Lennox International Inc (LII) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Lennox International first-quarter 2016 earnings conference call.

At the request of your host, all lines are in listen-only mode.

There will be a question-and-answer session at the end of the presentation.

As a reminder, today's conference is being recorded.

I would now like to turn the conference over to Steve Harrison, Vice President of Investor Relations.

Please go ahead, sir.

Good morning.

Thank you for joining us for this review of Lennox International's financial performance for the first quarter of 2016.

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&A, please limit yourself initially 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 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 will archive the webcast 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 Bluedorn.

Thanks, Steve.

Good morning, everyone and thanks for joining us.

Lennox International realized record first-quarter profit on strong revenue growth and margin expansion across all three of our businesses in the quarter.

Total Company revenue was up 6% in constant currency.

Total segment profit rose 50% to a new first-quarter high and total segment margin expanded 200 basis points to a first-quarter record of 6.5%.

Adjusted EPS from continuing operations was a first-quarter record $0.60, up 62% from the prior year quarter.

GAAP EPS from continuing operations was a first-quarter record $0.56, up 81% from the prior year quarter.

In our residential business in the first quarter, profit was up 23% on 5% revenue growth at constant currency.

Segment margin rose 160 basis points to a first-quarter record 10.2%.

Residential mix and volume was negatively impacted by the warmer weather in the first quarter that truncated the winter season and led to lower furnace sales.

Heating degree days were down 16% from the prior year quarter and were 12% below normal.

Residential revenue from replacement business was up mid-single digits and revenue from new construction was up low double digits in the first quarter.

On the operations front, we continue to see a smooth regulatory transition from 13 to 14 SEER minimum efficiency in the South and Southwest regions of the United States.

We will know more as we get further into the summer season, but so far so good on price.

We opened two new Lennox PartsPlus stores in the first quarter for 188 stores in total and we still plan to open at least 27 new stores this year.

Turning to our commercial business.

Revenue was up 8% at constant currency and segment profit rose 84% to a new first-quarter high.

Commercial segment margin expanded 350 basis points to a new first-quarter record of 8.3%.

In North America, commercial equipment revenue was up high single digits at constant currency.

National account equipment revenue was up mid-single digits and we won 10 new national account customers in the quarter, a great start to the year.

On the services side, national account services revenue was up high single digits.

In North America, non-national account business revenue was up high single digits.

We also saw strong growth in our global export business with revenue up more than 30% from the prior year quarter.

Overall, constant currency, new construction revenue was flat and replacement revenue was up mid-teens with double-digit growth in both planned and emergency replacement.

In Europe, commercial HVAC equipment revenue was up low single digits at constant currency.

In refrigeration, revenue was up 6% at constant currency in the first quarter and profit rose 125% from the prior year quarter.

Refrigeration margin expanded 300 basis points to 5.4%.

From a regional perspective at constant currency, North America revenue was up low double digits, Asia was up high single digits, Australia was flat and Europe was down mid-single digits.

South America was up low double digits as our team in Brazil had a good quarter, but the economy there remains very soft as we continue to look ahead.

Overall for the Company, our underlying business expectations for the year remain consistent with previous guidance.

We are reiterating revenue and raising guidance on EPS from continuing operations due to a lower effective tax rate of approximately 32% this year and Joe will talk about that further in a moment.

It's early in the year and the largest seasonal quarters are still in front of us, but 2016 is off to a strong start and we continue to expect another record year with strong growth and profitability across all three of our businesses.

Now I will turn it over to Joe.

Thank you, Todd and good morning, everyone.

I will provide some additional comments and financial details on the business segments for the quarter and full year starting with residential heating and cooling.

In the first quarter, revenue from residential heating and cooling was $377 million, which was up 4%.

Volume was up 5% and price and mix combined was flat on a revenue basis.

Foreign exchange had a negative 1% impact.

Residential segment profit was $38 million, up 23% from the prior year quarter.

Segment profit margin was a first-quarter record 10.2%, which was up 160 basis points.

Segment profit was positively impacted by higher volume, lower material costs, lower freight costs and higher productivity.

Partial offsets include an unfavorable price mix, foreign exchange and investments in SG&A and distribution expansion.

Turning to our commercial heating and cooling business, commercial revenue was $170 million in the first quarter, up 7%.

