Lennox International's (LII) CEO Todd Bluedorn on Q1 2016 Results - Earnings Call Transcript

| About: Lennox International (LII)

Lennox International, Inc. (NYSE:LII)

Q1 2016 Earnings Conference Call

April 18, 2016 9:30 AM ET

Executives

Steve Harrison – Vice President, Investor Relations

Todd Bluedorn – Chairman and Chief Executive Officer

Joseph Reitmeier – Chief Financial Officer and Executive Vice President

Analysts

Robert Barry – Susquehanna Financial Group

Ryan Merkel – William Blair & Co.

Charles Tusa – JPMorgan Securities

Jeffrey Hammond – KeyBanc Capital Markets, Inc.

Gautam Khanna – Cowen & Co.

Keith Hughes – SunTrust Robinson Humphrey, Inc.

Richard Kwas – Wells Fargo Securities

Lee Sandquist – Credit Suisse Securities

Jeffrey Sprague – Vertical Research Partners

Joshua Pokrzywinski – The Buckingham Research Group, Inc.

Robert McCarthy – Stifel, Nicolaus & Co., Inc.

Tim Wojs – Robert W. Baird & Co.

Walter Liptak – Seaport Global Securities

Operator

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.

And I would now like turn the conference over to Steve Harrison, Vice President of Investor Relations. Please go ahead, sir.

Steve Harrison

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 re-queue 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'll 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 Bluedorn

Thanks, Steve. Good morning, everyone, and thanks for joining us. Lennox International realized record first quarter profit of strong revenue growth and margin expansion across all three of our businesses in the quarter. Total company revenue is up 6% at 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 SEER 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 businesses – or 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 a strong growth on our global export business, with revenue up more than 30% from the prior-year quarter.

Overall, at 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, and we – 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's 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'll turn it over to Joe.

Joseph Reitmeier

Thank you, Todd, and good morning, everyone. I'll provide some additional comments and financial details on the business segments for the quarter and full year, starting with Residential Heating & Cooling. In the first quarter, revenue from Residential Heating & 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 cost, lower freight cost and higher productivity. Partial offsets included unfavorable price mix, foreign exchange and investments in SG&A and distribution expansion.

Turning to our Commercial Heating & 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 included 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 cost, 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 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'd 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 times. And we currently expect that trend – 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 America Refrigeration shipments to be up low-single digits for the industry.

Based on this underlying market environment and our target for the market share gains, revenue growth guidance for Lennox International remains 48% 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 par 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 cost. 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 for 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]

Question-and-Answer Session

Operator

The first question comes from the line of Robert Barry from Susquehanna. Please go ahead.

Robert Barry

Yeah. Hey, guys. Good morning.

Joseph Reitmeier

Hey, Robert.

Robert Barry

So, I guess I wanted to just get a sense of how you're 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're tracking at – 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?

Todd Bluedorn

Well, I think, Robert, it ties to the overall guidance that we gave that we raised it for taxes, but operationally, we're 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 – or, excuse me, all three of our business units, all three of our segments had very strong quarter margin-wise, we're executing on the cost side. We're delivering volume growth. And so, I think it's steady as she goes on the margin expansion.

Robert Barry

Yeah. Would you say that the margins though here are kind of tracking above the plan that you had originally set and that it's just too early to kind of make an update?

Todd Bluedorn

I think we've had a good quarter – we had a good quarter and – I mean, it might be – the honest answer 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 works. It's a seasonably light quarter. And when we've 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.

Robert Barry

Got you. Fair enough. On the commodities front, I mean, you left the outlook there unchanged. We have been seeing increases in some of the commodities. I imagine that copper is kind of locked in at this point. But steel, you buy kind of 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-à-vis the unchanged outlook on the commodities?

Todd Bluedorn

I wouldn't use the word buffer per se. I think the way I 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 in our December guide, 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. It was in the guide before. It's still in the guide.

Robert Barry

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 inter-company debt. I mean, 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...?

Todd Bluedorn

Yeah, Robert, you're 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 international subsidiaries that enables us to utilize foreign tax credits and it's 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.

Robert Barry

Great. Thank you.

Todd Bluedorn

Thanks, Robert.

Operator

And we do have a question from the line of Ryan Merkel with William Blair. Please go ahead.

Ryan Merkel

Thanks. Good morning, everyone.

Todd Bluedorn

Hey.

Joseph Reitmeier

Good morning.

