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Operator
Ladies and gentlemen, thank you for standing by.
Welcome to the Lennox International First Quarter 2017 Earnings Conference Call.
(Operator Instructions) As a reminder, this call is being recorded.
I'd like to now turn the conference over to Steve Harrison, Vice President of Investor Relations.
Please go ahead.
Steve L. Harrison - VP of IR
Good morning.
Thank you for joining us for this review of Lennox International's financial performance for the first quarter of 2017.
I'm here today with Chairman and CEO, Todd Bluedorn; and CFO, Joe Reitmeier.
Todd will review the key points for the quarter, and Joe will take you through the company's financial performance and outlook.
(Operator Instructions)
In the earnings release we issued this morning, we have included the necessary reconciliation of the non-GAAP financial measures that will be discussed to GAAP measures.
In addition, all comparisons mentioned today are against the prior year period.
You can find a direct link to the webcast to 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.
Todd M. Bluedorn - Chairman and CEO
Good morning, and thanks, Steve, and thanks, everyone on the call, for joining us.
Lennox International posted strong revenue growth and margin expansion for another record first quarter despite some headwind from the weather.
New first quarter records include revenue, total segment profit and margin as well as earnings per share.
Revenue was up 11% in the first quarter on growth across all 3 of our businesses.
On a GAAP basis, operating income rose 39% to a first quarter record of $61 million.
GAAP EPS from continuing operations was up 79% to a first quarter record of $1.
On an adjusted basis, total segment profit rose 39% to a first quarter record of $65 million, and total segment margin expanded 170 basis points to a new first quarter high of 8.2%.
Adjusted EPS from continuing operations rose 50% to a first quarter record of $0.90.
A couple of points to make here on the first quarter.
First, as we pointed out in the press release, the company had 5 more days or approximately 6% more days in the first quarter this year compared to last year.
This balances out for the full year with the fourth quarter having 6% fewer days this year than last year.
We usually don't talk about the number of days between quarters.
But this year, the difference is notable, and we want to make sure everyone keeps this in mind in thinking about the year overall.
Second, as you know, there's a required change this year in GAAP accounting in regard to excess tax benefits from share-based compensation.
This now flows to the P&L instead of directly into equity.
We expect this item to have some volatility during the year from movements of stock price, the timing of share exercises and the vesting of our share-based compensation plans.
Accordingly, we have excluded this in looking at our adjusted earnings to give investors a better view on operational performance.
For the first quarter, this is a benefit of $0.17 to GAAP EPS.
We excluded that benefit from adjusted EPS, and we aren't attempting to forecast it in the out quarters.
We're only adjusting the guidance for 2017 GAAP EPS by the first quarter net benefit.
We will report the impact on future quarters after we close and report for each period.
It's a mouthful.
The company's effective tax rate guidance for the year on an adjusted basis remains 32%.
We currently expect a benefit and lower effective tax rate on a GAAP basis as reported under this new requirement.
Turning to the highlights in our business segments for the first quarter.
The Residential first quarter revenue and profit were up 11% to new first quarter highs.
Weather was warmer than normal and warmer than prior year in the quarter, which is a headwind to the replacement business, specifically our furnace business.
Even with that, revenue from replacement business was up 10%, and new construction was up mid-teens.
Residential margin was relatively flat at 10.1% in the quarter.
Warmer weather and faster new construction growth led to mix not being as favorable as expected on our seasonally lightest quarter of the year.
In addition, we continue to make strategic investments in distribution expansion, including 4 new PartsPlus store in the quarter, as well as information technology, research and development and other SG&A investments.
As we move into our largest seasonal period, we continue to expect strong Residential margin expansion for 2017 and another record year.
Turning to our Commercial business.
Revenue, profit and margin all set first quarter records.
Commercial revenue was up 15%, and profit rose 35% as segment margin expanded 150 basis points to 9.8%.
In North America, commercial equipment revenue was up more than 20%.
New construction revenue was up mid-teens, and replacement revenue was up more than 25% on strong growth in both planned and emergency replacement business.
And we continue to see nice revenue growth in our VRF business.
Another cut at revenue.
Our National Account Equipment business is up more than 30% in the quarter.
And we had a great start to the year, winning new businesses with 14 new national accounts in the quarter, including retailers, restaurants, hotels, medical facilities and real estate firms.
On the service side, National Account Services revenue was up mid-single digits.
In Europe, Commercial HVAC revenues was flat at constant currency and down low single digit as reported.
In Refrigeration, revenue was up 5% at constant currency in the first quarter.
From a regional perspective, at constant currency, North America, Europe and Asia Pacific were up mid-single digits, and South America was down mid-single digits.
Refrigeration profit rose 57%, and segment margin expanded 250 basis points to 7.9%.
We continue to expect segment margin to be up 50 to 100 basis points for the full year.
With our strong balance sheet, we continue to make key investments in the first quarter to drive the future growth and profitability of the company.
Beyond that, the company paid $19 million in dividends and $75 million for stock repurchases in the first quarter.
We continue to target a total of $250 million of stock repurchases for the year.
Now I'll turn it over to Joe.
Joseph William Reitmeier - CFO and EVP
Thank you, Todd.
And good morning, everyone.
I'll provide some additional comments and financial details on the business segments for the quarter, starting with Residential Heating & Cooling.
In the first quarter, revenue from Residential Heating & Cooling was a first quarter record $420 million, up 11%.
Volume was up 10%, and price and mix combined was up 1%.
And foreign exchange was neutral to revenue.
