Lennox International Inc (LII) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Lennox International Q1 2011 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 first quarter of 2011.

I'm here today with Todd Bluedorn, CEO, and Bob Hau, CFO.

Todd will review the key points of the quarter and Bob will take you through the Company's financial performance.

In the earnings release we issued this morning, we have included the necessary reconciliation of the financial metrics that will be discussed to GAAP measures.

We can find a direct link to the webcast of today's conference call our corporate website at www.lennoxinternational.com.

We will archive the webcast on that site and make it available for replay.

I would like to remind everyone that in the course of this call, to give you a better understanding of our operations, 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.

Lennox 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 the CEO, Todd Bluedorn.

Good morning, and thank you for joining us.

Let me take you through a few key points on the first quarter and then Bob will discuss the financial results in more detail, and then the outlook for the balance of the year.

Total Company revenue in the quarter was up 7%, including the acquisition of Kysor/Warren, which closed mid-January.

Excluding the acquisition, and at a constant currency, revenue was flat with the first quarter a year ago.

We saw softness in our Residential Equipment and Service business, good growth in our Refrigeration business, and strong growth in our Commercial business.

EBIT Margin was down 190 basis points for the Company overall.

Primarily on lower volume, higher commodity costs and higher freight costs.

Adjusted EPS from continuing operations was a loss of $0.11, versus a profit of $0.06 in the first quarter a year ago.

GAAP EPS from continuing operations was a loss of $0.13, versus a loss of $0.02 in the prior year quarter.

Price and mix were up for the Company in total in the first quarter led by 5% benefit in our Residential business.

Residential price and mix fully offset commodity headwind in that business, and we expect that to be the case for the full year as well.

As 2011 progresses, we expect to see more benefit from price and mix in our Commercial and Refrigeration businesses.

Our Commercial price increase of 2% to 6% layer in as we work through backlog and as contracts come up for renewal at national accounts.

Our refrigeration price increase of 4% just became effective toward the end of the first quarter, and will likewise layer in over the course of the year.

We now expect $45 million to $50 million of commodity headwind in 2011, weighted more heavily to the first half of the year.

And we still expect to fully offset that amount on a full-year basis with our announced price increases.

Looking at the quarter for each of our businesses, let's start with Residential.

As we mentioned on the fourth quarter conference call in February, Residential was off to slow start in the first quarter, impacted by a couple of dynamics.

First there was pull forward of demand into the fourth quarter of last year, ahead of our announced price increases of 4% to 8% which became effective on deliveries after January 1.

Second, there was a pull forward of demand into the fourth quarter, ahead of the expiration of the government's tax credit of $1500 level for higher efficiency HVAC equipment.

These effects helped to drive 9% Residential growth in the fourth quarter, but contributed to a 4% decline in the first quarter.

Let me also make a few comments about our business relative to North America market overall.

First, with 80% of our HVAC business going through Company owned distribution, Lennox's does not see the swings that can happen on a monthly or quarterly basis from channel loading and independent distribution.

Second as I mentioned, we saw significant demand pull forward into the fourth quarter, ahead of our January 1, price increases.

Others in the industry announced price increases effective in February and March, and therefore likely saw similar pull forward dynamic in the first quarter.

Adjusting for the demand pull forward affects that we saw in our business, our Residential revenue would have been up 3% in the first quarter, more in line with underlying industry demand.

So a few moving parts in the fourth quarter for our Residential business and the Residential market, I will add that while January and February revenue was down year-over-year, revenue turned up, and we grew year-over-year in March.

We still expect Residential shipments for the industry to be up low single digits for the year overall.

Turning to our Service Experts business, revenue was down 8% against tough comparisons to the first quarter a year ago, when revenue was up 22%, driven in part by Canadian and US government incentives.

In Canada, we saw strong growth in the first quarter last year ahead of the expiration of a government tax rebate of up to CAD1350, and the US our new construction business was up 50% in the first quarter a year ago, ahead the expiration of the government's homebuyer tax credit.

