Lennox International Inc (LII) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Lennox International Fourth Quarter 2017 Earnings Conference Call.

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

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

Please go ahead.

Good morning.

Thank you for joining us for this review of Lennox International's financial performance for the fourth quarter and full year 2017.

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

Todd will review key points for the quarter and year, 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.

All comparisons mentioned today are against the prior year period unless otherwise noted.

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

The webcast will be archived on that site for replay.

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

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

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

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

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

Thanks, Steve.

Good morning, everyone, and thanks for joining us.

Let me start with a quick review of 2017 overall and then discuss some fourth quarter highlights and thoughts on 2018.

Lennox International posted another record year in 2017 as the company set new highs for revenue, operating margin and profit.

Revenue was up 5% for the year to a record $3.84 billion.

GAAP operating income rose 15% to a record $495 million.

GAAP EPS from continuing operations was up 13% to a record $7.17.

On an adjusted basis, total segment profit rose 10% to a record $515 million, and total segment margin expanded 50 basis points to a new high of 13.4%.

Adjusted EPS from continuing operations was up 14% to a record $7.92.

Our residential business led the company's performance in 2017 as it set new highs for revenue, segment margin and profit.

Commercial hit new highs for revenue and margin, and Refrigeration continued to show improvement with segment margin and profit up for the second consecutive year.

Residential revenue and profit were up 7% for the full year, and segment margin ticked up 10 basis points to 17.5%.

Revenue from replacement business was up mid-single digits, and new construction was up mid-teens for the year.

Replacement business was affected by unfavorable weather over much of the year, including the severe weather from the hurricanes that hit Texas and Florida.

Residential margins were affected by the unfavorable mix from new construction growing faster than replacement and by the significant investments we made for the future growth and profitability of the business.

Investments ranged from new products to distribution expansion to leading information technology for dealers, technicians and homeowners.

Investments returned to more normalized levels in 2018.

In commercial, revenue was up 5% at constant currency for the year, and profit rose 5%.

Segment margin was 16.2%, up 10 basis points.

As in residential, we made investments for the future growth and profitability of the business and had unfavorable mix from certain large national account shipments midyear.

In North America, commercial equipment revenue was up high single digits for 2017.

Replacement revenue was up mid-teens, and the new construction revenue was down mid-single digits for the year.

Looking at the business another way, national account equipment revenue was up low double digits.

The company had a record year in winning new national account business with 42 new customers across many vertical markets.

On the service side, Lennox National Account Service revenue was up low double digits as well.

Equipment from regional and local business was up mid-single digits.

In Europe, Commercial HVAC revenue was down low single digits.

In Refrigeration for the year overall, revenue was down 1% at constant currency.

Segment profit was up 5%.

Margin expanded 50 basis points to 10%, on target with our plans going into the year.

Looking at revenue by region at constant currency, North America was down low single digits as was South America.

Europe was down mid-single digits.

Asia Pacific was up low single digits.

Now turning to fourth quarter.

As we have talked about over the course of the year, the fourth quarter had 6% fewer days this year than last year, which impacts revenue as reported as well as a drop through that we get on earnings.

With that in mind, company revenue was down 2% at constant currency in the fourth quarter.

GAAP operating income was up 53% compared to the prior year quarter, that had a charge for a onetime lump-sum pension buyout program to certain vested participants.

GAAP EPS from continuing operations was up 9%.

On an adjusted basis, the company set new fourth quarter highs for total segment profit and margin as well as for EPS.

Total segment profit increased 1%, and total segment profit margin expanded 20 basis points to 11.9%.

Adjusted EPS from continuing operations rose 12% to $1.68.

In residential for the quarter, revenue was relatively flat at fourth quarter record levels.

Segment profit was down 7%, and margin declined 120 basis points to 16.0% on lower factory absorption than a year ago, the timing of other product costs and unfavorable mix, with replacement business down slightly and new construction up mid-single digits.

Residential's off to a nice start in the first quarter, and we expect residential margin expansion in the first quarter and full year 2018.

Turning to commercial in the fourth quarter.

Revenue, margin and profit established new fourth quarter highs.