Residential profit was a first quarter record $43 million, up 11%.
Segment profit margin was 10.1% compared to 10.2% in the prior year quarter.
Segment profit was positively impacted by higher volume, lower material costs and favorable foreign exchange.
Offsets included investments in distribution expansion, information technology, research and development and other SG&A investments.
Turning to our Commercial Heating & Cooling business.
Commercial revenue was a first quarter record $196 million, up 15%.
Volume was up 14%, and price and mix combined was up 1%.
Foreign exchange was neutral to revenue.
Commercial segment profit was a first quarter record $19 million, which was up 35%.
Segment profit margin was a first quarter record 9.8%, which was up 150 basis points.
Segment profit was positively impacted by higher volume and lower material costs with a partial offset from SG&A investments.
In our Refrigeration segment, revenue in the first quarter was $178 million, up 6%.
Volume was up 4% and price and mix combined was up 1%.
Foreign exchange had a positive 1% impact on revenue.
From a regional perspective, Todd addressed revenue growth in constant currency.
On a reported basis, South America was up 20%, Asia Pacific was up low double digits, North America was up mid-single digits, and Europe was up low single digits.
Refrigeration segment profit was $14 million, up 57%, and segment profit margin was 7.9%, which was up 250 basis points.
Segment profit was positively impacted by higher volume, lower material costs and favorable mix with a partial offset from SG&A investments.
Overall for the company, on an adjusted basis, the first quarter excludes a net benefit of $4.6 million.
Based on the new GAAP accounting requirements on excess tax benefits from share-based compensation, the company had a $7.4 million benefit in the first quarter.
Netted against this, we had $2.8 million of after-tax charges for special items in the quarter.
Corporate expenses were $11 million in the first quarter, down $4 million from the prior year quarter and consistent with our guidance for corporate expenses to be down $12 million for the full year.
Overall, SG&A was $152 million in the first quarter or 19.2% of sales compared to 19.6% in the prior year quarter.
Net cash used in operations in the first quarter was $108 million compared to $102 million in the first quarter a year ago.
Capital spending was $25 million compared to $24 million in the prior year quarter.
With respect to free cash flow, we used approximately $133 million in the first quarter compared to using $126 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 $285 million of free cash flow for 2017 overall.
Total debt was $1.1 billion at the end of the first quarter, and we ended March with a debt-to-EBITDA ratio of 2.0.
Cash and cash equivalents were $49 million at the end of March.
Now before I turn it over to Q&A, I'll review our outlook for 2017.
Our underlying market assumptions for 2017 remain the same.
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 America refrigeration shipments to be up low single digits.
Based on this underlying market environment and our targets for market share gains, revenue growth guidance for Lennox International remains 3% to 7% for 2017 with a minimal impact from foreign exchange.
Our guidance for GAAP EPS from continuing operations for the full year moves up by the net $0.10 benefit that we realized in the fourth quarter to a range of $7.65 to $8.25.
Our guidance for adjusted GAAP EPS from continuing operations for the full year remains $7.55 to $8.15.
Now let me run through the key points of our guidance assumptions and the puts and takes for 2017.
All of them remain the same from what we have previously discussed.
We continue to expect $35 million in savings from our sourcing and engineering-led cost reduction programs.
We expect $6 million in savings from our manufacturing operations in Mexico from actions already taken.
Residential mix is expected to be a $5 million benefit for the year.
We continue to expect $10 million of headwind from commodities in 2017 and are targeting $20 million in price increases for the full year.
We expect a minimal impact from foreign exchange.
A few other guidance points that are unchanged.
Corporate expense is expected to be approximately $85 million.
We still expect net interest expense for the year of about $32 million, and our effective tax rate guidance remains approximately 32% on an adjusted basis for the full year.
We continue to expect the weighted average diluted share count for the full year to be between 42 million to 43 million shares, which incorporates plans for a total of $250 million of stock repurchases for the full year.
Capital expenditures are expected to be $100 million, and we are targeting free cash flow of $285 million for 2017.
And with that, let's now go to Q&A.
Operator
(Operator Instructions) Our first question comes from the line of Jeff Hammond from KeyBanc Capital Markets.
Jeffrey David Hammond - MD and Equity Research Analyst
So just on Residential.
Can you just talk about how you think about incrementals playing out?
Certainly weaker this quarter.
How do mix dynamics normalize?
And just as you think about your price targeting, how are you doing capturing price thus far?
Todd M. Bluedorn - Chairman and CEO
Yes, I mean, I'll start with the lead, what I said in the script.
We expect and are planning for another strong growth and record year for Residential in 2017.
What we saw in the quarter, and I talked about it in the script, is we didn't have as strong a mix as expected because of the warm weather.
It was warmer, both versus last year but also normally, degree heating days were down double digits.
And it impacted us, not only that RNC grew faster than add-on and replace, residential new construction grew faster than add-on and replacement.
But even with add-on and replacement, our mix of furnaces were down where we make higher margins.
Now that's sort of all the reasons.
Now the good news is within our replacement business, we had nice mix up to premium products.
All that looks strong.
And we've implemented the price increases we announced in -- at the beginning of the year.
And as we enter the large selling season, we'll start to see that kick in.
And so it's our lightest quarter, and so all the investments that we make weighed on the margins.
But -- and with where I started, we expect strong margin expansion in Residential as we move into the seasonally largest quarters of the year.
Jeffrey David Hammond - MD and Equity Research Analyst
Okay.
And then Commercial, any good lumpiness around timing of national accounts in the quarter?
Or was that kind of all pure core growth?