On the Commercial services side of business, revenue was up slightly.

Growth continued in commercial service and replacement, while new construction was down.

Turning to our Commercial Equipment business, revenue was up 16%, with both replacement and new construction business up in the quarter.

Geographically, we saw strong growth in North America and Europe, with revenue from both regions up double digits.

Commercial segment margin was up 150 basis points in the first quarter.

With the inflection of our commercial business in the second quarter year ago, the year-over-year comparisons become more challenging in the quarters ahead, but we believe we are well positioned to capitalize on continued growth in the market and market share gains this year.

Year-to-date we signed up 7 more new national accounts bringing our total 82 national accounts since the start of 2007.

In our Refrigeration business for the first quarter, revenue was up 33%, including the Kysor/Warren acquisition.

Organic revenue at constant currency was up 3%.

Revenue was up in all regions except Australia, due to soft economic conditions in that country and our strategic exit of the third party coil business.

While reported Refrigeration segment margin was 7.7% , down from 113% in the first quarter a year ago, excluding the Kysor/Warren acquisition, in the first few months of ownership, Refrigeration segment margin was only down 70 basis points primarily from higher commodity and freight costs.

As I mentioned earlier, Refrigeration price increases were just put into effect near the end of the first quarter, so we expect price benefit over the coming quarters.

The Kysor/Warren acquisition has gone well since we closed mid-January and integration is fully underway.

We expect solid margin improvement as we proceed through the year.

The Kysor/Warren backlog continues to look very strong on the success of its STRATUS line of high-efficiency display cases.

We expect the deal to be at least $0.03 accretive in 2011, and $0.12 in 2012.

Before I turn it over to Bob, let me say as those of you who have followed the industry for some time know, that the seasonally light first quarter is not necessarily a good indicator of where the full year will come in.

We continue to expect a good year in 2011 and reiterate our guidance for the full year, including 17% to 29% growth in adjusted earnings per share.

In line with that, we have increased our dividend 20% to $0.72 per share annually.

We also repurchased $24 million of stock in the first quarter, and target buying more than $100 million in total this year.

Now, I will turn it over to

Thank you, Todd.

Good morning, everyone.

I'll provide some additional commentary on the business segments for the quarter, starting with Residential heating and cooling.

In the first quarter revenue from Residential heating and cooling was $272 million, down 4%.

Volume was down 10% and price and mix were up 5%.

Currency had a 1% positive impact.

Volume was down with the impact of the demand pull forward into the fourth quarter as previously discussed.

Through the first quarter, we did see shipment conditions improving each month.

Price and mix were favorable in the quarter on the strength of our January 1, price increases.

Residential segment loss was $1 million, compared to a profit of $7 million in the prior year quarter.

Segment loss margin was 0.4%, compared to segment profit of 2.5% in the prior year quarter.

Results were primarily impacted by lower volume, higher commodity costs, and higher freight costs, which were up on the timing of freight expense as well as fuel surcharges.

Higher commodity costs were fully offset by price and mix.

Residential also benefited from ongoing productivity initiatives and lower SG&A.

Turning to our Commercial heating and cooling business, in the first quarter, Commercial revenue was $139 million, up 16%.

The volume was up 15% and price and mix were flat.

Currency had a 1% positive impact to revenue growth.

Segment profit was $6 million, up 74%.

North American commercial HVAC revenue was up low teens, and European commercial HVAC revenue was up more than 20%.

Segment profit margin was 4.3%, up a 150 basis points from the prior year quarter.

Results were primarily impacted by higher volume and productivity initiatives with offsets from higher commodity and freight costs as well as selling expenses.

Moving to our Service Experts business, in the first quarter, revenue was $117 million, down 8%.

Volume was down 11% and price and mix were up 2%.

Currency had a 1% positive impact.

Residential revenue was down in the quarter, while commercial revenue was up.

Segment loss was $8 million, compared to a loss of $5 million in the prior year quarter.

Segment loss margin was 7.0% compared to segment loss margin of 3.6% in the first quarter a year ago.