Revenue was up 1% at constant currency, and segment profit rose 12% as margin expanded 150 basis points to 17.4%.

In North America, commercial equipment revenue was up low single digits for the quarter.

Replacement revenue was up low double digits, and new construction revenue was down low double digits.

National account equipment revenue was flat in the quarter.

On the service side, Lennox National Account Service revenue was up mid-teens.

Equipment revenue from regional and local business was up mid-single digits.

In Europe, Commercial HVAC revenue was down low double digits at constant currency.

In Refrigeration, revenue was down 9% at constant currency in the fourth quarter.

And a quick reminder, that's on the 6% fewer days in the quarter that we talked about at the beginning of the call.

From a regional perspective at constant currency, North America was down low double digits.

Europe and Asia Pacific were down mid-single digits, and South America was down low single digits.

Refrigeration segment profit rose 8% as margin expanded 140 basis points to 10.2%.

Looking ahead for the company overall in 2018, we are reiterating our guidance for revenue growth of 3% to 7%.

With a net benefit from U.S. tax legislation, we are raising our guidance for EPS from continuing operations by $1.10 to a new range of $9.75 to $10.35 for the full year.

With free cash flow of $227 million in 2017, we missed our guidance for free cash flow of $285 million due to working capital timing.

This resulted primarily from a culmination of sales taking place late in the quarter and from paying vendors earlier than previously planned for material and transportation services.

This working capital timing impacted us in 2017, but we expect it to benefit free cash flow by about $30 million in 2018.

Combined with a $35 million cash benefit from the new lower tax rate of 22% to 24%, we are raising our guidance for free cash flow in 2018 from approximately $330 million to $395 million.

In addition, in the first quarter, we expect to repatriate $40 million of cash on a tax-free basis.

We will continue to invest in the business to drive growth and profitability, grow the dividend with earnings over time and repurchase stock.

For 2018, we are increasing our stock repurchase plans from $300 million to $350 million for the full year.

Now I'll turn it over to Joe.

Thank you, Todd, and good morning, everyone.

I'll provide some additional comments and financial details on the business segments for the quarter and the full year starting with Residential Heating & Cooling.

In the fourth quarter, revenue from Residential Heating & Cooling was a fourth quarter record $477 million, relatively flat.

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

Foreign exchange was neutral to revenue.

Residential profit was $76 million, down 7%.

Segment margin was 16%, down 120 basis points.

And segment profit was impacted by lower factory absorption than a year ago, unfavorable mix, higher commodity costs, the timing of other product costs and distribution investments.

Partial offsets included higher price, sourcing and engineering-led cost reductions, lower SG&A and favorable foreign exchange.

For the full year, residential segment revenue was a record $2.14 billion, up 7%.

Volume was up 7%.

Price and mix combined was flat, with price up about 1% and mix down.

Foreign exchange was neutral to revenue.

Residential profit was a record $374 million, up 7%.

Segment margin was a record 17.5%, up 10 basis points.

Turning to our Commercial Heating & Cooling business.

Commercial revenue was a fourth quarter record $250 million, up 3%.

Volume was flat and price and mix combined was up 1%.

Foreign exchange had a positive 2% impact on revenue.

North American Commercial HVAC equipment revenue was up low single digits.

National Account Services revenue was up mid-teens.

Europe Commercial HVAC revenue was down low single digits.

Commercial segment profit was a fourth quarter record $44 million, up 12%.

Segment margin was a fourth quarter record 17.4%, up 150 basis points.

Segment profit was positively impacted by higher volume, higher price, sourcing and engineering-led cost reductions, lower other product costs and lower SG&A.

Partial offsets include higher commodity costs and warranty expense.

For the full year, commercial revenue was a record $974 million, up 6%.

Volume was up 5%, and price and mix combined was flat, with price up and mix down.

Foreign exchange had a positive 1% impact on revenue.

Segment profit was a record $157 million, up 5%.

Segment margin was 16.2%, down 10 basis points.

In our Refrigeration segment, revenue in the fourth quarter was $165 million, down 7%.

Volume was down 10% and price and mix combined was up 1%.

Foreign exchange had a positive 2% impact on revenue.