Todd M. Bluedorn - Chairman and CEO
It was broad, strong growth across all our Commercial businesses.
I should -- every lens I looked at during the script was good news, whether it's national accounts, non-national accounts, VRF, emergency replacements, planned replacements, new construction, it was all strong.
And again, as I called out on the national account conversations, we continue to sign up new national accounts, and equally important, a diverse range of end markets.
Sort of, every day, there's new headline about the pressure on retail in the journal.
But we continue to diversify our end markets, and we think some of that strength is playing through.
Operator
The next question comes from the line of Tim Wojs with Baird.
Todd M. Bluedorn - Chairman and CEO
You there, Tim?
Timothy Ronald Wojs - Senior Research Analyst
Just anything that you've seen in terms of a change in how you view the replacement cycle or how you're reviewing pent-up demand as you kind of enter the seasonally stronger period of the year?
Todd M. Bluedorn - Chairman and CEO
No.
I mean, we are excited.
I mean, I think you saw it.
Even when you adjust the 11% revenue growth for the extra days, we still -- and you adjust for the weather, I think we had a very strong revenue quarter for Residential in the first quarter.
And that's on top of what we've done -- did last year, and I think the momentum continues.
Had all our dealer meetings, and our contractor customers seem strong and encouraged and optimistic.
And the U.S. consumers seem strong.
And so I think all that's queued up.
We get the right weather pattern, I think we're set up for another very good year.
Timothy Ronald Wojs - Senior Research Analyst
Okay.
And then just on the investments in the resi segment.
Is the right way to think about it that that's evenly weighted through the year?
So just the fact that you have lower profitability in the first quarter just abnormally weighs on the margin, and we'll see that kind of get leveraged through the rest of the year?
Todd M. Bluedorn - Chairman and CEO
Yes.
It's the right way to think about it.
Timothy Ronald Wojs - Senior Research Analyst
Okay, great.
And then any indication on April?
Todd M. Bluedorn - Chairman and CEO
We're off to a solid start.
I mean, the momentum we saw in the first quarter around revenue continues in the second quarter, and it's early.
And as you know, June is sort of the big -- the money month, and it's about half of the quarter.
But things are trending well, and we're happy where we sit this far into the quarter.
Operator
The next question is from Steve Tusa with JPMorgan.
Charles Stephen Tusa - MD
So I know you guys are a little bit different given your distribution profile.
But can you just give us a little bit of color on how the comps are going to kind of play out in second and third quarter given the pretty extreme weather conditions that we had last year?
I know for some, second quarter was a lot weaker than third quarter.
So maybe if you just want to help us position for what's to come in the next couple of quarters, just directionally?
Todd M. Bluedorn - Chairman and CEO
Yes.
Well, I think I stamped my foot as hard as I could to say take fourth quarter down, right, because it's going to have fewer days.
Charles Stephen Tusa - MD
Yes, sure.
And I meant second and third.
Todd M. Bluedorn - Chairman and CEO
I think high level, it's what you called out.
I mean, the weather came late last year.
But we still had a pretty good second quarter.
But I think the weather came late last year, and so I think net-net, the comp in third quarter's a little harder than the comp in second quarter.
But that being said, we're getting some weather already, and we're starting off good.
Charles Stephen Tusa - MD
Is it possible that the comp in the third quarter is -- doesn't grow because of that?
Would you be concerned if you didn't see growth in the third quarter, about kind of the cycle from that perspective?
Todd M. Bluedorn - Chairman and CEO
I would be concerned if we didn't have growth in third quarter unless there was a huge weather comp that got in the way.
Charles Stephen Tusa - MD
Okay, got it.
And then just lastly on the Commercial side.
Where specifically -- can you just unpack the growth a little bit more, in more specifics?
You mentioned kind of the retail concerns out of The Wall Street Journal.
I mean, I kind of have the same retail concerns watching what's happening out there with Amazon.
So maybe if you could just unpack the verticals, and maybe where you're seeing the backfill related to retail?
Or maybe retail is still relatively strong.
Todd M. Bluedorn - Chairman and CEO
I think it's across the board, without being too cute about it and trying to avoid your question.
But what I talked about in the script is, overall, commercial equipment was up 20%, both in planned and emergency replacement.
So emergency replacement is not sort of big-box retail.
We continue to see -- and just on our national account business, up 30%.
And it was not only retailers.
It was medical, restaurants, hotels, real estate firms.
All verticals that we've been focused on.
I mean, look, retail's still our largest vertical in national accounts.
But where it used to be the vertical, we've significantly diversified.
And so our growth in other verticals has been significant.
But I'd also say, even retailers spend on planned replacement.
The article in The Wall Street Journal, the one I'm referring to, they talk about JCPenney and RadioShack, and I think The Limited.
We haven't sold a whole lot of rooftops to RadioShack, The Limited and JCPenney in the last few years.
I mean, there's still other formats that are growing and some big boys and big businesses that are spending on planned replacement, and we do very, very well there.
Charles Stephen Tusa - MD
So I assume your Sears, Kmart exposure is relatively minimal from (inaudible)
Todd M. Bluedorn - Chairman and CEO
I haven't got an electronic tip from RadioShack in years.
Charles Stephen Tusa - MD
So what -- why is this growing so fast?
I mean, that seemed like a pretty big number.
Are you just taking a ton of share here?
Or is -- or do you think this is market related?
That maybe this is -- the pent in -- maybe a little bit of pent-up demand perhaps on the Commercial side?
