thanks. Good morning, guys. Hey, Gautam. So a couple of questions. First, now with the refrigeration exits announced, are there any assets in that space you'd like to add to the portfolio to the remaining Refrigeration business to help shore it up? Or do you sort of have what you need and not really that's not really a focus of M and A from here? I think there could be some opportunities, both in North America now that we've parsed our business back. And I not in the display case business, but sort of in our more core traditional Refrigeration business, there may be opportunities. And we talk more broadly in Europe, both HVAC and Refrigeration, there's opportunities. But I wouldn't expect us to pull the trigger on Refrigeration in the near term. I think we still have organic opportunities both for growth and to continue to grow margins to get to our 3 year target. So if we do something in refrigeration, I would look for that to be sometime next year or later. Okay. And then just as a follow-up, when you look at the industry landscape, it all seems pretty rational and everything. But are there any combinations out there that would you think pose a threat to Lennox? Because you've heard a little bit about UTX maybe splitting up their company eventually and who knows what happens with JCI post the separation of the auto battery business. Are there any combinations like would that combination be a threat or change the landscape significantly from where you guys sit? Anything else that, that scares you? No. I mean, short answer is no. I said it 3 times, but I guess I'll underline it and say, where we play North America Residential and North America Light Commercial or Unitary, we're 3 in our end markets and we're at critical mass and scale. And so if 2 of these other sort of large applied companies that also have residential businesses and then certainly in JCI's case almost an afterthought sort of combined, that doesn't bother us at all. And again, I without being too snarky about it, having spent a lot of time at UTC when these conglomerates combine, people are worried about are they going to still have a corner office and are they going to still have the VIP parking pass rather than customers. And so it doesn't bother me when sort of combination actually think we gain a lot of share of that app. Now that's I guess is a snarky answer. The more constructive answer is I do think there can be value created to combinations in this industry and I think we've demonstrated that we're pretty good operators here. And if something becomes available, I think we could create value if we were part of the combination. Appreciate it. Thanks a lot, Todd. Next question is from Jeff Sprague with Vertical Research. Please go ahead. Thank you. Good morning, everyone. Hey, Jeff. Hey. The good news is aluminum is down 8% this morning on a little Russia relief. But I've got a question about China, if you don't mind. You had made a point, Todd, historically about outsourcing significantly to China and highlighted that at the Investor Day. As you know, there's a lot of motors and compressors on that list that came out a couple of weeks ago. Can you give us a little color on how you might deal with that? Can you shift back to the U. S? Is there anything preliminary that you are doing? Or do you just need to wait and see how these cards fall? I think I'll answer the latter part of the question first. We have to wait and see how the cards fall. I've learned we've all learned you got to sort of see how it plays out. You can't react to the tweets or sort of to the early pronouncements. And this is obviously more than the tweet they've put it in on paper, but we just got to see how it plays out. The answer is we have options. We have options both to move it back to North America, to move it other places in Asia. So we'll wait and see how it plays out, but we have multiple suppliers and flexibility on almost all the components, including the motors, and we'll just see how it plays out and react. Can you give us a sense of how much of your sourcing is still in the U. S. On motors and compressors? We do over half our compressors in the U. S. We have a joint venture from decades ago with Emerson that we do it. We have a base load of our compressed scroll compressors come from there. And then some of the premium motors we still source in the U. S, but even our U. S. Suppliers of motors make a lot of those in Asia and source them for us from there. So compressors more than 50 in the U. S, motors more than 50 outside the U. S. And I just wanted some help thinking about incrementals too. Obviously, you're targeting kind of 35%. But as you know, the way the arithmetic works, right, if you're getting price offsetting cost dollar for dollar, that actually erodes margin, right, works against the conversion rate, so to speak. Do you still see a path to drive to 35% incrementals? Maybe a little color on how you get there? I'll parse a little bit and just say, I think it's closer