Lennox International Inc (LII) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Lennox International first-quarter 2015 earnings conference call.

(Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the conference over to Mr. 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 2015.

I'm here today with Chairman and CEO, Todd Bluedorn; and CFO, Joe Reitmeier.

Todd will review key points for the quarter and the year, and Joe will take you through the Company's financial performance and outlook.

Financial results reflect sold businesses in discontinued operations.

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

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

We'll archive the webcast on that site for replay.

We'd like to remind everyone that in the course of this call, to give you a better understanding of our operations, we will be making certain forward-looking statements.

These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements.

For information concerning these risks and uncertainties, see Lennox International's publicly available filings with the SEC.

The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

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

Thanks, Steve.

Good morning, everyone, and thank you for joining us.

Let me start with a few high-level comments on our businesses for the first quarter.

In residential our strong business momentum continued.

Residential revenue was up 7% in constant currency in the face of unfavorable weather conditions in the first quarter.

Residential profit rose 28% over the prior-year quarter, and segment margin expanded 150 basis points to 8.6%.

Revenue from replacement business was up high single digits, while new construction revenue was flat from the impact of severe weather in much of the country.

With the onset of spring and summer, we are confident our business in the new construction market will see a rebound.

On the operational front, we are on track in Mexico for $4 million of savings in 2015 and an additional $11 million in 2016 following the opening of our second plant in the second half of last year.

The facility performed well with furnace production for the winter season, and we continue to grow and expand our operations there.

Our residential distribution expansion also continues.

We opened two new Lennox PartsPlus stores in the first quarter to a now total 163 stores across North America, on our way to a total of 250 stores in 2017.

Turning to our commercial business, revenue was down 3% at constant currency, and segment margin and profit were down from a year ago.

National account and equipment revenue was down high teens, as we saw the timing of orders shift beyond the first quarter into the second, third, and fourth quarters for this year.

This is due to severe winter weather in much of the country, as well as some timing decisions by specific national account customers.

While commercial national accounts business was down in the first quarter, our backlog is up double digits from a year ago, and we continue to expect solid growth for 2015 overall.

In the first quarter alone, we won 10 new national account customers, and off to a great start with new customer business coming online within the next year.

In the portion of our business that's non-national account, we continue to see strong momentum with high single-digit revenue growth.

This reflects our continued progress in the emergency replacement market and the underlying continued strength of the North America unitary market.

Europe commercial HVAC revenue was flat at constant currency.

A disappointing first quarter on a national account timing, but with strong backlog we are well-positioned over the coming quarters to deliver a solid year.

And momentum continues in our non-national account business.

In refrigeration the quarter was as we expected.

Refrigeration revenue was down 2% at constant currency.

By region North America was up mid-single digits, lead by double-digit growth in supermarket business.

Asia was up mid-teens, and South America was up low single digits.

Europe was down low double digits, and Australia was down mid-teens.

We discussed previously that it would be a tough quarter for refrigeration, and it was, but as expected.

Refrigeration segment margin and profit were up significantly from the year-ago level due to lower refrigerant profitability following the repeal of the carbon tax in Australia, North America's supermarket mix, and foreign exchange.

In the second quarter we have a couple million dollars more of negative impact from the repeal of the carbon tax in Australia, and then the tough year-over-year comparisons will be behind us going into the second half.

I would note that refrigeration segment margin was flat from year-ago when adjusted for the impact of Australian refrigerant and at constant currency.

For the full year in refrigeration, we continue to expect top- and bottom-line growth, with 50 basis points of margin expansion.

Overall for the Company in the first quarter, revenue was up 2% at constant currency.

Total segment profit margin was down 60 basis points to 4.5%.

This includes a negative impact of $6 million from Australia refrigerant and $4 million from foreign exchange.

Adjusted EPS from continuing operations came in at $0.37 compared to $0.42 in the first quarter a year ago.

With the seasonally lightest quarter of the year behind us and better weather, the second quarter is off to a solid start.

residential business momentum is continuing.

The refrigeration business is stabling, as we expected; and commercial has a strong backlog of national account business scheduled over the coming quarters.