Ryan Merkel

So, I know March is a big month for the quarter, can you comment on how the month played out and finished?

Todd Bluedorn

Yeah. I mean, March was a nice quarter for us across the board, except in the one category of furnace sales. I mean, 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 down 25%. And so, we saw a real truncation of the – if that's a word, but the furnace season was truncated. And so, it 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.

Ryan Merkel

Are you able to comment on what you're seeing so far in April? I mean, I do HVAC provision, they sound pretty healthy, but I want to hear it from you.

Todd Bluedorn

Yeah. I mean, it's – yes. I'd look over a longer period than just the last two weeks or three weeks. My answer on Q2 is off to a solid start, but it's early in the summer selling season. June is nearly half the quarter, in the last couple of weeks of June or half the month. And so, we're 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 a little – we need normal weather in May and June to have a strong quarter. And we think we will. We say this every year, and we just got to let it play out.

Ryan Merkel

Got it. And just lastly, how was the price increase in Canada that I think you put through on March 1? Is that tracking well?

Todd Bluedorn

It continues to track. I mean, 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.

Ryan Merkel

Very good. Thank you.

Todd Bluedorn

Thanks.

Operator

And we do have a question from the line of Steve Tusa with JPMorgan. Please go ahead.

Charles Tusa

Hey, guys. Good morning.

Todd Bluedorn

Hey, Steve.

Joseph Reitmeier

Hey, Steve.

Charles Tusa

You had a slightly unfavorable price mix in Resi, I guess, was that just the furnace dynamic?

Todd Bluedorn

Yes.

Joseph Reitmeier

Yes.

Charles Tusa

And then, what – how do you expect that to kind of play out over the course of the year? I mean, I know it was a big year last year, but maybe just remind us on the Resi side what you're expecting for mix this year, and I guess price as well.

Todd Bluedorn

We guided in Resi that we're going to have $5 million of benefit from Residential mix. And so, we had negative mix in the quarter. And so, we're backing on positive mix second, third quarter primarily as we get into the summer selling season. And then on price, we haven't guided for Resi overall. We just guided for the corporation that we'd have $15 million benefit from price, full-year.

Charles Tusa

Okay. So, that stuff is holding up reasonably well?

Todd Bluedorn

Yeah. And again, as you well know, I mean, it's early. On the 2013 to 2014 share 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'll know for certain there. But so far everything is tracking as we hoped it would.

Charles Tusa

Right. How is the pipeline lining up on the Commercial front [indiscernible]? And maybe just by vertical, as you guys kind of get into the – little more of, I guess, the education selling season, and any signs of – on a quotation front, anything to read into there?

Todd Bluedorn

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 we came out the gates with a nice national account quarter in the first quarter. And we think it will be low single-digits for the year. We were off to a nice start and customers feel good right now.

Charles Tusa

Okay. Great. Thanks a lot.

Todd Bluedorn

Thanks, Steve.

Operator

And we do have a question from the line of Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Jeffrey Hammond

Hey. Good morning, guys.

Todd Bluedorn

Hey, Jeff.

Joseph Reitmeier

Hi, Jeff.

Jeffrey Hammond

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

Todd Bluedorn

The big driver in the quarter was the planned replacement cycle. Emergency replacement was up year-over-year, but emergency replacement is a 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. I mean, 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 years or six years ago, the vast majority of what we call national accounts for retail now it's less than half of our "national account business" is retail, it's other verticals, convenience, fast food, entertainment, and so, we're diversifying up 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 build-out 10 years to 15 years ago, a lot of those were Lennox units, and it's a natural placement market for us, and that's what we're seeing.

Jeffrey Hammond

Okay. And then just on the buyback, I think you said the ASR would be done in 2Q, but it looks like put it to cash flow you bought $200 million. So, can you just explain the dynamic there?

Joseph Reitmeier

Yeah. We initiated the accelerated share purchase, Jeff, in the first quarter. It takes time to go ahead and execute that. So, we get a certain portion of those up front, 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.

Jeffrey Hammond

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

Joseph Reitmeier

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

Jeffrey Hammond

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 plan or ability to do planned replacement or the new construction demand you saw in Res? Thanks.

Joseph Reitmeier

No. I don't think so. I don't know. 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, where our customers pulled things forward naturally. I think it was more of just the 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'll replace them with. But we're going to have to wait until fourth quarter of 2016 to really see that market take off again.