to 30% than 35%, at least that's what we're attempting to do with our guide this year and longer term. So I think it's more 30% is what we should see the drop through on the model. Yes, we're still pretty confident that we can do it. I mean, we're price offsetting commodities, but we got SG and A productivity for the quarter and we'll get SG and A productivity for the year. We're offsetting freight and distribution productivity And we still have the $7,000,000 of factory productivity we're getting in North America. So we still feel pretty good as long as we get the volume on the 30% incrementals that we talked about. And just one final point of clarification. Is the freight of 2 to 3 in addition to the commodities of 9 that you felt in the quarter or it's inclusive? Yes. Yes. Yes. Great. Thanks a lot, guys. Appreciate it. Our next question is from Robert Barry with Susquehanna. Please go ahead. Hey guys, good morning. Hey Robert, how are you? Good. Thanks. Thanks for the more detailed color this quarter on the price versus the mix breakout. Appreciate that. But I did actually have a question on a couple of those metrics. That 2% of price in resi kind of expressed as a growth rate, how would you expect that to track as the year progresses? I think in resi, it will be relatively consistent. And I think on the commercial and refrigeration, we'll see it uptick a little bit. And I think there'll be some lapping maybe in Q4 because we took sort of some preliminary actions going into the year to as this commodity spiked up second half of the year. So I think maybe I'm answering the question real time. I think maybe a 2% tails it down for resi a little bit second half of the year, while commercial and refrigeration tails starts to climb as we're able to get national accounts with some of our larger customers with pricing. Yes. I mean maybe there's some rounding there, but it does look like you're off to a pretty solid start on that front. Yes. I mean, state the obvious, if we do the math of it, if we do $1,500,000,000 all year on $3,900,000,000 of sales or whatever you sort of have in your model, we're going to do better than what we said, but that'd be good. Yes. And that mix component of the guide, that 5, is that just resi? It's primarily I mean, I don't think it was a yes, primarily resi, the guide that we give is specifically resi. Yes. I mean similar question, 1% in the quarter is almost 5% just in this quarter. I mean, is that just conservatism or do you see some offsets there as we go? It's conservatism. I mean, it's quite frankly just not well, let me give a more thoughtful answer. A part of that mix in the quarter was add on and replacement outgrowing R and C for the quarter, residential new construction. That happens on a full year basis. We'll probably do better on mix than what we guided. If R and C sort of kicks back in, it's growing at double digits and add on replacements more like high single digits, then we have negative mix the other way that we have to offset. I think that's sort of the math of it. Got it. Fair enough. In our models, we still think residential new construction on a full year basis will grow faster. Got it. What was the kind of net net bottom line on how weather impacted resi growth in the quarter, do you think? The degree heating days were up year over year. So I mean it was colder in Q1 than it was a year ago. So I think net net it helped. It helped early and it helped sort of on spare parts and supplies. But as we said before, when it's been warm in Q1, the weather in Q1 isn't near as impactful as it is 2nd Q3. So maybe 1 point or 2, 1 percent or 2 of revenue. Got it. Just one quick last one for me. In your cash flow guide of 395, do you contemplate any material kind of working capital headwind or tailwind in that number? The tailwind we incorporated was last year, as you recall at the end of the year, we had a disappointing end of the year on cash flow and we pointed at payables and to a lesser degree receivables is the reason And we said that would flow into 2018. And so we added about $30,000,000 to our initial cash flow guide to reflect that working capital tailwind. And then there's sort of nothing other than sort of normal working capital performance that's baked in other than that. Got it. And that normal would be just some modest incremental just need given yes, got it. Yes. So the core working capital metrics slow. We'll spend working capital to drive revenue. Great. Thanks. Thank you. Next, we'll go to Ryan Merkel with William Blair. So first question, just back on residential new construction. Why was it slower in the quarter? And it sounds like you think it will still be strong for the year, but just what did you hear? And why do you think it's going to pick up? I think it's mainly weather driven. The flip side of it being colder this year rather than last year is job sites don't get started and projects or houses don't get finished. And so I just think it's the reverse of the weather. I