We are maintaining our view on revenue and EPS growth for 2015 and expect another strong year of growth and record profitability with strong cash generation.

Now I'll turn it over to Joe.

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 first quarter revenue from residential heating and cooling was $363 million, up 6%.

Foreign exchange had a negative 1% impact on revenue.

Volume was up 6%, and price and mix combined was up 1%.

Residential profit in the first quarter was $31 million, up 28% from the prior-year quarter.

Segment profit margin was 8.6%, which was up 150 basis points.

Segment profit was positively impacted by higher volume, favorable price and mix, and lower material costs, with partial offsets from negative foreign exchange and investments in SG&A and distribution expansion.

Turning to our commercial heating and cooling business, in the first quarter revenue was $160 million, down 8%.

Foreign-exchange had a negative 5% impact on revenue, volume was down 3%, and price and mix combined was flat.

North America commercial HVAC equipment and service revenue was down mid-single digits.

Europe commercial HVAC revenue was down high teens, including the negative foreign-exchange impact -- although flat at constant currency, as Todd mentioned.

Commercial segment profit in the first quarter was $8 million, down 25% from the prior-year quarter.

Segment profit margin was 4.8%, down 110 basis points.

Segment profit was negatively impacted by lower volume, negative foreign exchange, investments in distribution expansion, and the VRF business, with partial offsets from favorable price and mix and lower material costs.

In our refrigeration segment, revenue in the first quarter was $163 million, down 9%.

Foreign exchange had a negative 7% impact on revenue.

Volume was up 1%, and price and mix combined was down 3%.

From a regional perspective, Todd already addressed revenue growth in constant currency; but on a reported basis, Asia was up low double-digits, North America was up mid-single digits, South America was down midteens, and Europe and Australia were down more than 20%.

Segment profit was $4 million, down 67% from the prior-year quarter, as expected.

Segment profit margin was 2.4%, which was down 430 basis points.

Segment profit was negatively impacted by lower Australian refrigerant profitability following the mid-2014 repeal of the carbon tax; unfavorable mix in North American supermarket business; and negative foreign-exchange, with partial offsets from lower material costs and factory productivity.

Regarding special items in the quarter, the Company had after-tax charges of $2.8 million, which included $2.2 million in a special legal contingency and $600,000 for other items, net.

Corporate expenses were $12 million in the first quarter compared to $11 million in the same period a year ago.

Overall, SG&A was $133 million in the first quarter, which was down $2 million from the prior-year quarter.

Cash used in operations in the first quarter was $122 million compared to $125 million in the prior-year quarter.

Due to the seasonality of our business, we tend to use cash in the first half and generate cash in the second half of the year.

As previously discussed, in the fourth quarter of 2014 we strategically built inventory to support customers in the minimum efficiency regulatory transition that took effect for certain products at the start of 2015.

The special inventory build amounted to $77 million, and we expect most of this to be monetized as we progress through the year.

Capital spending was $18 million in the first quarter compared to $17 million in the quarter a year ago.

Free cash flow was a use of $140 million in the first quarter compared to a use of $142 million in the prior-year quarter.

Cash and cash equivalents were $37 million at the end of March.

Our debt-to-EBITDA ratio was 2.7 ending the quarter.

This is higher than our typical range of 1 to 2 times debt-to-EBITDA due to the accelerated share repurchase program, but we expect that to be back within the range as we progress through 2015.

And total debt was $1.09 billion ending the quarter.

Before I turn it over to Q&A, I will review our outlook for 2015.

First, our underlying market assumptions for 2015 essentially remain the same.

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.

Based on these market assumptions for shipments and our targets for market share gains, guidance for our revenue growth remains 4% to 8% at constant currency for the full year.

We continue to expect a negative 3-point impact from foreign exchange from revenue growth guidance of 1% to 5% at actual currency for the full year.

Guidance for adjusted EPS from continuing operations for the full year remains a range of $5.20 to $5.60.

We are adjusting guidance for GAAP EPS from continuing operations to a range of $5.14 to $5.54 to incorporate the $0.06 of special charges we had in the first quarter.