Segment profit was down on lower volume with some offset from lower SG&A expenses.

In the refrigeration segment, revenue in the first quarter was $175 million, up 33% including the impact of the Kysor/Warren acquisition.

Volume was up 3% and price and mix were flat.

Organic revenue was up 7% or up 3% at constant currency.

In constant currency, Europe, South America, and China all saw double-digit revenue growth.

North American organic revenue was up mid-single digits, and Australia was down low double digits.

Segment profit was $14 million, compared to $15 million in the prior year quarter.

Segment profit margin was 7.7%, including the effect of the Kysor/Warren business, in the first few months of ownership versus 11.3% in the prior year quarter.

Overall Refrigeration results were primarily impacted by higher volumes and productivity initiatives, with offsets from higher commodity and freight costs as well as selling expenses.

Looking at special items in the first quarter, the Company had after-tax charges of $1.4 million, including charges of $800,000 for restructuring projects announced in prior quarters.

Corporate expenses were $15 million in the first quarter, compared to $13 million in the prior year quarter.

For 2011, our corporate expense guidance remains approximately $70 million.

SG&A was $174 million in the first quarter, up 3% from the prior year quarter.

With 7% reported revenue growth, SG&A is on track with our long-term goal for it to grow at no more than half the rate of revenue growth.

For the first quarter, cash used in operating activities was $148 million, compared to $40 million in the prior year quarter.

Cash used in operating activities was up from the first quarter a year ago, primarily due to higher inventory build and product positioning of Company-owned distribution ahead of the summer selling season.

The change in accrued expense is due to higher variable incentive compensation for 2010 performance that was paid out in the first quarter and a change in income taxes payable.

Capital spending was $8 million in the first quarter, compared to $11 million in the prior year quarter.

Free cash flow was a negative $157 million in the first quarter, compared to a negative $51 million a year ago.

Due to the seasonality of our businesses, it is common to use cash in the first half of the year and generate cash in the second half of the year.

Excluding the impact to the Kysor/Warren acquisition, working capital as a percent of trailing 12 month sales for the Company was 17.5%, up slightly from 17.3% in the year-ago period.

Also, the quarter-end working capital ratio was 17.8%, up from 16.4% at the end of the first quarter a year ago.

Looking at liquidity, cash and cash equivalents were $55 million at the end of March.

Our debt to EBITDA ratio was 2.1 ending March after the Kysor/Warren acquisition.

This is slightly above our long term range of between 1 and 2 times, but we expect this to trend down over the course of the year.

Our total debt was $542 million at the end of the quarter.

For 2011, we currently expect interest expense to be around $17 million.

We remain well positioned with our balance sheet to continue executing on our strategic initiatives, and returning cash to shareholders.

Todd mentioned the dividend increase and the share repurchase in the first quarter.

I'll just add that at the end of the first quarter we had $117 million remaining under our existing stock repurchase authorization.

Before I turn it over to Q&A, I'll briefly talk about our outlook for 2011.

While there were several moving parts in the first quarter, our underlying market assumptions remain the same for the full year.

We expect North American residential market to be up low-single-digits, we expect the North American Commercial unitary market to be up mid-single digits, and we expect Europe HVAC and Refrigeration markets to be up mid-single digits as well.

Based on these assumptions our guidance for organic revenue remains 5% to 8%, including 1 point positive foreign exchange impact.

Including 6 points of growth from Kysor/Warren acquisition, our revenue growth guidance range is 11% to 14% on an as reported basis.

We now expect commodity headwind of $45 million to $50 million for the full year, weighted more to the first half of the year.

We also expect to fully offset this commodity headwind on a full-year basis through pricing actions we've taken.

Residential was successful with this in the first quarter and our Commercial and Refrigeration price increases layer in over the course of the year.

The Company overall will realize more price benefit in the Company -- in the coming quarters.

In our Global sourcing program, we expect in year savings of $25 million $30 million.

We reiterate our 2011 guidance for adjusted EPS from continuing operations of $2.80 to $3.10.