Volume was up 8% and price and mix combined was flat while foreign exchange had a negative 1% impact on revenue.

North America commercial HVAC equipment and service revenue was up high single digits.

Europe commercial HVAC revenue was down slightly, including negative foreign exchange impact, although up at constant currency as Todd mentioned.

Commercial segment profit was a first-quarter record $14 million, which was up 84% from the prior year quarter.

Segment profit margin was a first-quarter record of 8.3%, which was up 350 basis points.

Segment profit was positively impacted by higher volume, favorable price mix, lower material costs and lower freight and distribution costs.

Partial offsets include an unfavorable foreign exchange and higher SG&A.

In our refrigeration segment, revenue in the first quarter was $168 million, which was up 3%.

Volume was up 7%, price and mix combined was down 1%, foreign exchange had a negative 3% impact on revenue.

From a regional perspective, Todd addressed revenue growth in constant currency.

However, on a reported basis, North America was up low double digits, Asia was up mid-single digits, Europe was down mid-single digits, Australia was down high single digits and South America was down high teens.

Segment profit was $9 million.

That was up 125% from the prior quarter.

Segment profit margin was 5.4%, which was up 300 basis points.

Segment profit was positively impacted by higher volume, lower material costs, lower freight and distribution costs and higher productivity.

Unfavorable price mix was a partial offset.

Regarding special items in the first quarter, the Company had net after-tax charges of $2.1 million.

The amount included $1.2 million for special legal contingency charges and $900,000 net for other items.

Corporate expenses were $15 million in the first quarter compared to $12 million in the prior year quarter.

Overall, SG&A was $140 million in the first quarter compared to $133 million in the prior year quarter.

Net cash used in operations in the first quarter was $113 million compared to $122 million in the first quarter a year ago.

Capital spending was $24 million, up from $18 million in the prior year quarter.

Free cash flow was a negative $137 million in the first quarter compared to a negative $140 million 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 back half of the year and we continue to target $250 million of free cash flow for 2016 overall.

Total debt was $1.1 billion at the end of March deploying $200 million in February for the accelerated share repurchase and we ended the quarter with a debt to EBITDA ratio of 2.4 and we currently expect that to trend down over the course of the year as we seasonally generate cash.

We paid $16 million of dividends in the first quarter and at the end of March, cash and cash equivalents were $41 million.

Now to review our outlook for 2016.

First, our underlying market assumptions for the year remain unchanged.

For the industry overall, we expect North American residential HVAC shipments to be up mid-single digits.

We expect North America commercial unitary shipments to be up low single digits and we expect North American refrigeration shipments to be up low single digits for the industry.

Based on this underlying market environment and our target for the marketshare gains, revenue growth guidance for Lennox International remains 4% to 8% at constant currency for 2016.

We continue to expect 1 point of negative foreign currency impact for the full year for revenue growth guidance of 3% to 7% at actual currency.

We are raising our guidance for adjusted EPS from continuing operations for the full year from a range of $6.10 to $6.60 to a new range of $6.30 to $6.80.

Guidance for GAAP EPS from continuing operations moves to $6.26 to $6.76 incorporating the new guidance range and $0.04 of special items in the first quarter.

The higher EPS ranges reflect a lower tax rate of approximately 32% versus our prior guidance of 34% to 35% on a full-year basis for 2016.

The lower tax rate relates to our restructuring of international subsidiaries that will enable us to utilize foreign tax credits and other benefits that drive our effective tax rate down by approximately 250 basis points.

We view this as a structural change to our ongoing tax rate that can be modeled for 2016 as well for the out years.

Now let me walk you through the other key points of our guidance and the puts and takes for 2016.

We still target $35 million of savings from our sourcing and engineering-led cost-reduction programs.

We continue to expect $25 million of savings from lower commodity costs.

Foreign exchange is still expected to be a $20 million headwind and we still expect a $15 million benefit from price.

Residential mix is still expected to be a $5 million benefit for the full year and we still expect to see $11 million from incremental savings this year from our second plant in Mexico.

And finally a few other guidance points.

We continue to expect corporate expenses of approximately $85 million.

We still assume net interest expense of approximately $29 million for the year.

The weighted average diluted share count for the full year is expected to be approximately 44 million shares following our February announcement of a $200 million accelerated share repurchase program.