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

On a reported basis, North America was down low double digits, Europe was up low single digits and South America and Asia Pacific were both down low single digits.

Refrigeration segment profit was $17 million, up 8%.

Segment margin was 10.2%, up 140 basis points.

Segment profit was positively impacted by favorable mix, sourcing and engineering-led cost reductions, lower other product costs and lower SG&A.

Partial offsets included lower volume and factory absorption and higher commodity costs.

For the full year, Refrigeration revenue was $725 million, up slightly.

Volume was down 1%.

Price and mix combined was flat, and foreign exchange had a positive 1% impact.

Segment profit was $73 million, up 5%.

Segment profit margin was 10%, up 50 basis points.

Now regarding special items in the fourth quarter.

The company had net after-tax charges of $27.9 million.

This included $40.2 million related to the U.S. tax legislation and the associated write-down of deferred tax assets and $1.7 million for various other items, net.

As a partial offset, the company had a benefit of $14 million for excess tax benefits from share-based compensation.

For the full year, the company had net after-tax special charges totaling $30.8 million.

Beyond the $40.2 million related to the U.S. tax legislation and the associated write-down of deferred tax assets, the company had $3.5 million for special product quality adjustments, $3.3 million for special legal contingency charges and a total of $7.4 million for various other items.

As a partial offset, the company had a benefit of $23.6 million for excess tax benefits from share-based compensation.

Corporate expenses were $31 million in the fourth quarter and $89 million for the full year.

Overall, SG&A was $158 million for the fourth quarter or 17.7% of revenue, down from 18.4% in the prior year quarter.

For 2017, overall SG&A was $638 million or 16.6% of revenue, down from 17.1% in the prior year.

For 2017, the company had cash from operations of $325 million compared to $374 million in the prior year.

Capital expenditures were $98 million for the full year, up from $84 million in 2016.

Free cash flow was $227 million for 2017 compared to $290 million in the prior year.

In 2017, the company paid approximately $80 million in dividends and repurchased $250 million of company stock.

Total debt was $1 billion at the end of the fourth quarter, and we ended the year with a debt-to-EBITDA ratio of 1.7.

Cash and cash equivalents were $68 million at the end of the year.

Now before I turn it over to Q&A, I'll review our outlook for 2018.

Our underlying market assumptions for 2018 are unchanged.

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

We expect North America commercial unitary shipments to be up low single digits, and we expect North America refrigeration shipments to be up low single digits.

Based on the underlying market environment and our targets for market share gains, revenue growth guidance for Lennox International remains 3% to 7% for 2018 with a minimal impact from foreign exchange.

We are raising our guidance for EPS from continuing operations for the full year from a range of $8.65 to $9.25 to a new range of $9.75 to $10.35.

This $1.10 increase to the range reflects our new lower effective tax rate from U.S. tax legislation.

For 2018, we are lowering our effective tax rate guidance from 31% to 32% to a range of 22% to 24%.

The timing of when we are required to recognize certain tax benefits will vary quarter-to-quarter.

And currently, we expect our effective tax rate to be approximately 21% in the first quarter.

As Todd mentioned, between the additional cash from the lower tax rate and working capital timing benefiting 2018, we are raising our guidance for free cash flow from approximately $330 million to $395 million for the full year.

As Todd also mentioned, in the first quarter we plan to repatriate $40 million on a tax-free basis.

Let me now run through the other key points of our guidance assumptions and the puts and takes for 2018.

We continue to expect $40 million of headwind from commodities in 2018 and are planning on $40 million of price increases for the year.

We continue to expect $35 million in savings from our sourcing and engineering-led cost reduction programs.

We expect $7 million in savings from our residential factories as we focus on automation in our U.S. plants and other productivity initiatives.

We expect a $5 million benefit from foreign exchange and investments and distributions -- investments in distribution will be a $10 million headwind this year.

And SG&A growth will be another $10 million headwind.

A few other guidance points.

Corporate expenses are targeted at $85 million this year, and net interest expense is expected to be approximately $32 million for the full year.

We continue to expect the weighted average diluted share count for the full year to be between 41 million to 42 million shares, which includes our plans to repurchase $350 million of stock this year, up from our prior guidance of $300 million.