Our GAAP EPS range remains $2.75 to $3.05 including the impact of announced restructuring activities.

Our weighted average share count for the full year is approximately 54 million shares, we expect our full-year tax rate to be approximately 35%, and for capital spending we expect about $65 million in 2011.

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

(Operator Instructions)

Our first question will go to line of Jeff Hammond with KeyBanc Capital Markets.

Please go ahead.

I know you guys don't give quarterly guidance, so we're trying to assess versus our models, but I guess versus your model in the first quarter, where were you particularly surprised?

Was Res ultimately weaker?

How did price/cost fall out versus your kind of internal plan?

And just maybe expand on how that biases your view on a go forward basis, if at all?

We expected first quarter to be soft, if that's your question.

We knew that, and we talked about it in the February call - although to your point we don't give quarterly guidance - that the timing of our price increase which is, for deliveries after January 1, we knew some volume have been pulled in.

We also weren't surprised that and we talked about it that the commodity headwind was for the first half of the year rather than second half of the year, and that the material cost savings are more second half of the year than first half of the year.

And that the pricing on commercial and refrigeration as we worked through the backlog of existing orders, would sort layer in part way through the quarter.

So, all that was in large part what we expected.

Volume quite frankly in Res was a little softer than maybe what we had expected.

And the freight surcharges and the increase in steel pricing was probably -- wasn't what we thought it would be when we started the year.

But net-net, in large part the quarter came in about where we thought, although it came in little light.

Okay and then you bumped the commodity inflation, I assume that's related to your comment on freight and steel, but any additional price actions you've announced or contemplating?

None that we've announced, many that we're contemplating.

Everyone on the call I think understands, certainly you do Jeff, there are two ways that you can price.

One, is the umbrella that you announce.

And second, is the yield to get from it.

We are happy with the yield that we are getting in the Residential piece of the business.

We're confident that from the little we've seen, so far, of the effective dates in Commercial and Refrigeration we're going to get it there also.

So, we are still, as Bob gave in his comments, planning on offsetting commodities on a full-year basis.

Okay.

And then Service Experts, I guess the last couple quarters have been a little surprisingly weak, and I think you mentioned some comp issues.

But anything in particular going on there?

I know you made a management change.

Any kind of early observations around the change in management?

Any change in direction or additional actions within that business?

I think there's lots of additional actions, but at least from a strategic point of view I think it's consistent with what we've been talking about, which is continuing and hopefully at an increasing rate, to take a national business and leverage that by making investments in controls and our way of running the business that allows us to compete with local Ma and Pa's.

So, it continues to be investments in how we manage efficiency, how we manage productivity of our technicians, how we manage pricing on a national level, so I think it's more of the same.

The Service business, it's thousands of little knobs that you turn everyday to drive the profitability of the business.

And the management team we have in place are the right guys to do this.

So, the drop -- the decrementals were a little off on Service Experts, but to a large degree the miss in the first quarter was on volume and revenue as they reflect the same things that we talked about on the Resi business.

But, we still remain very confident in our Service Experts team.

Okay, great.

I'll get back in queue.

Thanks, Jeff.

Next, we'll go to the line of Robert Barry with UBS.

Your line is open.

Hi, guys.

Good morning.

Hi, Rob.

How are you?

Good.

Thanks.

Could you give us any color on what the weighting was of that 5% price mix?

Was it more weighted to price or mix?

Sort of order of magnitude, it was split between the two.

And we get into a little bit of trouble just in the fact that we have a new platform launch, our new furnace platform.

So, it is often hard to tell how much is mix, how much is pricing when you launch something new.

But I think the message is net-net the 5% reflects our ability to offset the commodity increases.

Have you -- what has been your experience on the mix front post the tax credit reduction?

You know, Watsco on their call the other day said that, surprisingly, it seems to have no impact.

Yes.

Or very little impact.

I was pausing on the no which is a pretty aggressive statement.

And I heard what they said also.

I think the answer is we've sort of powered through this through one quarter, which is what we had planned on doing.