The ASR will be completed by the end of the second quarter of this year.

And finally, we continue to target capital expenditures of approximately $95 million and free cash flow at $250 million for the full year.

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

(Operator Instructions).

Robert Barry, Susquehanna.

Good morning.

So I guess I wanted to just get a sense of how you are thinking about the margin outlook in resi and commercial for the rest of the year.

Off to a very strong start here.

I think you are tracking at what would be the high end of the ranges you set right out of the gate.

So I know it's still early in the year and the business is seasonal, but is there anything that you can identify that you see as headwinds that may kind of tamper the degree of margin expansion we see as the year progresses?

I think, Robert, it ties to the overall guidance that we gave that we raised it for taxes, but operationally we are still where we were before and it's early in the year.

You know how seasonal the business is.

The answer is all three segments, all three of our business units, all three of our segments had a very strong quarter margin wise.

We are executing on the cost side.

We are delivering volume growth and so I think it's steady as she goes on the margin expansion.

Yes, would you say that the margins though here are tracking above the plan that you had originally set and that it's just too early to make an update?

I think we've had a good quarter -- we had a good quarter and it might be -- the honest answer is it's slightly above our internal plans for first quarter, but one week of cold weather in June evaporates all that, so that's just sort of the way the business work.

It's a seasonally light quarter and when we -- we have had first quarters that disappointed ourselves and you guys and we didn't touch anything and we've had first quarters like this quarter I think which was better than people expected, maybe even including us, but we've got to see how the second and third quarter go for the full year.

Got you.

Fair enough.

On the commodities front, you left the outlook there unchanged.

We have been seeing increases in some of the commodities.

I imagine the copper is kind of locked in at this point, but steel you buy closer in.

So was there just maybe a larger buffer internally that kind of has shrunk now, or how are you thinking about steel, especially vis-a-vis the unchanged outlook on the commodities?

I wouldn't use the word buffer per se.

I think the way I'd characterize it would be is our internal planning always expected steel to go up during the second half of the year.

We talked about that on our December -- when we first gave our December guide on this.

And I think some folks weren't as confident as we were that that would happen.

I wish we would have been wrong, but I think the trend up in steel is what we expected, was in the guide before and is still in the guide.

Right.

Fair enough.

We were probably in that camp too at that time.

Just one last quick one on the housekeeping around tax.

So it sounds like this is a structural change; we should just carry it forward.

There's been a lot of talk recently about tax rule changes I know mostly related to inversions, which is not that relevant to you, but also related to use of intercompany debt.

Maybe I missed it in the prepared remarks, but I assume this has nothing to do with that and you kind of feel good about it regardless, or --?

Yes, Robert, you are exactly right.

There's been a lot in the headlines today about income taxes that involves really two things, inversions and earnings stripping.

We assure you this has nothing to do with that.

This is simply a restructuring of our international subsidiaries that enables us to utilize foreign tax credits and is generating some other sustainable benefits for us.

So we view this as a structural change to our ongoing tax rate and we can model this in 2016 and in the subsequent years.

Great.

Thank you.

Ryan Merkel, William Blair.

Good morning, everyone.

So I know March is a big month for the quarter.

Can you comment on how the month played out and finished?

Yes, March was a nice quarter for us across the board except in the one category of furnace sales.

I talked a little bit about that in the script.

It was unseasonably warm weather for us in the quarter and we talked about degree heating days being down 16% from prior year first quarter, but in February/March, they were done 25% and so we saw a real truncation, if that's a word, but the furnace season was truncated and so started out strong in January and then sort of tapered off as we went through the quarter.

So I think the one area was furnace sales.

But the bright side is, even with those furnace sales being slightly down, volume was up mid to high single digits overall for our residential business and HVAC was strong.

Our dealers are confident and we go into the summer selling season we think well prepared and need a little bit of weather and I think the momentum continues.

Our other two businesses, both commercial and refrigeration, had strong quarters overall and March was like the rest of the quarter, which was very strong.

Are you able to comment on what you are seeing so far in April?

I do HVAC [areas] and things sound pretty healthy, but want to hear it from you.

Yes, I'd look over a longer period than just the last two or three weeks.

My answer on Q2, it's off to a solid start, but it's early in the summer selling season.