Todd M. Bluedorn - Chairman and CEO
I don't know if it's pent-up demand.
Again, sort of not to get too breathless, I think you'd knock off 6% for the extra days, and you're mid-teens.
And then I think there's probably some -- it's tough to say share gain for a quarter, but I think we got sort of an outsized piece of the business.
I do think -- again, this going to be anecdotal in nature.
But just like you've seen the stock market pick up after the election, as there's sort of confidence about -- we can debate whether that's right or wrong, but confidence about what the new administration's going to do with pro-business policies.
I think some of our larger commercial customers sort of have the same sense and are willing to spend money maybe in a way that they might not normally.
Operator
Question is from the line of Gautam Khanna with Cowen and Company.
Gautam J. Khanna - MD and Senior Analyst
I was hoping if you could talk a little bit more about how trends are at Kysor/Warren, and just kind of your confidence on Refrigeration margins.
It looks like you might be able to do better than the guidance.
So how's Kysor doing?
Has the Walmart new business order kicked in yet?
And any comments on your conviction around maybe exceeding the Refrigeration margin guidance for the year?
Todd M. Bluedorn - Chairman and CEO
I'll take KW first, and then I'll talk more broadly about Refrigeration.
I mean, we continue to drive performance improvement and focus on share gains within the Kysor/Warren business.
And we have a -- have and have had a significant chunk of the Walmart business, and we continue to deliver on that.
More broadly on Refrigeration, up 250 basis points for the quarter on top of the 210 that we had last year for an entire year, driven by some additional volume, lower material costs and some strong mix improvement with some of the -- selling some of our higher-margin mix across the entire Refrigeration segment.
Back in December, as you -- I think you're suggesting, we guided 50 to 100 basis points.
I still think that's the right guide for now.
Let us get further into the year, we'll revisit it.
If you recall last year, we raised the margin guidance, I think, a couple of times during the year but we continue to make good progress on Refrigeration.
Gautam J. Khanna - MD and Senior Analyst
And at one point, we were waiting on a new contract award from Walmart that might confer better mix at Refrigeration.
Has that happened yet?
And did what -- Kysor, was it in the black in the quarter?
Todd M. Bluedorn - Chairman and CEO
We're still waiting for the -- for Walmart to make a decision on sort of the new contract.
Gautam J. Khanna - MD and Senior Analyst
And Kysor was in the black.
Todd M. Bluedorn - Chairman and CEO
I don't know.
I think given that's the seasonal low point of the business, my guess is not because we were profitable last year but not strongly profitable.
So my guess is we didn't make money in first quarter.
Although, I would parenthetically point out as a corporation, up until about 3 or 4 years ago, we didn't make money as an entire corporation in the fourth -- first quarter.
And so sort of the -- being at $0.90 EPS, given where we used to be in a very seasonally low quarter, I think underlines the improvement of the business.
That's my victory lap.
Gautam J. Khanna - MD and Senior Analyst
Yes, very strong start.
Operator
Next question is from the line of Ryan Merkel with William Blair.
Ryan Merkel - Research Analyst
So Todd, first question.
Is having extra days in the first quarter versus the fourth quarter, is that a net negative for you?
Todd M. Bluedorn - Chairman and CEO
No.
I think it's...
Ryan Merkel - Research Analyst
Doesn't matter?
Todd M. Bluedorn - Chairman and CEO
I think, it's net neutral.
Ryan Merkel - Research Analyst
Net neutral.
Okay.
And then can you talk about sales performance in March on a days-adjusted basis?
Todd M. Bluedorn - Chairman and CEO
I'm just pausing because I'm not sure I know the answer off the top of my head.
Give me more.
What are you looking for?
Ryan Merkel - Research Analyst
Well, I'm just trying to get a sense, I heard March was a pretty solid month based on my surveys.
And then you mentioned that April was off to a solid start.
So I'm just wondering if April was as good as March, or is it April picked up.
Just trying to get a sense of the trends.
Todd M. Bluedorn - Chairman and CEO
You're right about March being strong.
So January and February is when we had the warm weather.
And March, it started -- it got cold in some places.
And also, it's -- you switch to loading for the cooling season.
And then, to state the obvious, I mean, April's an artificial construct.
I mean, the momentum that we saw at the end of March sort of rolled into the first couple of weeks, and we're now starting to get to some warm weather in parts of the country, which again sort of gets dealers excited to get ready for the cooling season.
Ryan Merkel - Research Analyst
Right.
Okay, and then lastly, can you just comment on price capture for both Residential and Commercial?
It sounds like everything's on track.
But just want a little bit more clarity.
Todd M. Bluedorn - Chairman and CEO
Yes.
Our sense is things are on track.
We'll know a lot more when we get into the summer selling season.
That's sort of when you'll really know.
But we're pretty confident that going into the seasonally significant parts of the year, that the $20 million of price that we put out there, we're going to get.
Operator
And the next question is from Julian Mitchell with Crédit Suisse.
Julian C.H. Mitchell - Head of Global Capital Goods Research Team, Director, and Lead Analyst for United States Electrical Equipment and Multi-Industry Group for United States Equity Research
Just -- I wanted to drill in a little bit on the helpful color you gave on the cost base.
In the sense that it sounded as if a lot of the cost efforts or cost step-up in Q1 was in the OpEx line, SG&A, investments, distribution, R&D and so on.
But if I look at just the COGS and the SG&A, they both grew about 9% or 10% year-on-year.
So I'm just trying to understand, is the implication from that, that the SG&A to sales over the balance of the year should fall even more than it did in Q1?