We have our guys focused on selling high-efficiency product.

We often talk about the mix of our business that is 14 SEER and above.

It was 56% last year, it was 54% this year, so in essence the same number.

So, we did well in first quarter.

But I would also caveat, to say as you get into the selling season, where the real volume is in second or third quarter, we will know better.

We are still optimistic we are going to power our way through there.

But ask me at the end of the third quarter, and I think the answer will be something greater than no impact.

And we have all that worked into our guidance.

And then I guess I'm just trying to understand a little more about what's going on in the volume front.

I understand the pull forward, but it looked like the volume in fourth quarter, the volume piece of the revenue growth was up 4%, and what you disclosed implies that the volume piece of the revenue in the first quarter was down 10%.

So, it suggests there's something potentially more going on than just the pull forward.

I know that there was also the tough comp.

I mean, to what extent do you think share loss might be a factor here?

If we look back over the last 6 months, sort of look at it together, because again the effect of - we pulled volume in the fourth quarter, some of our competitors pulled volume from second quarter and the first quarter.

When we look at - over our share position over the last 6 month, we lost a little bit of share, measured in tenths of a point.

So, the big difference in our reported numbers isn't explained by that.

I think given our business model, we are selling directly to dealers, and except for a price increase, they are buying it when they see end-demand.

We don't have large independent distributors who are loading and unloading.

So, we had a little bit of share loss measured in tenths of a point, but I think we have a pretty good view of the underlying market.

And if you make sort of the fast math that Bob did which is, if we adjust for the volume that we think got pulled in the fourth quarter, we think our revenue in Res was up 3%.

You assume some price/mix on top of that, and then the actual industry -- the actual volume was up -- down, low single digits.

And we don't think that was -- we think the underlying demand for sort of flattish to slightly down in the first quarter.

And then maybe there was some short-term share loss because of the timing of the competitor price increases?

Well but again, I think if you just look at first quarter, we clearly lost share just from the announced numbers.

But I think if you go back and look over fourth quarter and first quarter -- look at it over a 6-month period, we lost a few tenths of a point but not major share loss.

And just finally --

The other number I would throw out there just to sort of to underline that is - if you look December, just the month of December, industry numbers had unit volume flat.

Our unit volume in the month of December was up 30%.

So, that sort of gives an indication with at least two numbers, of sort of the pull forward that I'm talking about.

Right.

And just, one last question on the pull forward.

I mean, how is that distributed between the Lennox brands and the Allied brands?

And how do you get a good read on quantifying it?

It's spread across both of them, so I think about it evenly.

Because we have dealers -- especially our large dealers who will buy ahead of a price increase.

It's in an inexact science, how we quantify it.

I mean, what we did was went in and looked at, like the number I gave you of what happened in December.

We can literally go SKU by SKU and understand the type of products that dealers are buying ahead.

Another fact that I would give you would be in first quarter, when we look at the industry numbers, air conditioning product and unit volume was up, as industry was up 15%, and the furnace product line in first quarter -- what was -- I'm looking around making sure I have the right number.

I think it was flat in first quarter.

So, we have furnaces actually down 3%.

So if you look at first quarter as an industry, air conditioning and heat pumps are up 15%, furnaces down 3%.

In first quarter, when people are buying air conditioners, it's not for end-use demand.

It's for loading or ahead of a price increase.

What's really being bought and sold for end-use demand are furnaces.

So, that is another number that we look at, to sort of say a big spike in a bridge period like first quarter in air conditioning, is around loading the channel or buying ahead of a price increase.

Okay, Todd.

Well, thanks very much for all the detail.

Thanks.

Next, we'll go to the line of Adam Samuelson with Goldman Sachs.

Please go ahead.

Yes, good morning everyone.

Question on cash flow, EPS guidance is unchanged for the year despite the soft start in Residential.

I don't think you have given formal cash flow guidance for the year but you previously talked about expecting cash roughly approximating net income, given the working capital build in the first quarter.

Is that's a reasonable assumption?