June is nearly half the quarter and the last couple weeks of June are half the month and so we are on track.

Everybody feels good.

Everything looks solid, but we need to book and ship and we need a little bit of weather and it needs to warm up.

You may recall last year, or you may not recall, we recall last year April was seasonably warm and then it cooled down in May and June, seasonally.

And this year, April started out a little cooler and so we need normal weather in May and June to have a strong quarter.

And we think we will.

We say this every year and you've just got to let it play out.

Got it.

And just lastly, how is the price increase in Canada that I think you put through on March 1?

Is that tracking well?

It continues to track.

We've said all along it's tough to get everything in a year or two when FX moves as quick as it has.

The good news is FX has moved back our way a bit in Canada, so we don't have to get quite as much to be whole, but we continue to push the price increase in Canada.

Very good.

Thank you.

Steve Tusa, JPMorgan.

You had slightly unfavorable price mix in resi.

I guess was that just the furnace dynamic?

Yes.

Yes.

And then how do you expect that to play out over the course of the year?

I know it was a big year last year, but maybe just remind us on the resi side what you are expecting from mix this year and I guess price as well.

We've guided in resi that we are going to have $5 million of benefit from residential mix and so we had negative mix in the quarter and so we are banking on the positive mix second, third quarter primarily as we get into the summer selling season.

And then on price, we haven't guided for res overall.

We've just guided for the corporation that we'd have $15 million benefit from price full year.

Okay.

So that stuff is holding up reasonably well?

Yes.

And again, as you well know, it's early.

On the 13 to 14 SEER transition, steady as she goes, but the honest answer is all the cards won't be turned over till June/July time period and we will know for certain there, but so far everything is tracking as we hoped it would.

Right.

How is the pipeline lining up on the commercial front and maybe just by vertical as you guys get into the little more of I guess the education selling season and any signs on the quotation front, anything to read into there?

No.

I'll be honest, I don't have the education backlog numbers at my fingertips, so I can't really give them to you, but overall in our commercial business, both on our national accounts and our non-national account business where education is a big vertical, things feel solid.

As we saw, we had a strong first quarter there and where national accounts were up and down last year, at least these came out of the gates with a nice national account order in first quarter and we think it will be low single digits for the year, but we are off to a nice start and customers feel good right now.

Okay, great.

Thanks a lot.

Jeff Hammond, KeyBanc Capital Markets.

Just back on commercial, can we maybe just talk about what we see as driving the replacement up mid-teens and then we've seen a lot of news flow about store closings and e-commerce taking share from traditional retail and how that is playing into how your national account players are talking about business trends this year?

The big driver in the quarter was the planned replacement cycle.

Emergency replacement was up year-over-year, but emergency replacement is really a summer selling season phenomenon.

It was driven in large part by planned replacement with national accounts and making plans and us executing on it.

The move to e-commerce I think over the long term obviously will have some effects on our business and why we've so aggressively focused on diversifying our end markets.

And so five or six years ago, the vast majority of what we call national accounts for retail, now it's less than half of our, quote/unquote, national account business is retail.

It's other verticals, convenience, fast food, entertainment and so we are diversifying of where we play.

But even within our traditional retail channels, people still have -- there's still a lot of rooftops out there and if you look back at the big box buildout 10 to 15 years ago, a lot of those were Lennox units and it's a natural replacement market for us and that's what we are seeing.

Okay.

And then just on the buyback, I think you said the ASR would be done in 2Q, but it looks like part of the cash flow, you bought $200 million.

So can you just explain the dynamic there?

Yes, we initiated the accelerated share repurchase, Jeff, in the first quarter.

It takes time to go ahead and execute that, so we get a certain portion of those upfront, similar to what we had done last time.

And by the end of the second quarter, it should be wrapped up.

The timing of that altered our guidance on the number of shares outstanding and that's what we provided.

So we dialed it down slightly, but quite frankly it was a slight rounding difference.

So you had been buying stock opportunistically outside of the ASR?

No, the ASR is what we initiate and that's all we have going, all we've done in 2016 thus far.

Okay, okay.

And then just real quick back on -- I guess maybe across the businesses, anything, the mild weather, any kind of pull-forward or impact on either your ability to do planned replacement or the new construction demand you saw in res?

No, I don't think so.