Todd M. Bluedorn - Chairman and CEO
Yes.
I think what it's saying is that SG&A and our investments, on a full year basis, [ aren't ] penciled out to grow 10%.
Julian C.H. Mitchell - Head of Global Capital Goods Research Team, Director, and Lead Analyst for United States Electrical Equipment and Multi-Industry Group for United States Equity Research
Understood.
And then on the COGS line, would the input cost pressures relative to price get heavier in the second half still?
Todd M. Bluedorn - Chairman and CEO
They get heavier in the second half.
Although we -- the price take-up will happen more second half of the year than first half of the year because we're now setting -- we've set price or implemented price first quarter.
The other issue for the balance of the year that should be positive compared to the first quarter was mix.
So we didn't -- I sort of kicked it a couple of times, but the furnace sales as a percent of total revenue wasn't where it was last year because of the warmer weather that we had in the first quarter versus last year and versus normal.
And as we get into the balance of the year, the mix sort of swings our direction as well as AOR growing closer to what residential new construction's grown, where in first quarter residential new construction grew 500 basis points quicker than add-on and replacement, which is a negative impact to mix.
Julian C.H. Mitchell - Head of Global Capital Goods Research Team, Director, and Lead Analyst for United States Electrical Equipment and Multi-Industry Group for United States Equity Research
That's very helpful.
And then I guess my second question is just around Refrigeration and the sort of competitive landscape in that.
One of your main peers obviously changed hands a year ago.
One of your other peers has had some production manufacturing issues for 12 or 18 months now.
They may be coming to the end of that.
I just wondered how you saw the competition in Refrigeration, if there was any difference at all today, good or bad, versus 12 or 18 months ago.
Todd M. Bluedorn - Chairman and CEO
No I, think it's very similar.
And again, when we -- the portion of our competitor base that people are able to see publicly is really just the Kysor/Warren.
It tends to be, Hillphoenix, part of Dover; and Hussmann, now part of Panasonic.
And we talk about KW, and I talked about it earlier.
And the other parts of our Refrigeration business, different sets of competitors, we continue to make investments and grow significantly there.
So I think I'd just point to the margin expansion, 200 basis points last year, 200-plus basis points first quarter.
We feel like we're heading in the right direction in Refrigeration.
Operator
(Operator Instructions) The next question comes from Robert Barry with Susquehanna.
Robert Barry - Senior Analyst
So how many selling days were there in the quarter?
Todd M. Bluedorn - Chairman and CEO
Doing it from memory, 91 versus 85 or 91 versus 86.
Joseph William Reitmeier - CFO and EVP
Correct.
Robert Barry - Senior Analyst
91 versus 86.
Okay, cool.
That's the 6% impact.
So if we wanted to just kind of level set everyone, we could shave about 6 points of growth off of each of the segment [ and ] growth rates?
Todd M. Bluedorn - Chairman and CEO
Order of magnitude.
No, the other thing that I would do to just sort of level set everybody is we've always talked about our drop-through being 30% target, and that reflects sort of all the actions that we're taking in multiple parts of the business.
A purer number just to use for revenue drop-through for incremental revenue is more like 20% to 25%, depending on the segment.
So if I was going to model the EBIT impact or EPS impact, I'd have that incremental revenue drop at 20% to 25%.
Robert Barry - Senior Analyst
Got you.
So maybe it added about $0.15 in the quarter.
Todd M. Bluedorn - Chairman and CEO
Plus or minus.
Robert Barry - Senior Analyst
Got you.
Okay.
And I think you said earlier, you would expect a similar impact to be taken out of fourth quarter.
Todd M. Bluedorn - Chairman and CEO
Correct.
Robert Barry - Senior Analyst
So it sounded like mix tracked weaker.
You're keeping the outlook for mix the same for the year.
Is that just less upside to the original outlook on mix?
Or is it just not significant enough because it's shoulder period?
Todd M. Bluedorn - Chairman and CEO
I think it's that.
But it's also what we were encouraged by was within the product categories, the amount of mix up that we had to premium product.
And so we think that will offset sort of the "miss" that we had in the first quarter from the furnace sales.
Robert Barry - Senior Analyst
Got you.
How -- what is the mix tracking now?
Is it like above 14% versus a year ago or...
Todd M. Bluedorn - Chairman and CEO
I still think it's a squirrely metric just because of the regulatory change last year.
And so I think it starts becoming a cleaner metric when we revisit it after the transition, which was in June.
So we have a number written down here, but to me, it's meaningless.
Robert Barry - Senior Analyst
Got you.
And then, Todd, could you just talk about pricing in resi?
We've been hearing that pricing pressure has been a rising in resi, different views on whose starting it.
But I -- it sounds like it might be trickling through.
It sounds like maybe more intense in the builder channel, but could be more broad.
Just any thoughts on what you're seeing there.
Todd M. Bluedorn - Chairman and CEO
There's always -- my line is -- that I'd like to say is there's always skirmishes on the edge of the empire, and I think that's the case now, and that's always the case.
I just underlined, we're confident we're going to get to $20 million in price as an enterprise.
I think if I had to take an over-under on commodities, I might take the over, which is different than what I would do 30 days ago, and over being bad news.
So we understand we got to get price, and I assume our competitors do, too.
And if the commodities stay in place and everybody's hedges roll over and no one's gotten price, 2018's going to be painful on price increases.
So I think we need to get it now, and I assume our competitors think the same thing.
Robert Barry - Senior Analyst
Okay.