Yes, we historically build inventory really in the first half, getting ahead of the summer selling season, and then bleed it out, really Q2, Q3.

So, no change in overall long-term guidance of net income, or -- excuse me - free cash flow, approximating net income.

Okay but in terms of the working capital built in the first quarter relative to your expectations going in, did that -- would it end up being bigger, given some of the inventory draw that you saw in the fourth?

Or how do you -- how did that -- how do those dynamics play out?

I would - the working capital change in Q1 was in line with our expectations, slightly higher given the Residential volume that Todd talked to little bit about but largely in line with our plans.

Okay, that's helpful.

And then switching gears onto the Commercial side, revenues up 15% organically, how were orders in the quarter?

You indicated backlog was strong, but then the comps get tougher so maybe some color on the order trends and the pockets of strength by vertical market there?

Orders continue to be strong both in the Commercial business and Refrigeration business.

I mean a year ago, the numbers were sort of high-teens, 20% year-over-year increases.

It's not quite as strong on the order rates this year, but they still remain strong both in Commercial and Refrigeration.

Our verticals that remain strong are the Grocery segment, obviously, and our Refrigeration business.

The planned replacement for our retail customers, both in Commercial and in Refrigeration, and in schools - which was a pocket of strength for us last year - continues to be strong as we enter in into our primary selling season for schools.

Okay, that's helpful.

And then, thinking just lastly -- I know it's still early and you've indicated that sequential trends for the quarter had improved -- but any early thoughts on spring selling season?

Any early traction or early read that you have there?

On the Res side, as you alluded to in your question, January and February were soft for us, March picked up, and we saw it grow year-over-year.

April, quite frankly, started little slow, I mean the weather in the Northeast and sort of the wet, cool weather isn't helping.

But, at the end of the day, second quarters May and June -- 50% of our volume for the quarter is in the month of June, and that's really where it comes down to.

So, it's a two-weekly time business, and May and June are the two months.

Fair enough.

Thanks very much

Thanks

And next we'll go the line of Josh Pokrzywinski with MKM Partners.

Please go ahead.

Good morning, guys.

Hi, Josh.

Just trying to understand - I think we can all appreciate why Residential in the first quarter is a difficult read to extrapolate over the course of the year.

But it seems like there were fewer moving pieces in Commercial, certainly around price increases, pull forward et cetera.

I mean, I guess the Comp has already been getting tough there for awhile?

Is there any reason to believe that we will fade from here, other than the Comp?

It seems like there's a lot of optimism both from your competitors and the channel out there already.

We have lots of confidence in our Commercial business and I think there's sort of a, given our retail customer base, there can be some chunkiness from quarter to quarter.

But the momentum we have in Commercial and Refrigeration remains constant.

I mean part of my caution is just around, you can't have order rates, I think, go up 20% continuously when half of your business is retail, with consumer confidence where it is at.

And so, we remain confident for the year, but again as far as we can see in Commercial and Refrigeration, things look good, if that's the question.

Got you.

And then just trying to understand, I guess the high-level guidance for Residential, the low-single-digits industry shipment.

A couple things, I want to dig in on.

First, it seems like coming into the year, inventory in the channel for your competitors was pretty light.

So maybe industry shipments in general could look a bit ahead of what Lennox could do, simply on channel fill.

And then, are you speaking on a volume basis or a revenue basis?

Certainly more relevant as price becomes a bigger part of the story in 2011.

We're saying low-single-digits, we're talking unit volume and we're calling out the industry.

So, when we give the guidance of low-single-digits, it's what we think the Residential industry is going to do in unit volume.

Okay.

So, to think of Lennox being on a dollar basis, ahead of that because of price.

And maybe shave off a little because of inventory in the channel, you're not having a fill dynamic, not an unreasonable way to think about it?

Not an unreasonable way to think about it.

Okay, thank you.

Thanks.

Next, we go to the line of Keith Hughes with SunTrust.

Please go ahead.

Yes, thank you.

Questions within Refrigeration.