No, I understand your question and I think the short answer is no.

I don't think we mortgaged the summer selling season for first quarter or our customers pulled things forward naturally.

I think it was more of just a lost opportunity on furnace sales for the quarter.

To state the obvious, it will get cold again and when it gets cold again, those furnaces will break and we will replace them, but we are going to have to wait until fourth quarter of 2016 to really see that market take off again.

Okay, great.

Thanks, guys.

Gautam Khanna, Cowen and Company.

Thank you.

First question, I just want to make sure I understand was there any change to the underlying EBIT guidance this year?

No.

Okay, thanks, that's helpful.

I wanted to also ask on Kysor/Warren, how did it do in the first quarter and when do you anticipate this could actually get to breakeven?

We had a nice first quarter.

You saw the refrigeration margins up very nicely in first quarter and a major driver of that was the continued turnaround in Kysor/Warren.

Our refrigeration business first quarter was the fourth quarter in a row on a year-over-year basis margins being up and so we think we are well into the turnaround that we talked about a year and a half, two years ago and Kysor/Warren is a big piece of that.

I understand the question about breakeven and I'm not going to answer it, but we are making nice progress on our Kysor/Warren business.

Okay.

And last question, just on the SEER 14 transition, you mentioned we won't know until the summer, but can you characterize how much inventory you think is actually out there on 13 units and how closely (multiple speakers)?

I really don't know what competitors have.

I think we all know we need to burn it down by the end of June.

So the end of June, we are no longer able to sell it in the South or California and so come the end of June, it'll all be gone and we will know where we are at.

We have enough to get us through the end of June, we think, for normal demand.

We are not going to do anything extraordinary to move it because when we are done, if we still have -- when the end of June comes, if we still have some in the South, we will just ship it to our northern distribution points and sell it there.

But I'm not exactly sure how much the competitors have.

And maybe just a last one.

You opened two PartsPlus stores in Q1.

You are targeting at least 27 this year.

What is the -- how does that look the rest of the year?

Is it evenly distributed in terms of number of openings and does that have any impact on SG&A or any other items that we should be mindful of (multiple speakers)?

No, I don't think it has anything to do certainly with SG&A.

I think the way I would think about it is if you have a revenue component to your model for 2017, when you layer in the incremental stores as we layer them in, we've traditionally done more the second half of the year than the first half of the year.

We are spending the first half of the year quite frankly converting dealers, working with dealers to leverage the investments we made in the prior year and then second half of the year, we are putting in new locations to position us for the first-quarter selling season with our dealers and so it tends to be second half of the year.

Thank you very much, guys.

Keith Hughes, SunTrust.

Thank you.

The question is on refrigeration.

Several geographies are doing well, but the two that sort of stood out I think you said were negative were Europe and Australia.

Can you give us a feel of what the trends are there, what do you think the future will look like in those regions?

I think Europe bounces around a little bit on us.

I think it's going to be -- we are going to have flattish revenue there I think in 2016.

We continue I think to gain share.

The French market has stabilized a bit, but I think part of that was just chunkiness of some demand in the quarter.

Australia continues to just be soft overall given the exposure to the mining economy.

We are a -- refrigeration wholesale is our primary business there and so we are tied to the overall broad economy and I think that just reflects the overall market.

And so I think we will be flat maybe to slightly up in Australia on a full-year basis.

Okay.

And then commercial, your organic growth in commercial really took off about the second quarter of last year, so you've got those comps you are going up against.

Is there anything specific, any one national account you want or anything along those lines that was causing that?

Was that just good numbers last year?

I think it was good numbers.

I think it was -- when you look back on the year last year in second quarter when we took off, national accounts were flattish on a full-year basis and it was really our other national account business, some emergency replacement driven by [radar] to be a broken record.

Our success in schools and just the overall light commercial building growth that I think all of North America saw, so I think part of it was just high seas raise all boats, but I also think the verticals that we were focused on, school specifically and then the emergency replacement market we gained share in.

Okay, thank you.

Rich Kwas, Wells Fargo.

Good morning.

Todd, on the commercial piece, national accounts, so you go back to last year, you were down pretty significantly in the first quarter and came back nicely in the second quarter.

I think you alluded to this year getting off to a less volatile start.

You are up mid-single digits.