don't believe so far when we talk to our and I think continuing when we talk to our builders, big builders, they remain confident. They're not intimidated by the interest rates. They are sort of more constrained by making sure they have the property in the trades, and we still think it's going to be an up year. Okay. That makes sense. That's helpful. And then just a follow-up on the commercial margins. It sounds like you think the national account mix is going to improve going forward and that's going to be the big driver of why we should see margins starting to improve year over year. But is it also secondary that you should gain a little more price as the year goes on? I think you said that, so price cost actually starts to improve a little bit as well? Yes, exactly. Next question is from Robert McCarthy with Stifel. Please go ahead. Good morning, everyone. Hey, Robert. How are you? Good. Three quick questions and I'll try to keep it on point, so you don't go from snarky to snide with me. In any event, because I know it's a slippery slope with me in particular. So in any event, number one, could we just talk about maybe the hurricane impact in terms of anecdotal, what you could see in terms of rebuild activity? And then maybe just the second part of that question is just level set us for the compare and the disruption in the Q3 as we kind of address our models as we're making the turn here? When you talk to the team in Houston or to the team in Florida, what they'll tell you is we saw a spike in spare parts right after each of those events and we saw it for a quarter. And then I think the variable that's unaccounted for that we just have to see how it plays out is, those are places that it's hot year round, so they had to repair their units. And the question is, will they replace them when we get into the summer selling season if there's another issue on the unit. So I think it's still yet to be seen and but I think quite frankly, it's on the round. And then I'll have to double check, Robert, what we said last year. I don't think we complained. Look, we had a weaker Q3. We were down low single digits and we thought part of the impact of that were the hurricanes. But as I recall from memory, it was much more about the weather in Q3 than it was that. So I don't think we blamed it when it happened and then I don't think we were as bullish as others have been about how it's going to bounce back. I think it's on the round both times. Moving around to national accounts, definitely strong growth, obviously, on a bit of a shoulder quarter. But I mean, could you talk maybe a little bit about the was there any compare benefit or as you're kind of weathering kind of the retail Armageddon maybe in terms of trends overall, how should we think about national account growth playing out for the year? I think it continues to be a good story for us. And again, we've as you know, Robert, we've made explicit efforts to diversify away from retail. And increasingly, our mix of business is less retail and more when you look at new accounts we won over the last 2 or 3 years, a higher percentage of them are nonretail than retail. And so we're working our way around it. And then the other point, as you've heard me talk about, is some of our customers are figuring out how to compete and have a business model that works, whether it's Home Depot, whether it's Lowe's, whether it's Best Buy and to continue to compete against Amazon. And so there's going to continue to be brick and mortar and a lot of those have rooftops that we put on place during the last big bubble of new construction and retail, which mirrored the housing construction a decade ago. Those units are now aging and have to be replaced. Our business model is now a replacement model, 2 thirds rather than a new construction model, which used to be 2 thirds of our business. Final question is just Parts Plus. Any update there on the trajectory of store adds? And any deployment and traction? Yes. Our focus, as you know, in 2018 was to not open the same 25 to 30 stores we've opened in the last few years to have it be more like 5 or 6, I forget the exact number. We opened 1 in Q1, but we increasingly were talking about the need to drive parts and supplies as a mix of the sales. And we had a nice again, weather helped us because it was cold, but we had a nice growth in parts and supplies. We outgrew our total revenue growth in resi. Parts and supplies grew double digits rather than the high single digits overall. And so parts and supplies had a nice quarter. 