The various puts and takes going into our guidance for 2015 remain the same, as we discussed on the last call in early February, when we trued up guidance for the significant moves we had seen year-over-year in foreign exchange and in commodities.

Now, looking at the headwinds for 2015, we continue to expect foreign exchange to have a $20 million negative impact on earnings, net of specific price increases that we have enacted and are pushing through to help mitigate the unfavorable foreign-exchange impact.

Most of the headwind is coming from the Canadian dollar, with some coming from the Australian dollar.

The repeal of the carbon tax in Australia was a negative $6 million impact to us in the first quarter, and we expect a couple million more dollars in the second quarter.

A headwind of $3 million is expected from our investments in VRF for the year.

And we have ongoing investments in the expansion of our residential and commercial distribution network across North America, as well.

Now, looking at some of the tailwinds for 2015, on the commodities front we continue to see a $15 million benefit to earnings.

This includes the benefits we expect to see in 2015 from lower metal prices to include copper, steel, and aluminum; but also lower fuel costs, as well.

We still target $35 million of savings from our sourcing and engineering lead cost reduction programs, and we continue to expect $10 million from incremental price for the full year.

This is separate from the price we are capturing specifically to help offset negative foreign exchange.

As Todd mentioned, we expect about $4 million from incremental savings this year from our second plant in Mexico.

And we continue to assume residential mix is flat in 2015, but we will know more about this as we move into the summer selling season.

A few other guidance points that are unchanged: corporate expense is expected to be approximately $75 million, which is up slightly from 2014.

We still expect net interest expense for the year of about $25 million.

Our effective tax rate guidance remains 34% to 35% on a full-year basis.

We continue to expect the weighted average diluted share count for the full year to be approximately 45 million shares.

Capital expenditures are expected to remain at $85 million for the year, and we are still targeting free cash flow of about $265 million for 2015.

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

(Operator Instructions) Jeff Hammond, KeyBanc Capital Markets.

So can you go through the magnitude of the timing and weather issue in commercial?

And then, just as you look at the double-digit backlog growth, how should we think of the growth rate for commercial for the next three quarters?

You know, as I had mentioned in the call, Jeff, we saw multiple national account customers shift the timing of shipments for various reasons.

In some cases it was due to the severe winter weather we had, where new construction was slowed down.

We are one of the last things that happen on a store -- a new store, when you put the air conditioner or, excuse me, the rooftop on top of the building.

Some of the shipments shifted into Q2, but I would say more moved into the second half of the year and are scheduled for Q3 and Q4.

It was a bit of a disappointment for Q1, but our North American national account backlog -- as I talked about on the call -- is up double digits from a year ago.

And we continue to expect a solid year overall in the business.

So is that kind of a mid-single digit grower, where you continue to outperform kind of the market expectation?

You know, overall for North America commercial, we've called the market out to be low single digits, and we still believe we will outperform the overall market.

Okay.

Great.

And then just quick -- following up on the price cost.

It seems like between fuel and steel, you maybe got a little more headwind there, but you are not changing that.

How should we think about upside to that number?

You got me confused when you said headwind.

Say that one more time?

I guess it seems like that tailwind is better with lower fuel and lower steel costs.

You know, we tried to true it up as best we could.

On the call -- I think it was in February, when we announced fourth-quarter earnings -- when we set a $15 million benefit from commodities, I think we had sort of either had flat or $5 million back in December, and we raised it to $15 million.

That's sort of -- you know, order of magnitude, that's still our best guess, Jeff.

Okay.

Thanks, guys.

Steve Tusa, JPMorgan.

On the refrigeration side, could you just maybe give us a little bit of an expectation of the trajectory?

It just seems like it's kind of tough to model quarter to quarter.

You've got a lot moving around there.

So maybe if you could give us some sense of how those margins play out over the course of the year?

First, just on first quarter, we thought it would be a tough quarter; and it was, but it was as expected.

I think sort of the moving pieces I think that are most impactful to our margin story was -- in first quarter we had $4 million year-over-year headwind because the carbon tax repeal in Australia and the lower refrigerant pricing.

And so we think that obviously had major impact.