Do you see anything on the horizon here because it seemed like in the first half of last year, things moved around a bit and then it came through, but bounced around a bit.

Anything prospectively here that you see on the horizon that would impact and create that sort of volatility?

I think we continue to see solid backlog.

As you recall last year first quarter, we were down significantly mid-teens and that got us off to a rocky start for the year.

But we are continuing to see solid backlog as we enter in the second quarter.

But, again, we still have to book and ship a lot, but overall the customers feel solid in all our verticals in commercial.

Okay.

And then on the guide, just a clarification, so the ASR helps a bit on the EPS line, and you did it after you guided last time on the Q4 results.

So should we interpret this as there's maybe a little bit of cushion here?

You didn't change the underlying metrics in terms of what you were expecting.

So just trying to interpret that with regards to the tax rate declining adding $0.20 or so here to the outlook.

I think that's fair.

I would spin it my way and say we did a lot of this just on big round numbers and $0.20 was a round number and we took the benefit of the round.

But I think the message is let's get through second -- as we always do, let's get through second quarter and we will true-up some of the longer-term, the full-year guidance on the EBIT side.

And yes, I think if you do the pure math on the share counts and the tax rate, while I think it may not be as high as some have put in their early notes just because there's some expenses to us of implementing the tax benefit that sort of eats into a little bit of it, the answer is there is a little bit of cushion there, yes, is the short answer.

Okay.

Understood.

Thank you.

(Operator Instructions).

Julian Mitchell, Credit Suisse.

This is Lee Sandquist on for Julian Mitchell.

For VRF, you previously mentioned that you expect to break even this year.

How is this expectation tracking?

That's still where we are at.

We had a nice first quarter for us again off a very low base, but we are gaining traction, as we've talked about before.

We think the area where we are going to have the most success and where we had the most success from first quarter is when we can package it with our industry-leading rooftop.

We think that gives us an edge and allows us to get specified in a market that's very much driven by the specifying engineers.

But it was a nice progress in the quarter, but still a lot of work over the next few years to get to $100 million in revenue and certainly to get to breakeven this year.

Great.

Thank you.

You touched on the Canadian dollar a little bit, but I was wondering if you could parse out the FX guidance on changing this for this quarter and the full year?

Yes, again, it's early in the year, so we are letting it sit where it's at, which is a $20 million FX headwind.

Again, we will true it up when we get halfway through the year, but right now sort of what we are looking at on the future is in our best call.

We think that's probably the right place to be.

Great.

Thank you.

Jeff Sprague, Vertical Research.

Thank you.

Good morning, guys.

A couple quick ones.

A lot of ground covered.

Just on SG&A, you guys did mention it a couple times in your remarks and in the press release, it didn't actually go up more than I think 10 bps as a percent of sales in the quarter.

So are you suggesting there is something we should be aware of here as the year progresses, some investment program or something else of note?

No, I think we are just trying to be complete and exhaustively complete on the pros and cons and we had lots of good news for the quarter.

We spent a little bit more on SG&A as a percentage of sales.

I wouldn't read anything into it.

And then I am just wondering on the tax, Joe, should we expect that to come through directly in cash taxes also?

Yes, a lot of that will come through in cash taxes.

I will give you a little more guidance on how to think about the rate because I think that matters too.

For the first half of the year, I would expect the tax rate to be around 30%, 31% and then for the second half, about 33% so that the full year will be a 32% effective rate.

And you did mention that it allows you to use tax losses and things like that.

Wouldn't those ultimately get exhausted maybe if there's just so many, it's beyond our horizon to think about?

Yes, the foreign tax credits were only a portion of the benefits and once again some of the restructuring afforded us the ability to gain access to lower tax rates internationally and that will be the more longer-term structural sustainable benefit that will keep us at 32% beyond 2016.

Great.

And then just back to education, do you see any bifurcation in where the demand is K-12 versus higher ed and is that even relevant to your business?

Our strength is K-12.

We play in higher education, but quite a few of those projects are applied projects, even district heating or district cooling, very large applied projects.

Our bread and butter is K-12.

Great.

Thank you.

Josh Pokrzywinski, Buckingham Research.

Good morning, guys.

I know the price mix was a headwind in resi in the first quarter on account of the furnace dynamic, but maybe on the AC side, any comment there on how that trended, Todd?