Given the comments on price, and I've been seeing some of the same headlines, especially on steel, I mean, what's the history of and potential to do mid-year pricing if you need to?
Todd M. Bluedorn - Chairman and CEO
We've done it.
And again, we're protected this year in large part from copper and aluminum because of the hedges.
And our guide assumes forwards on cold-rolled steel.
That's sort of in line with where it's at now.
So it would have to move up before we'd sort of aggressively take action.
But we've done it before.
And if we needed to, we'd do it again.
Operator
The next question is from Rich Kwas with Wells Fargo Securities.
Richard Michael Kwas - MD and Senior Equity Research Analyst
Just a couple of questions on the Commercial side.
Todd, when you look at the quarter relative to where we were back in February when you reported Q4, you mentioned the billing days.
I mean, it does seem, though, Commercial came in better than expected relative to maybe internal projections.
Is that right?
Or how would you characterize it, expectations at the beginning of the year for the quarter?
Todd M. Bluedorn - Chairman and CEO
Again, we don't give quarterly guidance.
So hopefully, I didn't guide you on what we were going to do in Commercial for the quarter.
You didn't take it from my comments.
I think we could see the backlog.
And so coming into the quarter, we knew we're going to have a pretty good quarter.
And it remained strong through the whole thing.
So yes, I think incrementally, it's probably better than where started in December, and February we had pretty good visibility.
And so we hoped it would be a good quarter, and it turned out that way.
Richard Michael Kwas - MD and Senior Equity Research Analyst
Anything on the national accounts that you've cited in terms of -- I think you said 14 new accounts, anything that rolled through that was immediate, more immediate?
Todd M. Bluedorn - Chairman and CEO
I think the really good thing about it for the quarter is there wasn't a lumpiness.
It wasn't like Walmart did this or company X did that.
It was broad based.
And as I suggested, whether we look through the lens of emergency replacement, planned replacement, national accounts, non-national accounts, VRF, sort of across the board, we did well, which was a positive sign.
Richard Michael Kwas - MD and Senior Equity Research Analyst
Okay.
And then just across the 3 segments, anything we should be mindful of with regards to commodity in terms of protection, whether it's hedges or being able to get price, et cetera?
Anything, any deviations?
Todd M. Bluedorn - Chairman and CEO
No.
I think broadly speaking, it's the same.
I think the only nuance would be, as a percentage of COGS, we use less steel in Refrigeration.
So I think you could argue they're going to be less impacted by it.
But then on the flip side, I think they're less likely to get price in the marketplace.
So net-net, it should be neutral probably.
Richard Michael Kwas - MD and Senior Equity Research Analyst
And then, last one in terms of the competition, following up on Rob's question.
You have a major -- a competitor that's going through a merger right now and integrating that.
Anything that you've seen out in the marketplace on the unitary side from them or anyone else that -- from a share standpoint that you would highlight or you've seen?
Todd M. Bluedorn - Chairman and CEO
No, no.
I mean, I think we're gaining share, and I think anytime one of our competitors is consolidating, what, 4 million square foot of factory in Houston, good luck.
Our other competitor's gone through a major, as you said, acquisition.
And having sort of been involved in those over the years, that always turns into a Game of Thrones where people are worried about where to go and who they work for and what's going on.
So I think those are all good things for us.
That being said, we have a set of competitors.
They're all good.
But I think we're gaining share, and our strategies are well known, and we just continue to pound on them.
Operator
The next question is from the line of Walter Liptak with Seaport Global.
Walter Scott Liptak - MD of Diversified Industrials and Senior Industrials Analyst
I wanted to ask, with the weather better this year, warmer this year, what's your experience with how weather impacts the business?
Because I'm sensing a little bit of tone of caution, I think, in kind of the back half of the year.
And I wonder if that's -- if you think we're going to have really nice second quarter and it might be tougher in the back half.
Or is your experience, when we've got this warmer weather that starts early in the year, that it flows through for the full year?
I wonder if you could help us with that.
Todd M. Bluedorn - Chairman and CEO
Let's maybe just clear up what you -- what I said or what you thought I said.
I wasn't trying to show caution for the back half of the year.
I was just trying to make the mathematical point of if we had 6% more days in the first quarter and 6% less days in the fourth quarter...
Walter Scott Liptak - MD of Diversified Industrials and Senior Industrials Analyst
Yes, yes, I get that.
I get that.
Todd M. Bluedorn - Chairman and CEO
Yes.
And then the other point I was making, I think in direct answer to your question is, cost of steel's going to be higher second half of the year than first half.
And cost of copper and aluminum's going to be higher second half than first half.
In terms of -- and then I was trying to say that we had warm weather in the first quarter.
So in the rearview mirror, I was complaining, if you will, that we didn't sell as many furnaces.
We're confident going into the second and third quarter.
And the honest answer to your question is, if you have a warm second quarter, you don't necessarily pull volume from third quarter.
Third quarter tends to be -- second quarter tends to be they're stocking it and they're getting ready.
Third quarter tends to be they buy because they're running out of inventory, and they need to fix customer problems.
And so if there's hot weather, we'll get units breaking.
In the field, we'll see units breaking in second quarter and units breaking in the third quarter, and the flow will continue.
And so we've had years where sort of the summer selling season rolls all the way to Labor Day.
So short answer is, it can carry through.
Walter Scott Liptak - MD of Diversified Industrials and Senior Industrials Analyst
Okay, that's great.
I wonder if you noticed in your numbers a difference geographically.
Like in the Midwest, it's been a really nice, warm spring and people have had their ACs on already.