1 quarter doesn't make a trend, but sort of our increased focus appears to be paying off, and we look forward to a good year in parts and supplies. All right. One press by rock. Thanks. Thanks. Next we'll go to Chris Belfort with UBS. Please go ahead. Good morning. Hey, Chris. So in terms of residential, replacement picked up sequentially against pretty tough comp from last year. Do you think that you guys are seeing any pre buy ahead of like price increase being fully baked in? And with regard to that, are you seeing any channel inventory levels? Are they normal or higher than last year? No. The price increases were effective at the end of the year. And so if we pulled anything in, we pulled it in the Q4 last year. The other is and I know you know it, Chris, but I'll mention it for others. I mean, it's tough to do the year over year against the hard comp point because last year, we were up significantly because we had more days in Q1. The number of days versus last year, this year, difference of 1. So it's on the round where last year was up by 4 or 5 days from the prior year. So it's hard to look at the percentages year over year and say it was up on a tough comp. But the answer, I think what you're trying to probe is we think it was real demand, underlying homeowner confidence to replace units when they break demand and that foreshadows, even with the weather being a little cool right now, confidence as we go in the quarter, both for us and for our contractors. Right. Yes, great. And then just on the called out factory absorption negatively affecting profitability for the year or for the quarter. Was that only in Refrigeration? And how should we expect that to kind of continue go through the year? Or is this kind of largely behind them at this point? It's only Refrigeration, and we think it's largely behind us. Again, we sort of communicated that we think we're going while the margins in Refrigeration were down 100 basis points for the quarter, we're still confident that we're going to have Q2. Okay. And then just one last kind of on the commercial side in terms of mix. I think last quarter you guys talked about the mix improving there and trying to potentially gain some more share on the emergency replacement side of things with your product there. So just any color there in terms of what you're seeing or any trends there? No. I mean, we continue to focus on growing not only our national accounts business, but our local and regional business. And as I spoke about, we had a pretty good Q1 in our Regional and National Account business, which actually grew quicker than our national accounts business. So there's sort of focus on regional and locals working out and we're focused on growing it. Okay, great. Thank you. Thanks. And we'll go to Rich Kwas with Wells Fargo Securities. Please go ahead. Hi, everyone. Just a couple ones. On that local regional piece, is that better margin than national account? National accounts is actually better margin, believe it or not. And so that's why we felt margin pressure. In part, we had mixed down in the quarter from that part of the business growing faster than national accounts. And again, you know this, Rich, but for the broader audience, it's counterintuitive when you think about who our customers are on national accounts, but it's also our most expensive, most premium energy efficient product is who we sell them or the product we sell to them. Okay. All right. And then on mix for resi, so a point benefit in the Q1. My recollection was last year you faced stronger growth on the construction side. So you're comping against that replacement is a little bit weaker. So should we expect this mix of, let's say, 100 bps, is that going to continue next couple of 3 quarters? Steve asked a question or someone asked a question earlier and I sort of talked all the way around. The short answer is if we are mixing up and always sort of mix up and add on and replacement. And so that's been the trend for the last 2 or 3 years. We expect that to be the trend this year. The variable that's offset it over the last couple of years is because residential new construction has grown faster than add on replacement has both as a market and our sales. And so if the rest of the year looks like Q1, which is our add on replacement business grows faster than residential new construction, we're going to have nice mixed tailwind. We don't think that's going to be the case in our internal models. We think residential new construction was impacted by cooler weather in the quarter and for the balance of the year. The market will probably outpace add on and replacement. Okay. So that's potential upside when it's all set and done? Correct. On the mix side. I mean, potential upside on mix, but maybe less volume. So we like both of them to be up strong. Right, of course. And then SG and A, should we still think about half of sales growth? Yes. Although we're off to a good start. But yes, that's how I would model it. Okay, cool. Thank you. Okay, super. Thanks. With no further questions, I'll turn it back to the company for closing comments. Great. Thanks again, everyone, for joining us to wrap up. First quarter was a record start to the year. We entered our largest seasonal period. We continue to expect strong growth, profitability and cash generation for another record year in 2018. Again, thanks everyone for joining us. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.