No, I think it was a strong quarter.

I think you saw it in the margins, so we were up over 150 basis points, even in the face of this mix downturn in furnaces.

And so the -- and then I also talked about, although I didn't give a whole lot of color other than to say it's steady as she goes on the 13 to 14 transition, which is code for that's holding up as we had expected in our guide.

So price mix you see in the margin expansion for resi.

Got you.

So you wouldn't classify that as maybe digging a bit of a hole in the first quarter and just seeing the positive indicators for the rest of the year?

Say it one more time.

You wouldn't characterize it as maybe digging a hole in the first quarter on the furnace side that AC makes up over the balance of the year?

It sounds like you would call it as generally on plan?

No, I think you are right.

We didn't plan for it to be a warm first quarter and so we had some headwinds there.

But we still think on a full-year basis $5 million of resi mix is the right number.

Okay.

And then just shifting over to refrigeration, price mix there being a headwind is a little surprising with the Walmart business.

I guess what else is going on there that we should think about and how does that play out over the balance?

I think it continues to be that.

I think it's -- when I think about our refrigeration business, this is specifically Kysor/Warren, when we drive volume, that helps us, but there's some negative mix associated with it as we pick up display business, specifically at Walmart, it becomes a headwind for us.

Net-net, it's good business for us and so one piece of the P&L, it's good news.

Another piece of the P&L, it's bad news.

Net-net, it's overall good news and that's why we saw margins up over 300 basis points in refrigeration.

Got you.

That's helpful.

And I guess just to maybe zoom out here and revisit the guidance topic, obviously, it's just 8% or whatever it is of your total year here in the first quarter, but it seems like you have a lot of items in the goodie bag here between tax in this quarter and maybe the Canadian dollar as well, which you will look at later.

Is it just a matter of getting through 2Q or is there some other event that isn't necessarily like 2Q specific that you want to see as well?

No, it's just getting through the quarter.

I will maybe reflect on what I said earlier.

I think we are consistent on this.

We've had some first quarters where I think people were surprised we didn't lower our guidance for full year given how we came out of the gates.

But we sort of stayed to it because second and third quarter is so important for us and then when we have a nice first quarter and to use your phrase a goodie bag that at least has some goodies in it, we've got to get through second and third quarter to really have full visibility on the year.

And so I just think it's sort of false precision to be adjusting it now.

We are off to a strong start.

I think that's the message on the call.

We are off to a strong start.

Let's not get carried away, but we are off to a strong start.

Understood.

And then just one follow-up for Joe.

Not to get too deep in the weeds, but a 32% tax rate this year probably says the rest of the year we are a little under 32%.

Is that the rate run rate, or are we just rounding kind of nuance at this point?

It's pretty close.

What I think will happen was first quarter was 34.3%.

As I mentioned for the first half, we will be at about 31% and then for the second half, it'll be 33%, and once again, I'll leave you with those variables.

Got you.

All right.

Thank you, guys.

Robert McCarthy, Stifel.

Good morning, everyone.

Obviously, you don't want to touch on 2Q or April too much, but could you talk about potentially just the impact of the Easter shift and then any incremental commentary about how the weather is shaking out initially in terms of heating degree days, or anything we can just hang our hat on for April?

I think it's early to talk weather.

It needs to get warmer, but I think -- I will go out on a limb and say it's going to be warmer.

So I think it's warming up.

The Easter has some effect.

I think the thing I'd give you is more anecdotal, which is we have dealer meetings every year where we meet thousands of dealers.

I think it was eight or nine locations this year.

Our dealers are optimistic.

People are excited.

Those of you who do channel checks I think are seeing the same trend.

All the macroeconomic indicators that we look at for our business are all green.

So I think consumers are ready to spend money.

I think they are willing to spend money to upgrade their systems and so -- and I think pent-up demand is still in the market, so I'm not trying to show any more caution than I normally would given that just first quarter and we have to get through the summer selling season, but it's steady as she goes.

And I may be getting this wrong, but given the mild weather, I think you've made some comments in the past going to 4Q given the mild weather I think you experienced then that it actually puts you in a pretty good inventory position overall on the -- for the spring and summer season on the resi side.

Is that correct, or any incremental commentary there?

I don't think they are connected is the way I would answer the question.