I know you mentioned Australia being a big negative for you in the quarter.

But if you look at the various other geographies, were they well above this 3%, excluding acquisition number, we saw?

Yes.

Is that going to continue in the future?

Do we have the same sort of chunkiness or lumpiness that we would see in Commercial in that business?

Can you ask the question one more time, Keith?

Will we see the same kind of chunkiness, lumpiness that we have traditionally seen in Commercial, which you talked about earlier?

I think we have a broader-based, order of magnitude about half the business and Refrigeration goes through wholesalers.

So, that's less ups and downs, and so -- it's traditionally less chunky than our Commercial business.

And someone just reminded me with a note to make sure I said that, outside of Australia we were up double-digit revenue in Europe, South America, and China.

And in North America we were up mid-single digits.

Okay.

And with the acquisition their primary business, what kind of market share do you have there now?

We think we're number three, and we think we're below 20%.

Okay, number one is currently for sale, correct?

Correct.

Is that something you'll be interested in?

Two answers, one is, I wouldn't comment on an active acquisition.

The second, and I'll answer question by not answering it, is we like Kysor/Warren.

We think we can win in the marketplace with Kysor/Warren.

All right, thank you.

Thanks.

And next, we have a question from the line of Rich Kwas with Wells Fargo Securities.

Please go ahead.

Hi, good morning, guys.

On the Refrigeration segment, Bob, was there anything kind of unique in terms of acquisition costs that depressed the margin in the quarter?

There are two things that occur with the acquisition.

Number one, and we indicated this when we announced the acquisition.

There is some modest upfront costs with looking at the factory doing some lean work, so some minor investment around lean in the factory, as well as some IT systems work.

The real issue is the acquisition accounting.

So, we've got, overall, paid $140 some-odd million for the business.

If you look at the intangibles and the amortization of that, it's about $3 million or so, probably for the year, and that will bleed off over time.

And so that -- so pro rata, that should hit probably equally across the quarter or so, a quarter of that in the first quarter?

Yes, give or take, correct.

Okay and then, on Commercial, I know -- Commercial and Refrigeration in terms of the price increase.

I know that you have a number of contractual arrangements.

What percentage of the revenue base in Commercial and Refrigeration is contractual, and how does that play out during the year?

Is there any lumpiness to that?

Or is that kind of pretty steady, in terms of how it comes up for renewals.

I think that short answer is that, it's reasonably steady how it comes up for renewals.

And as you can imagine -- it's not a - contract with Wal-Mart's different than a contract for someone that has 10 stores.

So, our ability to leverage price immediately versus sort of allowing things to play out, are different by customer types.

I think the high-level message is, we remain confident both in Commercial and Refrigeration that we can offset commodity -- at a minimum offset commodities with price increases.

Okay.

And then it sounds like the order book is building nicely for Commercial and Refrigeration.

Are you seeing any signs of push out because of higher commodity prices and maybe projects shelved for a period of time because of that?

No.

Okay.

Not that I'm aware of.

Maybe down in the bowels of the organization but I haven't heard that.

Okay great, thank you.

(Operator Instructions) We do have a follow-up from the line of Jeff Hammond with KeyBanc Capital Markets.

Please go ahead.

Hi, guys.

Just a couple of things on Kysor/Warren.

One, as you've had the business for a relatively short period of time, as you dig in and you look at lean opportunities and restructuring, what are you finding -- more opportunity, less, any positive/negative surprises?

Net-net we're positive, even where were two or three months ago, on Kysor/Warren.

Good team, good team on our side, in terms of aggressive integration, and driving the synergy plan that we had, around cost take-out, material cost reduction, streamlining the organization.

And as we gave in the guidance, or when we bought it, we plan on it being at least $0.03 accretive this year, and at least $0.12 accretive next year.

But net-net, if this was a stock it's trading up after 3 months.

Okay, great.

And then just with all the trading -- jockeying and trading of businesses within this space, do you see any opportunity for share gain around disruption as some of these properties change hands?

What transitions?

Are you talking about in Refrigeration?