We also had FX headwinds of a couple of million dollars in the first quarter, just associated with the refrigeration segment.

And so as we think about the second half of the year, we have another couple million dollars in second quarter from Australia refrigerant, but second half of the year we no longer have that headwind.

And also, some of the FX comparisons get a little bit better when we get to fourth quarter -- that on top of the building backlog and order rates in North America with some of the business that we've won.

You know, as I talked about back in December, we don't think it's going to be a hockey stick year in refrigeration.

We think we are going to have a bounce-back in margins, primarily second half of the year.

Okay.

So kind of the exit rate, or ultimately kind of where you expect this thing to kind of -- what's kind of the best range you can give for how good it could get this year?

So how to kind of think about the more normalized run rate in 2016?

I understand the question; I don't think I'm going to give a direct answer to it.

I think the answer that we've given -- I mean, I think you can sort of model it, Steve, given what I said.

Right?

So if you have it full-year up 50 basis points, order of magnitude, plus or minus; and you have the first-quarter number, and I'm telling you we have $2 million of headwind -- $2 million or $3 million of headwind from Australia refrigerant in second quarter, I think you can start to get sort of a trajectory.

Right.

So you said a solid start for the second quarter.

Can you maybe just provide some -- is that -- are you just talking about resi, talking about commercial?

And then, does solid start mean better than the revenue trend you had in the first quarter?

Yes.

Part of the reason you have got to calibrate your wares -- as you know, we do half of our business in the month of June.

So it's hard to be too bullish when you sit in April.

But when we think about Q2 so far, strong momentum in residential as we move into the spring and summer selling season, everything tracking as we had hoped.

And we also think, given -- as I talked about in the script, we actually think there's going to be some bounce in residential new construction above where it was in first quarter.

Refrigeration business is, as we just talked about, stabilizing.

We won't have quite the headwind in second quarter.

Order rates look good; backlog looks solid.

Commercial, as I talked about in the phone call, has a solid backlog in national accounts, up double digits from where we were at a year ago.

When you sit at this part -- in mid-April, we have about 70%, 75% of the national accounts that we need to ship in the quarter in backlog.

We still have to book and ship.

That's a higher percentage than we normally have sitting in the first month of the quarter.

The non-national account business, which accounts for about half of what we do, as we talked about, was up high single digits in first quarter.

And order rates there continue to be solid and continue along those trendlines.

So net-net, feels good, but always cognizant that June is half our revenue, and a lot of things can happen between now and then.

Okay.

Great.

Thanks a lot for the color.

Jeff Sprague, Vertical Research.

Just coming back to national accounts, I'm still struggling with -- and then you have said -- you know, you made it clear there's some idiosyncratic customer issues.

But is there something by vertical that stands out, or some other factor that is making us look into H2 as opposed to just being kind of a timing difference between the first and second quarter?

You know, Walmart is one of our larger customers -- and our largest customer, I believe, in our North America commercial equipment business.

And that's had an impact.

But also, just not them.

We've had selective customers push things out.

Again, it's a dozen or so accounts, because that's sort of how national accounts work.

And they all have different stories.

As we talk to them, we are still confident for the full year, and that's why we said what we said.

But for all different reasons, they pushed things out.

Weather was part of it, but also just their own decision-making of when they had the money and when they wanted to spend.

And I think you characterized price mix as positive in the quarter for resi.

Any initial feel on how 2013 versus 2014 plays out here as we enter into the key season?

Is there anything in behavior that is kind of notable one way or the other?

I think the headline, Jeff, is: so far, so good.

It's going as expected.

But again, sort of the caveat of it's early.

You know this well, but I'll repeat it for others on the call: we prebuilt an appropriate level of 13 SEER to support our customers this year.

And most, if not all, of our major competitors did the same thing.

We are seeing -- as we expected, we are seeing a smooth transition from the regulatory change.

We'll know more as we go through the summer season whether some of our competitors run out of 13 SEER and sort of how that affects things, but so far, so good.

And then your comment that replacement was strong -- where do you think we are at on replacement at this point?

Do you actually see a replacement cycle gaining momentum per se?