There may be some of our competitors who have independent distribution.

We have both available and people want to buy.

I think what we saw with our dealers is without getting too far in the weeds, there tends to be multiple loads of dealers with furnaces during a furnace selling season, so they will buy a bunch beginning of the year and then -- or beginning of the furnace selling season and then some of them will buy big inventory loads partway through the winter selling season and what we saw this year was that second load really didn't happen and so people just waited for the weather and buy onesie twosies as they needed them from us.

And so they don't have a lot of furnace inventory and I wouldn't expect them to, but they have air conditioning inventory that we were selling to them and so they are ready for the summer selling season.

We are ready to support them.

Okay, so you see no connection to the summer selling season in terms of the mild weather on the shoulder quarters at all?

No.

Okay.

And then just finally on just corporate, is there a specific full-year run rate you are thinking about there for corporate?

It looks like we modeled a little heavy and that might be more my problem than yours, but I just wanted to get --.

Yes, our guide, Robert, is about $85 million.

$85 million?

Okay.

Great.

Thanks for your time.

Tim Wojs, Baird.

Good morning.

Just a quick one from me on the builder portion in resi, the new construction piece.

I know you had an easier comp and weather might have been a little bit more favorable, but any change in how often those builder customers are thinking about the pace of construction this year?

No.

I understand your question, but I would characterize it as it's steady as she goes.

We'd call for a full year up about 10% and that still feels about right to us and while the warm weather hurt furnace sales, it helps housing starts and so I think that was part of it also.

Great.

Okay.

Thanks.

Walter Liptak, Seaport Global.

Thanks.

Appreciate making the cut.

And apologize for beating a dead horse on this weather thing, but the heating degree days down 16% seems significant, but it didn't show up in your mid-single digit resi growth.

I wonder if you could tell us how much was furnace down and on the cooling side, how much was cooling up to offset that?

And then if there was any regional impacts, like if you saw southern states with better cooling that offset the furnaces?

Broadly speaking, in first quarter, our furnace sales are 40% to 45% of our volume and our furnace sales were slightly down, and so I will let you do the backward math on air conditioners.

And where we were impacted the most is where you'd expect, which is in the Northeast and the Mid-Central.

Okay.

And then also on the 14 SEER, the steady as she goes comment, does that mean steady as she goes from the fourth quarter because I think you had a stepup in SEER mix in the fourth quarter, or was the SEER mix similar to what it was in the first quarter of last year?

My commentary was less about the mix of revenue, more about the pricing erosion of 14 SEER as 13 SEER goes away and so we've articulated from the beginning of this that the biggest risk we felt on this transition would be how much the price of a 14 SEER moved towards what 13 SEER was.

And we said we baked into our guide some erosion, but so far it's holding up quite frankly a little bit better than we expected and we will know better once it's all gone.

So it's more about what's happening with pricing.

Okay, yes.

Fair enough.

What is the SEER mix looking like in the first quarter?

Was it a stepup from where it was last year?

Yes.

Someone is handing me a note that's saying it was up 21 points 14 SEER and above, but I think that's just natural.

I think the short answer is, in the South, almost all builders are now buying 14 SEER and even on the replacement side, we are seeing a big swing towards 14 SEER.

And then obviously by the time we get to end of June, 100% in the South and California will be 14 SEER.

So I think it's less about how quickly the move is taking place.

I think it's more about what's happening with price.

Okay.

All right, fair enough.

Thank you.

Robert McCarthy, Stifel.

Yes, just one more thing on currency moves.

Any implicit benefit from peso in the quarter, or anything along those lines, or you just don't think it's material?

I think it all -- we are still sticking to the guide right now that we had, which was FX headwind of $20 million.

And currencies have moved a little bit over the last month or two.

The one that affected us the most probably is the Canadian dollar, but I think it'll shake out over here and we will revisit it in June.

I'll leave it there.

I want to thank everyone for joining us.

A few points to leave you with.

And again, I think this is the mantra of what I was trying or saying during the Q&A, it's early in the year, but 2016 is off to a strong start for us.

The momentum is continuing as we enter second quarter.

We expect strong revenue growth and margin expansion across all three of our businesses this year and another record year of profitability and strong cash generation for the Company overall.

I want to thank everyone for joining us today.

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

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

You may now disconnect.