In the Southeast, I think it's been fairly hot already.
Is there a difference that you could see, like the stocking in the northern part of the United States versus new builds and sell-through in the Southeast?
Todd M. Bluedorn - Chairman and CEO
Well, I think broadly speaking, everybody stocks up at the end of March.
And then they have to sell through.
And most people take a little bit of time to sell through.
The other thing you always have to sort of be careful is you have to look at year-over-year comps.
I mean, it's always hot in the Southeast.
Midwest is different.
But yes, I think you're right.
We're getting warmer weather this year in the Midwest than we did last year.
So I think we just got to let it all play out.
Walter Scott Liptak - MD of Diversified Industrials and Senior Industrials Analyst
Okay, all right.
Fair enough.
If I could, just one last one.
On corporate expenses, you were a little bit lower than I thought.
Was that adjusted for the seasonal -- for this extra selling days, too?
Or -- in corporate expenses, and I apologize if you already said this, what's your expectation for 2017?
Joseph William Reitmeier - CFO and EVP
The corporate expenses usually aren't significantly impacted by volume, number one.
And what we saw there was lower long-term incentive compensation expense year-over-year, and then some benefits from lower health and welfare benefits year-over-year.
Some of those, we expect to continue for the full year, like I said, to target a $12 million reduction in corporate cost.
Todd M. Bluedorn - Chairman and CEO
Yes, and I think that's a high level.
Everything Joe said was right.
Our guide is to be at $85 million, which is $12 million lower than last year.
And the reduction of first quarter, a large part was in line with that.
Operator
Next question is from the line of Robert McCarthy with Stifel.
Robert P. McCarthy - Senior Analyst
Can you hear me?
Todd M. Bluedorn - Chairman and CEO
Yes, I can, Rob.
Robert P. McCarthy - Senior Analyst
So I guess the first question, again, on the Commercial strength.
Is there -- and this is probably a silly question, but I'll ask it.
Is there any kind of countervailing weather that kind of helped you in that business?
Do you think there is -- because it was a little warmer in the quarter, do you think it helped you at all?
Todd M. Bluedorn - Chairman and CEO
I think that's a fair question, Rob.
I think short answer's, on the margins, yes.
I think you're right.
I think when you think about planned replacement for national accounts, the fact that you have decent weather sort of supports that, new construction supports it.
I don't think it was a major driver.
But it might've been worth a point or 2.
Robert P. McCarthy - Senior Analyst
And then in terms of thinking about kind of share loss, share gain, obviously a lot of questions been asked.
But I guess from what you've been seeing, I mean, about this trend, you -- it would be fair to say, given the magnitude, even accounting for the days, you would expect directionality probably your competitive set to have a pretty good quarter in commercial across the board?
Todd M. Bluedorn - Chairman and CEO
I think what I said was -- we'll better state it.
Our revenue was up 20%.
Even if you adjust for the number of days, it's up mid-teens.
That wasn't all share gain.
That shows end market strength.
And so yes, let's put it this way.
If they don't, then we gained a hell lot of share in the first quarter.
Robert P. McCarthy - Senior Analyst
All going according to plan.
Now the last question is, of course, your favorite topic, which is the Internet of Things.
And perhaps you could just talk about kind of an update in terms of some of the technology investments, and obviously having called out some of the investment overall in Residential.
But could -- is there anything you can give to kind of quantify kind of the level of investment and how you're thinking about it for the course of the year?
And any kind of return there?
Todd M. Bluedorn - Chairman and CEO
We never -- unlike Watsco, we're not going to put a dollar figure on the investment.
I mean, it's part of our SG&A spend.
And if revenue started to go down, we'd sort of adjust SG&A.
So I think you can look at the business overall.
I think it's all the things we talked about in December and that you saw at the Analyst Day, Rob.
We continue to make investments to support our dealer customers with LennoxPROs, our online support system.
We continue to make investments to support the end customer with iComfort and all the things we can do with our digital homeowner control system that allows for prognostics and diagnostics.
And as we talked about in December, we're taking all those investments, quite frankly, that we've sort of led the way in res and rolled it over to other parts of our business, whether it's Refrigeration or whether it's our Allied business or whether it's our National Accounts Service business in Commercial.
And so we're leveraging the investments that we're making and repeat myself, we'll look back 15 years from now and the way this industry -- well, the way the industry's going to increasingly differentiate is that.
The fact that we own our own distribution allows us to leverage it, and we'll look back 15 years and be very happy we made all these investments.
Robert P. McCarthy - Senior Analyst
Well, despite what people may say, I think a strong, solid start to the year and congratulations on a good quarter.
Todd M. Bluedorn - Chairman and CEO
Thank you.
Thanks.
Operator
Next question is from Jeffrey Sprague with Vertical Research Partners.
Jeffrey Todd Sprague - Founder and Managing Partner
Just a couple of clean-up things here.
A lot of ground's been covered.
Todd, just on your comment about incrementals, it just wasn't clear to me if the days actually benefited your incrementals in the quarter or were negative.
And the reason I say that is just at the segment level, it looks like your incrementals were about 18, right, all-in consolidated, low 20s, so inside that 20 to 25 range.
Just clarify exactly how you're defining incrementals and what, if any, impact the days had.
Todd M. Bluedorn - Chairman and CEO
I mean, when I talk about incrementals, I'm including corporate.
So I think that may be one difference.
So I roll up the total delta in revenue versus what I would model on what the EBIT drop-through is on that incremental revenue.
So that's point number one.