It's interesting that replacement was strong in a quarter that was impacted by weather on the new construction side.

Just any other color you can provide there?

Well, to answer the last part first, the cold weather helped on furnace sales, right?

So that sort of drives the replacement market.

And the winter broke late, really, in many parts of the country -- second half of the year.

So that helped furnace season, if you will, on the add-on and replacement but hurt new construction.

I continue to be very bullish, as you know, on the add-on and replacement market for residential.

I still think we have significant amount of pent-up demand.

We didn't see that during furnace season.

We'll see that in the summer selling season.

But we still think that's out there, and we also -- as we've spoken about, we think the new construction boom of a decade ago is now starting to come into the replacement window.

So I know the quarter is a bit of a disappointment because of commercial, but the underlying fundamental of our story around residential, and add-on replacement and pent-up demand -- just another quarter of continued momentum.

And we think that continues as we go into the balance of the year.

Great.

Thanks for the color.

Rich Kwas, Wells Fargo Securities.

So on the national account piece -- so, Todd, it sounds like you are pretty confident.

What could derail second half?

What are you most concerned about in terms of the national accounts coming back?

We are confident because our customers are confident, but customers can change their minds.

That's the biggest risk.

So we are in constant dialogue with these national account customers, as you can imagine.

We have visibility of their plans over the balance of the year.

But that being said, customers can change their mind and sort of change things around.

So as we sit today, we feel confident for the balance of the year, and that's reflecting it.

But if there's a shock to the economy; if consumers quit spending, and our national accounts want to quit building -- there are scenarios, but what we see now, the economic environment we're in now, we all feel very good internally that this was just sort of a move out.

And we feel good for the balance of the year.

Okay.

And then on the non-national account piece, which was pretty good, what do you need to see to get more bullish about your overall view of the commercial market for the US?

I think we just have to go through the summer season.

These are things where you sort of call it, and then you see what happens.

And obviously, our low single-digits call of the market encompasses both sides of the market, not only for us but for the entire industry.

National accounts is a meaningful part of the unitary or rooftop market.

The non-unitary business, as you said, was up high single digits.

That reflects both market -- but I think it reflects us gaining share.

Emergency replacement initiative continues to work and continues to accelerate, and we continue to build out our distribution more broadly.

And that's helping with our sort of non-national account business.

Okay.

And then just a clarification: did you say $6 million from Australian headwind and $4 million from FX on a year-over-year basis to EBIT?

I sort of mixed apples and oranges.

I said overall for LII, $6 million from Australia refrigerant and $4 million from FX.

So $10 million total headwind from those two things.

And if you are just looking at -- if you're trying to model the refrigeration segment, all $6 million of Australia refrigerant, obviously, is in refrigeration segment.

Then about half of the $4 million of FX you could put in the refrigeration segment.

All right, great.

And one last one: in terms of oil prices coming down, obviously it's helping you on the cost side.

Any signal in terms of the type of demand you are seeing that is helping you on the demand side at all, if you look at residential replacement?

The honest answer is it's hard to tell.

Again, we had good news on add-on and replacement in resi for the quarter, but there's lots of forces driving that.

When I read the same things you do, when I hear retailers talk about it, and when we talk to retail customers, it sounds like a lot of consumers are putting the gas savings in their pocket rather than spending it.

I assume if it's true for them, it's true for us.

But even with that said, add-on replacement was strong.

And we expect it to continue to be strong.

Okay.

Great.

Thank you.

Robert Barry, Susquehanna.

I wanted to actually follow up on currency: you said $4 million total, $2 million in refrigeration.

I know there had been some concern about transactional exposure in Canada.

Does that mean that ended up being really quite small?

No.

I think it just means that we are going to see it for the balance of the year.

Joe talked about $20 million of headwind for the quarter -- or, excuse me, for full-year from FX.

And that's net of pricing we were able to get in Canada when we announced some price increases.

But we'll see the volume -- you know, furnace was a strong season; it's also a strong second and third quarter.

Joe?

I would just say that seasonally, first quarter is one of our lightest; so that's why you saw it have the impact that it did relative to our total full-year guidance.

Okay.

Why is that?