Capital expenditures are still expected to be approximately $100 million for the year.

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

(Operator Instructions) First from the line of Gautam Khanna with Cowen and Company.

A few questions.

First, just in terms of what you're seeing or when you expect to see any catch up from the hurricane impacted regions in terms of demand.

Any sort of color on that?

There's just so many moving pieces, Gautam, to be honest with you at least right now, I mean, between the weather -- the current weather and the hurricane impact.

I mean, I think it's probably bleeding through a little bit, and we'll see some in first quarter and a little bit in fourth quarter.

What we did see was we're off to a real strong start in the year in residential.

While January is the least important month in first quarter, we're off to a strong start, both on revenue and on margins.

And so some of that may be from the hurricane.

But I think more of it's impacted by the really cold weather we got in many parts of the country end of December.

So not to answer your question, it's just really hard to pull out what's driven by the hurricanes.

Understood.

Could you characterize -- you mentioned the $40 million of pricing that you anticipate getting to offset the commodity inflation.

Just -- can you comment generally maybe by region in that market what you're seeing in terms of price discipline in the industry.

Yes.

I mean, so far so good.

But as I always say when we -- and we're confident we're going to get it.

Everyone -- all our competitors have the same P&L that we have and are feeling the same pressures, so we're confident we're going to get it.

But I mean, the real acid test is when you get into April, May, June.

When you get into the summer selling season, that's where you really get to see what sticks.

So far, everything's sticking just as we expected it to.

And last one, just can you remind us -- because obviously, 2017 had some unusual quarters in terms of working days in Q4 and the like.

So do we have a much easier comp obviously in Q4 this year because we normalize back to the normal number of working days in each quarter?

It looks more like 2016 than it does '17.

Yes, exactly right.

We won't have any anomalies in 2018 like we did in '17 with the number of days.

They're consistent with what they were in 2017.

Which is different though than what he just said.

It's not going to bounce back the other way.

No, it's not going to bounce back, correct.

Next we'll go to Steve Tusa with JPMorgan.

You had mentioned, I think, the $10 million of investments, but not called out previously the SG&A as far as I recall.

Is that just -- do we just look at that increase as being offset by this factory savings?

I don't recall you guys calling that out either, but a lot of numbers moving around.

So maybe you could just detail what's changed within those items.

Nothing's change in our guide in '18 other than the tax.

So all the other guide points for it to be the same.

And you're right, in past years we haven't called out SG&A headwind of $10 million, because you may recall in December, when we were making the point that we were going to slow the growth of SG&A.

In prior years that number was more like $30 million, $40 million, $50 million year-over-year increase.

And so the $10 million, while it's technically an increase -- not technically.

It is an increase.

It's really meant to show and demonstrate that the increase year-over-year is much less than it's been in prior years.

But none of the guide points have changed other than the taxes.

And as far as your guidance for commodity headwinds, are those year-end prices?

Have you -- you feel pretty confident that you have visibility on the cost base for the rest of the year when you also include some of the components that are going in, like, compressors and motors and things like that?

Well, I'll break it out.

The raw commodities, the $40 million headwind is just raw copper, steel and aluminum.

So it doesn't count derivative effects on motors and compressors.

The derivative effects there are captured in the $35 million of benefit from sourcing and engineering-led cost reductions, and the $35 million is a net number.

And so that incorporates all our expectations on contractual price increases we have to take because of commodity increases.

And then on the $40 million of headwind from commodities, it's our best guess.

And as you know, but I'll say it for others, Steve, we're hedged approximately 50%, 55% on aluminum and copper this time of year for the balance of the year, and then we make some calls on what we think the future spot prices are going to be when we get later in the year.

And we were, I think, appropriately conservative on those.

And so it's copper, steel -- or as copper and aluminum have sort of gone up not so much the last week, but from December to end of January, we sort of anticipated some of that, and it's all baked into the $40 million.

Okay.

And then one last question.

What is your kind of implied price capture for resi for the year?

It's sort of similar in the other businesses, so it's $40 million on a $4 billion revenue company.

Order of magnitude, 1% a little bit more.

Next question is from Jeff Hammond with KeyBanc.