Just as people -- yes, I mean there's a lot of businesses being traded.

I forgot who asked the question, but maybe it was Rich asked the question earlier about the number one competitor in display case is Hussman.

Them being on the block, and depending on who buys them, that gives us an attackers advantage with Kysor/Warren and we like that business and we like our hand there.

So, yes disruption always helps, as you well know.

Okay.

And then, just back to the inventory, how would you characterize your inventories, as you enter the selling season?

And as you talk to people anecdotally, how would you -- what are you hearing about just overall inventories in the channel, at this point in the season?

I thought your note captured it.

I think, people are cautiously optimistic.

And again, with 80% of our sales to dealers, our dealers bought -- some bought, pull forward in the fourth quarter, they bled some of that off.

But, when the weather turns, we are real confident that volume and revenue for us will flow immediately afterward.

Okay, great guys.

Thanks, Jeff.

You do have a question from the line from Robert Wertheimer from Morgan Stanley.

Please go ahead.

Hi, good morning, everybody.

So, I just had a quick question on inventories, as well.

Are you able to -- your total inventory position, are you able to split it between the acquired piece and what you are?

Are you running higher than you normally would at this point in the year, just given the installed base?

I just can't quite see through the acquisition.

You're speaking specifically of Kysor/Warren?

Yes, just the total inventory position.

I don't know what it would be apples to apples versus last year, or priors?

Kysor/Warren up slightly, similar to overall Lennox as they get ready for the summer selling season, particularly with the new products in the Refrigeration market.

But, in line with the overall LII numbers.

They carry about $30 million, $35 million of inventory.

Perfect.

And then just a general question on what you're seeing -- I guess totally agree that 1Q is almost useless as a read.

I'm just curious if you can see anything in terms of mix, as to whether the consumer feels in better health this year as the economy slowly recovers or not.

And the impact that might have on mix in the Resi side?

Early to tell, is the real honest answer.

Someone quoted Watsco earlier.

You saw our price/mix number was very positive for the quarter, and so -- and I gave you the sales of 14 SEER and above.

So, our mix is remaining solid even without the tax credit.

But the second and third quarter, I think will be more indicative of how the consumer feels.

Because right now, as you said it's early.

Too early.

Perfect, thanks very much.

You do have a follow-up from Keith Hughes with SunTrust, your line is open.

Yes, just a quick follow-up.

Within Refrigeration, are there any kind of one-time cost associated with the deal?

Integration costs, transaction costs, something like that?

Short answer is yes.

I'll let Bob answer it.

The overall investment is probably, order of magnitude, less than $1 million, but we also have the amortization of the intangibles, that I indicated, is about $3 million for the full year.

So, $1 million in the quarter, and it will be $3 million for the full year, is that what you are saying?

Order of magnitude, less than $1 million in the quarter.

Less than $1 million in the quarter.

Okay.

The difference between the $1 million, or less than $1 million and the $3 million, is amortization of intangibles, correct?

The $3 million is the amortization of intangibles.

So, additive to, just under $1 million.

Add on top of that.

Correct.

Thank you.

Thanks, Keith.

At this time, there are no further questions.

Mr.

Bluedorn, please continue.

Thanks a lot, Operator.

Thanks everyone for joining us, I'd like to leave you with a couple points.

Number one, our price increases are on track as demonstrated by Residential in the first quarter, and we expect additional benefits from Commercial and Refrigeration as higher pricing layers in over the year.

We remain on track to offset commodity headwinds with price on a full-year basis.

Second, we saw strong revenue growth in Commercial, good growth in Refrigeration.

And adjusted for demand pull forward effects, 3% revenue growth in Residential.

We reiterate our outlook for each of these end markets for the full-year, and believe we are well positioned across all our businesses, moving into the strongest seasonal quarters of the year.

Thanks, again, for joining us today.

Thanks, Operator.

Ladies and gentlemen, it does conclude our conference for today.

Thank you for your participation and for using AT&T executive Teleconference Service.

You may now disconnect.