I mean, it's furnace season.

It's mostly a furnace market.

Why is it more in 2Q/3Q?

When you look at the numbers, it is a furnace market, but air conditioners sell for a lot more on a dollar basis than what furnaces do.

So even in Canada they buy air-conditioners.

Yes, believe it or not!

In the summer season, it matters.

And then what happens is when you have a catastrophic failure on an air conditioner, you have a tendency -- especially when you live in Canada or a cold-weather environment -- that you replace the whole system, and we do a system sell and we get the furnace.

So summer season, even there, is a large portion of the business.

Got you.

How would you characterize the underlying end market outlook in refrigeration?

You mentioned that your business came in as expected, but I know a competitor or two preannounced during the quarter citing weakness in refrigeration or food service.

It's choppy.

Globally, as we mentioned, we did well in Asia.

We did well in a tough market in Brazil.

Europe was soft, but it was soft for everybody.

And in North America we were up and driven by growth in our North America grocery segment.

I think that's share gain.

So I think we called the market in refrigeration flattish back in December.

And that still sort of feels right right now.

Got you.

And finally, on the margin in resi, you talked about a headwind being distribution expansion.

Is that investment actually rising year over year in dollar terms?

Because you seem to have reached a pretty steady, level pace of adding distribution.

It really hasn't increased year over year.

But again, it's sort of -- the way the model works is we continue to invest on a year-over-year basis.

We have more fixed cost investment in distribution.

And then it takes 18 months or so for it to get covered.

So someday, when we stop, there will be a year where we say, you know, net-net it's sort of a good story for us rather than sort of the continued investment.

Got you.

Okay.

Thank you.

Josh Pokrzywinski, Buckingham Research.

Just a couple of follow-ons to some of what was already asked.

I guess first, on commercial, if you could dimension out kind of 2Q versus second half?

You mentioned having a lot more backlog visibility than usual.

Just wondering if you could kind of put that, I guess, down 15%-ish in national accounts from 1Q, if my math is right -- kind of portion out when those come back?

If I was going to build a model, I would do it a little less than linear, so a little less than one-third in second quarter -- sort of how I think about it.

But again, we will have a better view, obviously, as we get through the second quarter, and sort of talk to our customers, and see how it flows.

But right now on a full-year basis, as I suggested, we are dealing still solid that -- of what we called, which is for the industry to be up low single digits and for us to have another solid year in commercial.

On the resi business, just given some of the channel movement; and, obviously, it's early in the year, so we are working off of low absolute numbers on the base, how would you characterize your quarter versus maybe the market on sellthrough?

Obviously Hardy and HRI data through February were quite strong -- but, again, probably a function of small numbers in the denominator more than anything else.

Yes.

I mean, we felt like we had a good quarter.

We feel like we've gained share over the last 2 1/2, 3 years.

And we think we continue to gain share.

But the honest answer is probably needs to be a few more cards turned over, and see how other people announce, and see what they do.

But we thought we had a nice quarter, being up high single digits in add-on and replacement in a tough residential new construction market being flat.

We think the momentum continues.

And on the FX headwind that you talked about, one thing that hasn't really come up is -- I imagine with all the production that you do in Mexico, and maybe this is the industry as well, that you are give some transactional benefit from labor costs denominated in pesos?

Is that included in the guidance as part of the netting process?

Is that something that could be a source of upside when we get into air-conditioning season and more of your production comes from Mexico?

Yes.

There is a slight benefit there that is factored into our guidance.

We have a small proportion of our costs that are conversion related.

So once again, the benefit of the lower pesos is factored into the guidance that we provided.

And about how big is that?

I've seen the spreadsheet, but -- again, it's sort of -- it's all in the $20 million.

Yes.

I mean, I think if you look at the charts of what we have communicated of the percentage of volume of air conditioners that we build down there, and that labor and fixed overhead -- labor is about 10% of our cost of goods sold.

I think you can sort of back into order of magnitude.

But when you are buying all of the components, even those that we buy from Asia in US dollars, and then you sell into Canada, you still have the issues.

Got you.

All right.

Thanks, guys.

Johnny Wright, Nomura.