Can you just -- on commercial, can you just talk about how you're thinking about mix in '18?

And how that flows through?

And then, also it seems like as we go to the trade shows, that more and more people are kind of coming into this emergency replacement market with a curve that fits the big player, more investment than inventory.

Just how do you think price shakes out in emergency replacement and your ability to continue to gain share there?

Our expectation on mix is that we'll continue to mix up with our high-efficiency product like we always do.

But also, the regulatory change we think will help us.

As you know, the minimum efficiency in commercial changed January 1. And we think we're -- with the design of our product, we meet the minimum efficiency requirement -- the new minimum efficiency requirements we think at a very good cost point.

So we think we can sort of pass on the cost increases plus get a little bit more margin.

And so we think that's positive mix.

In terms of emergency replacement, we still think we're very well positioned.

We think our PartsPlus stores, the fact that we own our own distribution allows us to grow it.

Also, when we talk about commercial at the analyst day in December, we sort of broadened the definition of how we're thinking about it.

There's national accounts and then there's the local regional contractor business the emergency replacement's an important part of.

But there's other parts of that business, plan and spec, for example, with local contractors.

And we're making significant investments to grow there also.

So we think we've gained share in our commercial business the last 5 or 6 years, and we think that continues.

And maybe just speak to mix in residential, new versus replacement?

And what you're seeing in this kind of more favorable macro economy on customers mixing up?

We continue to see -- or we saw in all '17, within add-on and replacement, a mix up in the business as people are buying more premium product.

The new construction business still tends to be primarily entry level or one tick above entry level, and we haven't seen much shift there.

And then obviously, in '17 new construction grew, I'm going from memory, mid-teens.

And add-on replacement was more like mid- to high single digits.

And so we sort of had it mixed out from that effect.

And as we go, the models we built for '18 has add-on and replacements and new construction more aligned with their growth rates.

And we'll just have to see what 2018 brings.

Next, we'll go to Ryan Merkel with William Blair.

So I want to start with commercial.

The margin expansion in the quarter really stood out.

Was there 1 or 2 big drivers?

And then how much is really sustainable?

There's a lumpiness in commercial that you have from quarter-to-quarter, and there was quarters in '17 where margins were down 1%, and we said don't worry.

And then '18, they spike up.

We had a really nice quarter in fourth quarter with our national accounts business, which depending on the customer, on average, is more profitable than our other segments of that business.

We also had a nice quarter in our service business, which is also very profitable for us.

And so I think to the question of, is margin improvements in commercial sustainable?

Absolutely.

I mean, our 3-year target for 2020 is to get it up to 17% to 19%.

We ended up the year at a little bit over 16%, so margins are going to continue to expand in that business.

Got it.

And then sticking with commercial, you already talked about the new efficiency standards, there's a price cost benefit potentially there.

But what about the change in the tax law, now 100% depreciation year 1. It seems to me that could be a pretty big driver, but maybe just help us there.

Our guys, our team talking to customers are a little bit more lukewarm on the opportunity.

I mean, obviously, it's a cash flow timing rather than absolute cash flow difference.

And so it changes the models a little bit, but not in a material way when they sort of lay in all the other costs and you sort of do the NPV of what the right trade-off is of when you replace the unit, and obviously, be the national accounts making a decision of should they replace their equipment earlier.

The more local business, it's certainly emergency replacement just when the unit breaks.

They have no choice anyhow.

Okay.

And then just lastly on residential margins, down 120 basis points year-over-year.

Can you just break down how much of that was absorption versus the timing of costs versus unfavorable mix?

I think it was -- I don't think I know.

It was more driven by the lower factory absorption and the timing of some product costs.

And the timing of product costs is -- over the year, they're always true-up of expense accruals.

In 2017, we had some more weighted to Q4 than in prior years.

But we're magnitude.

It's -- if I had to broadly model it, I'd say 1/3, 1/3, and 1/3.

But it's more skewed to the first 2 than to mix.

Our next question is from Tim Wojs with Baird.

I guess, just on that last point on factory absorption, was that mostly due to the demand coming in later in the quarter and just a little less production in the quarter?

Or does it have anything to do with the days?