Jeffrey Hammond

Okay. Great. Thanks, guys.

Joseph Reitmeier

Thanks.

Operator

And we do have a question from Gautam Khanna from Cowen & Company. Please go ahead.

Gautam Khanna

Yes. Thank you.

Todd Bluedorn

Hi.

Gautam Khanna

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

Todd Bluedorn

No.

Gautam Khanna

Okay. Thanks. That's helpful. But 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?

Todd Bluedorn

We had a nice first quarter. I mean, you saw the Refrigeration margins up very nicely in first quarter, and a major driver of that was the continued turnaround at Kysor/Warren. Our Refrigeration business, first quarter to the fourth quarter in a row, on a year-over-year basis margins being up and so we think we're 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're making nice progress on our Kysor/Warren business.

Gautam Khanna

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 the 13 units and how close we may be to [indiscernible]...

Todd Bluedorn

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're no longer able to sell it in the South or to California. And so, come the end of June, it'll all be gone and we'll know where we're at. We have enough to get us through the end of June we think for normal demand. We're not going to do anything extraordinary to move it because when we're done, if we still have – when the end of June comes and we still have some in the South, we'll just ship it to our Northern distribution points and sell it there. But I'm not exactly sure how much the competitors have.

Gautam Khanna

And maybe just a last one. You opened two PartsPlus stores in Q1. You're targeting at least 27 this year. What is sort of the – how does that look the rest of the year? Is that 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 as we move on to [indiscernible]?

Todd Bluedorn

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, it's – we've traditionally done more the second half of the year than the first half of the year. We're 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're 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.

Gautam Khanna

Thank you very much, guys.

Todd Bluedorn

Thanks.

Operator

And we do have a question from the line of Keith Hughes with SunTrust. Please go ahead.

Keith Hughes

Thank you. Questions over Refrigeration. Several shipyards just doing well. But the two that sort of stood out, I think you said were negative, were Europe and Australia. Can you give a sort of a feel of what the trends are there? What do you think the future will look like in those regions?

Todd Bluedorn

I think Europe bounces around a little bit, I want to say. I think it's going to be – we're 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 where Refrigeration wholesale was our primary business there. And so we're tied to the overall broad economy, and I think that just reflects the overall market. And so, I think we'll be flat, maybe just slightly up in Australia on a full-year basis.

Keith Hughes

Okay. And in Commercial, your organic growth in Commercial really took off about the second quarter of last year. So, you've got these comps you're going up against. Is there anything – any one national account you won or anything along those lines that's – it was causing that – kind of good numbers last year?

Todd Bluedorn

I think it was good numbers, I think it was. When you look back on the year last year, the 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 SEER replacements driven by radar to be a broken record, our success in schools and just the overall light commercial building growth that I think all North America saw. So, I think part of it was just, high seas that raised all boats. But I also think that the verticals that we were focused on, school specifically and then emergency replacement market we gained share in.

Keith Hughes

Okay. Thank you.

Joseph Reitmeier

Thanks.

Operator

And we have a question from the line of Rich Kwas from Wells Fargo. Please go ahead.

Richard Kwas

Hi. Good morning.

Todd Bluedorn

Hey, Rich.

Joseph Reitmeier

Good morning, Rich.

Richard Kwas

Todd, on the Commercial piece, national accounts, so you go back to last year, you're 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're 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 – create that sort of volatility?

Todd Bluedorn

No – I think we continue to see solid backlogs. If 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're continuing to see solid backlog as we enter in the second quarter. But again, we started to book and ship a lot. But overall, the customer is still solid in all our verticals in Commercial.

Richard Kwas

Okay. And then on the guide, just a clarification, so this – the ASR helps a bit on the EPS line. So, and you did it after you guided last time on the Q4 results. So, should we interpret this as maybe a little bit of cushion here, you didn't change the underlying metrics in terms of what you're expecting? So, just trying to interpret that with regards to the tax rate declining, adding $0.20 or so here to the outlook.

Todd Bluedorn

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 – as we always do, let's get to second quarter and we'll true-up some of the longer-term, the full-year guidance on the EBIT side. And yeah, I think if you do the pure math on the share count 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's a little bit of cushion there. Yes is the short answer.

Richard Kwas

Okay. Understood. Thank you. [Operator Instructions]

Operator

And our next question comes from the line of Julian Mitchell with Credit Suisse. Please go ahead.