So just on the refrigeration margins here, so clearly you said tough Southern year, and some of the headwinds fade away in the second half.

But I think, Todd, you underlined margins flat in 1Q.

So what are the big drivers in the second half of the year as the Aussie headwind fades away?

The gauges are plus-50 bps.

So it seems like quite a meaningful expansion for the second half.

I think there continues to be volume in North America, material cost reduction across our businesses, and the commodity tailwinds.

So I think those are three sort of major drivers that we'll get: volume and volume leverage, aggressive material cost reduction, and continued commodity tailwinds.

Okay.

And kind of broadly, on the refrigeration strategy as you look forward, you obviously won the Walmart business this year, which is giving you a boost in supermarket.

Are you willing to be aggressive on price going forward to try and get that volume leverage?

Is that part of the strategy, or is that sort of a one-off target?

That implies that we were aggressive on price on Walmart, a fact not in evidence, because I think we won it for a lot of reasons.

Look, we want to make money; and we think we have value-added product.

With some of the new product launches we've come out -- we've improved the reliability, and delivery and lead times of that business.

So we are not looking to be the price leader.

We want to win share the right way and continue to grow the business with margins.

Okay.

Great.

And just one more if I can.

On the national accounts, I think you said backlog of 10%.

Did you give the order number there?

What was the order growth for the national account customers in 1Q?

We didn't give it.

And at higher than 10% -- I think we said double digits, I would read that as mid-teens.

And we didn't give the dollar figure.

But I think you can sort of back into it, because I said we are 70% covered for second quarter for our national account business.

And it's about half our business.

So I think you can sort of figure it out.

Great.

Thanks, guys.

Keith Hughes, SunTrust.

The question is in residential -- really nice margins in the quarter.

Just from a production capacity utilization standpoint, where were you in the first?

What would that look like for the rest of the year, given the backlog of inventory that you have with the efficiency change?

I'm not sure I understand the question.

So burrow down on exactly what you are looking for, Keith.

I'm not sure I understood.

You've pre-built inventory, obviously, for the efficiency changes.

I want to know: is going to affect the production rates in residential in the first half, first three quarters of the year?

No.

What we did was we prebuilt in fourth quarter, so we took production from first quarter in the fourth quarter.

For the quarter it probably cost us $2 million or $3 million of absorption in first quarter.

I didn't whine about it, because we didn't pound our chest in fourth quarter, when we had the benefit.

But net-net, we sort of swapped $2 million or $3 million of EBIT we pulled from first quarter into fourth quarter.

And we had that headwind this quarter.

But second, third, and fourth quarter will be normal; curve of production change was from first quarter to fourth quarter.

Okay.

Second question -- back to commercial again.

Based on your comments from the previous question, I assume that national accounts business will turn back positive here in the second quarter.

Is that correct?

Correct.

But it will be at a lower rate than we will see in the second half of the year?

I wouldn't necessarily say that.

Let's sort of let it all play out.

Because, again, I think the question I was being asked was: how was the miss in first quarter going to be filleted on second, third, and fourth quarter?

But we never discussed what was in the base plan for second, third, and fourth quarter.

I think the answer is we think national accounts are going to be up each of the next three quarters.

But I'm not really guiding to which is the stronger of the three.

Okay.

Thank you.

Mark Douglass, Longbow Research.

Todd, just to go back to an earlier question on refrigeration, I think one of the questions -- we understand Australia has the headwinds, but it's still pretty lumpy on the organic growth side.

Last quarter was really strong; this quarter is weak.

It's just kind of back and forth.

Anything in particular that you can cite as to why refrigeration is so lumpy?

Is it just large orders occurring in different quarters?

Yes, I think it has to do with large orders.

I think it has to do with the comps, obviously, from the year before.

And I think it has to do with the currency.

When you look at actual currency, it's sort of a significant headwind.

When you look at constant currency, I don't think the story is quite as dramatic.

Right.

Is the currency headwind affecting you in sales into overseas refrigeration?

Basically, export -- are you at a disadvantage?

No.

It's affecting us on translational.

Okay.