I think it's primarily the days.

Okay, okay.

And then just in terms of the cadence of price cost, just so we can kind of level set ourselves for the year, how do you expect price cost to kind of hit the P&L in '18?

I think we'll lag maybe early in the year.

But come the summer selling season, we should be completely caught up and ready to go.

And the lag has to do more with national builders and national accounts and just sort of getting things in place.

But given that we started last year to put national account pricing in place, we're pretty confident that come midyear, we'll be cracking.

Okay.

And then the same thing on buybacks.

How do we think about the cadence there?

I'll talk, but short answer is I'm not going to directly answer your question.

We'll tell you the what, but the how and the when, we keep a little bit of flexibility.

So if I was going to model it, I would just lay it in pro rata during the year.

But if the world continues to burn, we may accelerate.

Next, we'll go to Jeff Sprague with Vertical Research.

Just a couple of loose ends for me.

First, just on commercial unitary, Todd, you remarked that everybody's got the same cost structure.

But we've had -- have heard some chatter that people are being a little bit more competitive on price moving for share and the like.

Are you seeing that in your business?

And can you draw a distinction between price cost and commercial relative to resi?

No.

I mean, not a meaningful way.

I mean, there's -- my cliché line is on the edges of the empire, there's always skirmishes.

But there's -- and if you talk to our sales guys, they always bitch about people lowering price.

But nothing different than it's been for a long time, so I don't see it.

I mean, I assume you're talking about Carrier, but we haven't seen Carrier sort of lead with price.

And just on the -- maybe for Joe.

Just on the repatriation, why is it tax-free?

Are you using some credits or something else going on there?

Yes, we continue to look at ways that we can, in a tax-efficient way, return cash.

And we've restructured some of our legal entities.

That's enabled us to free up some tax credits and enabled us to bring it back tax-free.

And I was also just wondering, thinking about maybe a normalized free cash flow now in this tax reform world that we're in.

I guess, if we adjust for the working capital timing, your conversion's a little bit below 90% on your guidance.

Is that kind of how you see the company tracking now on a normalized basis, roughly 90% conversion?

I think it might be closer to 100%, depending on the horizons you want to use.

I think right now, we're spending capital dollars in making investments in the business.

I think overall, if I was looking at a 5-year model, I might use closer to 100% of net income.

If I was using a 2- or 3-year model, I might use closer to 90%.

Our next question is from Robert Barry with Susquehanna.

This is Jake Lacks on for Rob.

You mentioned mid-teens growth in new construction in resi in '17.

Would you say that reflects significant share gain?

And thinking year-over-year, how's the pricing on the new construction business?

I'd like to think maybe some of it's share gain, but I just think it reflects a robust new construction market.

So maybe on the margins a little bit of share gain, but I think this reflects our position with national builders.

For pricing pressure, sort of normal.

I mean, there's always people trying to nip at our heels for this business, but we have strong relationships with the big builders and even beyond strong relationships.

Our North America-wide company-owned distribution footprint allows us to provide the same level of service and quality and relationships for national builders everywhere, and they value that and our ability to deliver to them.

Okay, great.

And then on non-res, what's the latest outlook there for the U.S.?

And do you think any of the weather at the start of January may have slowed anything down in 1Q?

Our call for new construction -- or better said, our call for commercial unitary in North America's to be up low single digits.

And the weather in January may have slowed it down a hair, but we're still pretty confident on -- that's our view of the market.

Next, we'll go to Rich Kwas with Wells Fargo.

Todd, so on -- just back on commodity.

So steel, I assume you've got some inflation factored in here.

I know you don't have as much visibility there.

So how should we think about that in terms of cold rolled, hot rolled and [paf] going higher here and impact on guidance?

What should we look for here for (inaudible) ?

I mean, the variable you don't know, that I won't give, is what we baked into the $40 million for pricing second half of the year, right?

Because that's an unknown.

And so we have to take future curves and do our best estimate on what second half of the year's going to be.

And so if any given day's movement, it's hard to reconcile with what we have baked into our number.

What I would tell you now is right now, where we sit, we think $40 million's sort of the right number, and I think it's the long and short of it.

Okay, all right.