Point number two is, so that typically, we guide 30% sort of as our medium- and long-term target.
And this year, on a full year basis, we're a little bit lower than 30% if you take the midpoint of our full year guide, just because of the headwind of commodities on a year-over-year basis.
So what I was suggesting was if you take pure revenue drop-through without all the material costs reduction and the things we're doing, it's more like 20% to 25%, sort of traditional volume drop-through.
And so I would -- the way I would model it is I would take the incremental revenue from the extra days, 5.5%, 6%; I would multiply it times 20% to 25%, and I would say that's the incremental EBIT drop-through.
Jeffrey Todd Sprague - Founder and Managing Partner
And then just on the cost side, can you update us a little bit more explicitly on how far your hedges roll out and kind of at what level you're hedged?
Todd M. Bluedorn - Chairman and CEO
Broadly speaking, we start hedging 18 months out.
12 months out we're 50% hedged.
We're a little over-hedged right now.
Joseph William Reitmeier - CFO and EVP
Yes, the full year, we're probably pretty close to 80% -- between 77% to 80% on copper and aluminum for the balance of 2017.
Operator
Question is from Jon Morales with Morgan Stanley.
Jonathan Morales - Research Associate
Question on resi margins.
What the peso -- even if it was a modest headwind, was it a headwind in the quarter?
Todd M. Bluedorn - Chairman and CEO
The what?
Jonathan Morales - Research Associate
The peso.
Todd M. Bluedorn - Chairman and CEO
No.
Joseph William Reitmeier - CFO and EVP
No.
Quite frankly, no significance with respect to the pesos.
Jonathan Morales - Research Associate
Okay.
And then just another question, too.
There are a lot of questions on the Commercial segment.
But -- and I don't know if you commented on it.
But what did the backlog look like at the end of the quarter?
Todd M. Bluedorn - Chairman and CEO
We entered second quarter with strength in Commercial.
I mean, we saw sort of strong growth, both in revenue that you saw but also the buildout in the backlog.
But as always, we enter a quarter and more than [ 0.5% ] we have to book and ship first quarter.
So while it's an indicator, we still have work in front of us.
But the momentum continues in Commercial.
Jonathan Morales - Research Associate
How does it look like compared to the fourth quarter?
Because I know you signaled that there was strength in the back half of the year.
Todd M. Bluedorn - Chairman and CEO
I'm not sure I understand the question.
Jonathan Morales - Research Associate
What does the first quarter backlog look like versus the fourth quarter backlog at the end of the quarter?
Todd M. Bluedorn - Chairman and CEO
I don't know the percentage.
I don't think we've ever guided that.
I think it's up just because we're a seasonal business, and so people are booking for the summer selling season.
Joseph William Reitmeier - CFO and EVP
Yes.
Quite frankly, it's up slightly.
However, it's so early to gauge the fourth quarter backlog at this point given sort of the lead times of Commercial product.
Todd M. Bluedorn - Chairman and CEO
I though he was asking for fourth quarter last year.
Joseph William Reitmeier - CFO and EVP
I thought you're asking for this year.
Jonathan Morales - Research Associate
No, no.
I meant because you signaled that there was strength coming out of the fourth quarter of last year, and that carried through into the quarter.
So I just wanted to get a sense of how that's looking now, for -- as we roll into the second quarter.
Todd M. Bluedorn - Chairman and CEO
Yes, I understand the question.
I'm not going to give you a math answer.
Maybe a qualitative...
Jonathan Morales - Research Associate
Yes, yes, qualitative is fine.
Todd M. Bluedorn - Chairman and CEO
It feels good, and the momentum continues.
Operator
The last question comes from the line of Robert Barry with Susquehanna.
Robert Barry - Senior Analyst
Just a quick follow-up.
Did you say or could you say how much you think the weather impacts impacted the revenue in resi in 1Q?
Todd M. Bluedorn - Chairman and CEO
Good question, Robert.
I'll be honest with you, we didn't try to model it.
I don't know.
I think if you adjust for days, we're still up 5%, 6%.
That's still a pretty good quarter.
I -- maybe 1 point, if I had to guess.
Robert Barry - Senior Analyst
Yes.
I mean, I asked because I agree with you.
It would normally be considered pretty good, but you're comping against a 5% last year and frankly, a 7% the year before.
So the comp and the stack are both really helpful.
Todd M. Bluedorn - Chairman and CEO
Yes.
Robert Barry - Senior Analyst
So if it's 1 point, it's kind of like 11 minus the 6 plus 1 is 6. So okay, good.
Just wanted to -- I mean, it feels a little slower but it's a shoulder period.
So...
Todd M. Bluedorn - Chairman and CEO
Yes, I guess I don't want to leave you with that.
I -- and I don't want to speak for my competitors.
They may say something different.
I mean, we wanted to call this day point out, because we thought it was material to the results.
I think most people are on the same kind of financial calendar as we are.
So I would just sort of ask you to think about that as you see some of our competitors report.
So I think we had a strong quarter.
Operator
There are no other questions in queue.
Todd M. Bluedorn - Chairman and CEO
Okay, great.
Thanks for all the questions.
A few points to leave you with.
It's early in the year, but 2017 is off to a strong start, with momentum continuing into the second quarter.
As we head into our largest seasonal period, we continue to expect strong revenue growth and margin expansion across all 3 of our businesses and new record highs for revenue and profit in 2017 for the company.
Thank you for joining us today.
Operator
And ladies and gentlemen, that does conclude our conference for today.
Thank you for your participation and for using AT&T teleconference.
You may now disconnect.