And then, finally, with 1Q up 2% organically, you are still guiding to 8% as a possibility.

Can you go through the puts and takes as to what could -- I mean, you'd have to really ramp sales there for the rest of the year to get to 8%, but you still believe that's doable.

Why?

Half our business is residential.

And I've seen some great summers in residential, so you sort of always keep that out there.

Residential new construction picks up, add-on replacement remains solid, and we get a hot summer -- we can sell a lot of air conditioners in one summer.

And that's sort of how you think about the peak.

Okay.

Thanks for taking my questions.

Walter Liptak, Global Hunter Securities.

I wanted to ask -- stick with refrigeration and just the timing -- you know, I think maybe the Walmart business wasn't expected to ship much in the first quarter.

So I wonder about the timing for the second and third quarters.

Is it more back-half loaded?

You know, we have more volume second half of the year in our refrigeration business than we do first half of the year; in part because of Walmart, but also in part because of other customers.

Okay.

And on that Walmart business, your comments earlier kind of suggested that as you ship more volume, that's where you get the leverage and the margin pick-up.

Is that the mix you were referring to?

I think where Walmart helps us is sort of the volume in the factory.

And we will continue to mix up across our refrigeration business in North America, in part because of other customers, including Walmart.

Okay.

All right.

Makes sense.

And I wanted to ask about -- in the resi business, if you could help us refresh on pricing, and the pricing actions that were taken this year, and how much is sticking?

We've called that we are going to get net price this year of $10 million, and we still think that's where we are at.

Again, we have to get into the summer selling season, really, to find out more.

In January we had a North America-wide price increase of 3% to 5%, and then we had a 5% increase in Canada only in April.

Then we've seen Carrier, Trane, Daikin/Goodman, and sort of our other major competitors announce similar pricing both in North America and in Canada.

So again, it's early, and we have to get into the major parts of the selling season.

But so far, so good on price.

Okay.

Sounds good.

Thanks for that color.

I wonder about SEER 13 pricing.

I know it's early in the season, but did you do anything with price on the SEER 13 product?

No.

I think as we called out in our residential business, price mix was positive for the quarter -- I'm looking to make sure; I'm sort of doing it from memory -- was positive for the quarter.

And so that's what we had expected.

I think as I talked about in an earlier call, transition from 13 to 14 SEER -- it's early, but so far so good.

And things are going as expected.

But we'll know more as we get into the throes of the summer selling season.

Okay.

Got it.

Okay.

Thank you very much.

Jim Krapfel, Morningstar.

You mentioned the residential replacement earlier, a lot of pent-up demand there.

Just hoping to get some quantification on how much pent-up demand is there?

You know, we've never shown our own number.

I always quote others.

And several of the sales-side analysts have sort of modeled it.

And if you look at over a four- or five-year period, replacement that was deferred because homeowners didn't want to spend the money on a new piece of equipment and they've band-aided old pieces of equipment, order of magnitude, people who have modeled sort of a full year, if you will, of air-conditioning -- volume was taken out of the market over a four- or five-year period.

I think we are a couple of years into pent-up demand, and I think there's another two or three, maybe even more, years of it left.

Okay.

Thank you.

That's all I have.

Glenn Wortman, Sidoti.

On refrigeration, I think you said earlier that you are still expecting sales growth for the full year.

Just to clarify, is that at actual currency?

And then, aside from Walmart, where the expected growth is coming from?

At actual currency we expect revenue to be up, and it's across our North American business; our Asia business; in a tough market, we expect revenues to be up in Brazil; Europe we are less optimistic about.

We sort of think flat to slightly down there.

Okay.

Thanks a lot.

I'll turn it back to the presenters for any closing comments.

Thanks.

Thank you, operator.

A few points to leave you with: we remain focused on capitalizing on growth in our major end markets, capturing additional market share and driving increased profitability through our operational initiatives.

We are well positioned for 2015 and expect another year of record profits with strong cash generation.

I want to thank everyone for joining us, and we look forward to the strongest seasonal periods ahead.

Thanks.

Ladies and gentlemen, that does conclude your conference for today.

Thank you for your participation.

You may now disconnect.