Lee Sandquist

Hi. This is Lee Sandquist on for Julie Mitchell.

Todd Bluedorn

Hey.

Joseph Reitmeier

Hi.

Lee Sandquist

For the RF, you previously mentioned that you expect to breakeven this year. How is this expectation tracking?

Todd Bluedorn

That's still where we're at. We had a nice first quarter for us. Again, off a very low base but we're gaining traction as we talked about before. We think the area where we're going to have the most success, and where we had the most success from first quarter so 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 is 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.

Lee Sandquist

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 in the full year? [indiscernible]

Todd Bluedorn

Yeah. I mean, again, it's early in the year. So, we're letting that sit where it's at which is a $20 million FX headwind. We'll – again, we'll true it up when we get halfway through the year. But right now, sort of what we're looking at on the future is in our best call. We think that's probably the right place to be.

Lee Sandquist

Great, thank you.

Todd Bluedorn

Thanks.

Operator

And we do have a question from the line of Jeff Sprague with Vertical Research. Please go ahead.

Jeffrey Sprague

Thank you. Good morning, guys.

Todd Bluedorn

Hey, Jeff.

Joseph Reitmeier

Hey, Jeff.

Jeffrey Sprague

Hey. A couple of quick ones, a lot of ground covered. Just on SG&A, you guys did mention that a couple of times in your remarks 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?

Todd Bluedorn

No. I think we're just trying to be complete and exhaustibly complete on sort of the pros and cons and to sort of, 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.

Jeffrey Sprague

And then I'm just wondering on the tax, Joe. Should we expect that to come through directly in cash taxes also?

Joseph Reitmeier

Yeah. A lot of that will come through in cash taxes. I'll 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.

Jeffrey Sprague

And you did mention that it allows you to use tax losses and things like that. Wouldn't those ultimately get exhausted? Maybe if they're just so many, it's beyond our horizon to think about.

Joseph Reitmeier

Yeah, the tax – 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 this more longer-term structural sustainable benefit that will keep us at 32% beyond 2016.

Jeffrey Sprague

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

Joseph Reitmeier

Our strength is K-to-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.

Jeffrey Sprague

Right. Thank you.

Joseph Reitmeier

Thanks.

Operator

And we do have a question from the line of Josh Pokrzywinski from Buckingham Research. Please go ahead.

Joshua Pokrzywinski

Hi. Good morning, guys.

Todd Bluedorn

Hey, Josh.

Joseph Reitmeier

Hi, Josh.

Joshua Pokrzywinski

I know the price costs or 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 trend had done?

Todd Bluedorn

No, I think it was – well, 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 mixed 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 2013 to 2014 transition, which is code for – that's holding up, as we had expected, in our guide. So, price mix continue to – you see in the margin expansion for Resi.

Joshua Pokrzywinski

Got you. 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?

Todd Bluedorn

Say it one more time?

Joshua Pokrzywinski

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.

Todd Bluedorn

No, I think you're right. I mean, 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.

Joshua Pokrzywinski

Okay. And then just shifting over to Refrigeration, price mix there being a headwind. It's a little surprising with the Wal-Mart business. I guess, what else is going on there that we should think about? And how does that play out over the balance?

Todd Bluedorn

I think it continues to be that. I think it's the – the bulk – when I think about our Refrigeration business, and 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 Wal-Mart. 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.

Joshua Pokrzywinski

Actually, 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 goody bag here between tax in this quarter, and maybe the Canadian dollar as well, which you'll look at later. Is this 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?

Todd Bluedorn

No. I mean, just getting through the quarter. I mean, I'll maybe reflect on what I said earlier. I think we're 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, and the second and third quarter is so important for us.

And when we have a nice first quarter, and to use your phrase, a goody bag that at least has some goodies in it, we got to get through second and third quarter to really sort of have full visibility on the year. And so, I just think it's sort of false position to be adjusting it now. We're off to a strong start. I think that's the message on the call. We're off to a strong start. Let's not get carried away, but we're off to a strong start.

Joshua Pokrzywinski

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 were a little under 32%. Is that the right run rate, or are we just rounding kind of nuance at this point?

Joseph Reitmeier

It's pretty close. What I think will happen was – first quarter was 34.3%. As I mentioned, for the first half, we'll be at about 30% – at about 31%, and then for the second half, it'll be 33%. And once again, I'll leave you with those variables.