And then Q1, last year's commercial was really strong.

I think that partly was due to favorable weather, it being warmer last year and a lot of construction projects getting done.

Is that something we should think about as you think of modeling volume and -- within commercial for first quarter here?

I think you can maybe put a little bit of that in.

But we're off to a nice start in January.

And again March is 40% to 45% of the quarter.

But we're off to a nice start.

And there's -- the warm weather helped some new starts.

But again, a big part of it is planned replacement and sort of the timing of when we're going to have it come.

Okay.

And then on Refrigeration, should we expect a decision by the time you report Q1?

You know how these things go, Rich.

So they go as they go.

We're still looking at it.

We're still sorting out exactly what we're going to do.

And when we have something to say, we'll say it.

And if it's Q1 call, we'll do it then.

If it's not, we'll do it when we're ready to talk about it.

Joe, real quick on tax rate, 22% to 24%.

Is that good beyond '18?

Yes, I would use that long term at this point.

And when that changes, we'll give you more insight.

We're still navigating and going through and sifting through some of the complexities of the new legislation, so we'll certainly keep you informed on that.

And we'll go to Chris Belfiore with UBS.

So just kind of piggyback off that one.

Given the significant impact going on a longer-term basis, where do you guys see the cash flow being allocated?

More store openings, internal investment, buyback, M&A, dividend, stuff like that?

How -- are you guys thinking about that all right now?

Short answer is, yes.

But the longer answer is the mantra that we've talked about this I think continues to be the answer regardless of the dollar value of free cash flow that we have, that we'll invest in the business and positive NPV projects that we think can grow the business.

That's always first and foremost.

And parenthetically, when debt is -- or has been 2.5%, 3%, we're investing in every project that we can find.

Second, if there's some M&A that comes available that we think makes sense and is core to our business, we'll do it.

And we'll have dividends, grow with earnings over time.

And with -- obviously, with the tax reform, our earnings spike up.

And so that implies that dividends will sort of grow a little bit faster.

And then what's left, we'll give back to shareholders with stock buyback.

Okay, great.

And then just on Refrigeration, with regard to the strong margin performance in the quarter, can you just provide a little bit more color in terms of the buckets there in terms of productivity mix and any other item?

And how sustainable that is going forward, understanding that in 3Q, you guys had some productivity issues that seemed to be kind of getting better or resolved in the quarter?

I think the productivity issues are behind us.

I think a driver of the profitability in fourth quarter was just the mix of the business.

Some of our North America, what we call our HRP business, had a nice quarter vis-à-vis the other businesses.

And so there was a mix to that business line.

Then also, what we're doing in factory productivity, to your point, sort of fixing some of the problems we had in our factories, both in U.S. and Europe.

And we'll go to Walter Liptak with Seaport Global.

I'll ask you a Refrigeration question, too.

I wonder if you talk about just the order of visibility here early in the year and maybe what you're expecting from the mix, c store versus grocery store, cold storage?

Are we back-half loaded for the year?

We think grocery, which has had some headwinds the last couple of years, we think those headwinds will probably continue in 2018.

Cold storage and convenience, where we've seen growth, we think that continues in 2018.

And just like the other 2 segments, we're off to a nice start of the year, but it's early.

Okay.

And any kind of tax reform?

Any kind of accelerated depreciation, I guess, that's not something that you see helping 2018 for Refrigeration?

I think on the margins.

But again, the way I simplistically think about it, for right or for wrong, is people have these -- our customers have detailed economic models that they're working through, and there's lots of inputs.

And the time value of money of the free -- of when the cash from the taxes get baked in on the depreciation side helps the model, but it doesn't tilt it.

And so I'd still think they're thinking roughly about the same paybacks and the timing of the investments.

And with no further questions, I'll turn it back to the presenters for any closing comments.

Thanks, operator.

To wrap up, 2017 was a record year for Lennox with new highs for revenue, margin and profit.

The first quarter's off to a nice start, and the company's momentum continues in 2018 as we focus on another record year with strong growth and margin expansion.

I want to thank everyone for joining us today on such a busy, busy day.

Thanks.

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

Thank you for your participation.

You may now disconnect.