Joshua Pokrzywinski

Got you. All right. Thanks, guys.

Todd Bluedorn

Thanks.

Operator

And we do have a question from the line of Robert McCarthy from Stifel. Please, go ahead.

Robert McCarthy

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 fundamental commentary about how the weather's kind of shaking out initially in terms of heating degree days, or anything we can just hang our hat on for April?

Todd Bluedorn

I think it's early to talk weather. I mean, it needs to get warmer, but I think it will – I'll go on a limb and say, it's going to warmer. So, I think it's warming up. I don't – the Easter has some effect. I think, the thing I'd give you is more anecdotal, which is we have fewer meetings every year. We're going to 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're willing to spend money to upgrade their systems. And so – and I think pent-up demand's still in the market. So, I'm not trying to show any more caution than I normally would, given that's just first quarter, and we have to get through the summer selling season. But, I mean, it's steady as she goes.

Robert McCarthy

And I may be getting this wrong, but given the mild weather, I think you made some comments in the past, going last 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?

Todd Bluedorn

I don't think they're connected.

Robert McCarthy

Yeah.

Todd Bluedorn

The way I'd answer that question. And maybe some of our competitors who have independent distribution, I mean, we're...

Robert McCarthy

Yeah.

Todd Bluedorn

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, we'll buy a bunch beginning of the year and then – or beginning of the furnace selling season, and then they'll – 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 once he chooses, because they needed them from us. And so, they don't have a lot of furnace inventory, and I won't expect them to, but they have – the HVAC or air conditioning inventory that we are selling to them. And so, they're ready for the summer selling season. We're ready to support them.

Robert McCarthy

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

Todd Bluedorn

Nope.

Robert McCarthy

Okay. And then just finally, on just kind of corporate, is there a specific full-year run rate you're thinking about there for corporate? It looks like we modeled a little heavy, and that might be more my problem in than yours. But I just want to get...

Todd Bluedorn

Our guide, Robert, $85 million.

Robert McCarthy

$85 million. Okay. Great. Thanks to for your time.

Todd Bluedorn

Thanks.

Robert McCarthy

All right.

Operator

And we do have a question from the line of Tim Wojs with Baird. Please, go ahead.

Tim Wojs

Hey guys, good morning.

Todd Bluedorn

Hey, Tim.

Tim Wojs

Hey, just a quick one for 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 some of those builder customers are thinking about the pace of construction this year?

Todd Bluedorn

No. I mean, I understand your question. But I characterize it as steady as she goes. We'd call for full year, up about 10%, and that still feels about right to us. And while the warm weather hurt furnace sales, it helped housing starts. And so, I think that was part of it also.

Tim Wojs

Great. Okay. Thanks.

Todd Bluedorn

Thanks.

Operator

And our last question of the day comes from the line of Walter Liptak with Seaport Global. Please, go ahead.

Walter Liptak

All right. Thanks. Appreciate making the cut. And apologize for beating a dead horse on this weather thing, but the heating degree day is 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?

Todd Bluedorn

Yeah.

Walter Liptak

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

Todd Bluedorn

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'll 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.

Walter Liptak

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 step up in SEER mix in the fourth quarter, or is it – was the SEER mix similar to what it was in the first quarter of last year?

Todd Bluedorn

My comment certainly 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'll know better once it's all gone. So, it's more about what's happening with pricing.

Walter Liptak

Okay. Okay. Yeah. Fair enough. What is the SEER mix looking like in the first quarter? Was it a step up from where it was last year?

Todd Bluedorn

Yeah. Someone's handed me a note that's saying, it was up 21 points, 14 SEER and above. But that – 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're 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's taking place. I think it's more about what's happening with price.

Walter Liptak

Okay. All right. Fair enough. Thank you.

Todd Bluedorn

Great. Thank you.

Operator

And it looks like we do have a follow-up question from the line of Robert McCarthy with Stifel. Please go ahead.

Robert McCarthy

Yeah. Just one more thing, on currency moves, any implicit benefit from peso on the quarter or anything along those lines, or you just don't think it's material?

Todd Bluedorn

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

Robert McCarthy

I'll leave it there.

Todd Bluedorn

Okay. Great. Thanks, Robert.

Todd Bluedorn

I want to thank everyone for joining us. A few points to leave you with. And again I think this is the mantra, what I was trying to make – or saying during the Q&A. It's early in the year, but 2016's 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.

Operator

And 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

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