Lennox International Inc. (LII) Q1 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Lennox International First Quarter 2013 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, Investor Relations. Please go ahead.

Good morning. Thank you for joining us for this review of Lennox International's financial performance for the first quarter of 2013. I'm here today with Chairman and CEO, Todd Bluedorn; and CFO, Joe Reitmeier. Todd will review key points on the quarter, and Joe will take you through the company's financial performance and outlook. Financial results discussed today have been adjusted for discontinued operations related to the company's previously announced plans to sell the Service Experts business, which closed on March 22. In the earnings release we issued this morning, we have included the necessary reconciliation of the financial metrics that will be discussed to GAAP measures. You can find a direct link to the webcast of today's conference call on our website at www.lennoxinternational.com. We will archive the webcast on that site and make it available 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. Lennox 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. 2013 is off to a good start as our business momentum continued in the first quarter. With growth across all 3 of our businesses, company revenue was up 9%, led by 15% growth on our Residential business. Total segment profit was 4.4%, which was a first quarter record for us. And the EPS from continuing operations was also an LII record for the quarter. Adjusted EPS from continuing operations was $0.33, up 74%. GAAP EPS from continuing operations was $0.31, up 72%. In Residential, segment profit was up 86% on a 15% revenue growth in the first quarter. We continue to capitalize on growth in Residential new construction, with equipment revenue up more than 20% in the first quarter. Replacement equipment revenue was up low double digits in the quarter. As expected, we saw some mix-down from the faster growth in new construction, as well as generally from consumers in the replacement market, but the mix-down impact was offset by price in the first quarter. In our Commercial business, revenue was up 4% and segment profit was up 34% in the first quarter. Growth was led by North America commercial equipment and services, while Europe remains soft and was down in the quarter. Our Lennox National Account Services business was especially strong on the growth of nationwide services. Refrigeration revenue was up 4% at constant currency in the first quarter, and segment profit grew 18%. Refrigeration was led by double-digit growth in South America and more than 25% growth in Asia-Pacific. Australia saw a strong growth as we continue to make investments in our wholesale business in that country and expand our refrigerant operations. In 2012, we made purchases of low-cost refrigerant and invested into canting equipment and operations to sell it through our distribution network throughout the country. Also in Asia-Pacific, we are seeing strong growth as we continue to capitalize on refrigeration build out opportunities in emerging markets of China and Southeast Asia. Turning to Service Experts. In late March, we completed the sale of Service Experts in a $10.4 million all cash transaction. As part of the deal, we also secured a tier supply agreement with Service Experts. Following the sale of the Hearth business in the second quarter of 2012, the sale of Service Experts completes the divestitures of our nonstrategic businesses and we like our business portfolio going forward. With a solid balance sheet, we are well positioned to continue to make transformational investments in our businesses, maintain a competitive dividend that grows with earnings over time and consider acquisitions that makes sense in our core businesses. In 2013, we are planning to repurchase $100 million of stock. Currently, we have $371 million remaining under our stock repurchase authorizations. Before I turn it over to Joe, let me update you on a couple of our strategic initiatives. In Residential, we added 7 more Lennox PartsPlus stores to our distribution network in the first quarter and are on track with plans to add a total of 28 of these wholesale stores this year. We now have 115 PartsPlus stores, and they continue to be one of the keys to the success we are seeing in our Residential business. Within these stores, about 3/4 of the sales are HVAC equipment and 1/4 of the sales are parts and supplies. In Commercial, our new RAIDER product line of rooftops, targeted at the emergency replacement market, started production in the first quarter and began hitting the street in March. We have seen a lot of excitement around the product launch from dealers and contractors, and RAIDER is off to a good start as we head into the summer season. So I mentioned before, this is a sizable opportunity for Lennox since the emergency replacement market comprises about 45% of the commercial unitary market in North America. The emergency replacement market has not been an area of traditional focus for Lennox compared to our success in the planned replacement and commercial new construction. But with RAIDER, we now have the right product to sell in the segment of the market that prioritizes upfront cost. With 24 commercial, regional and local distribution centers at the end of first quarter, we continue to invest in distribution to provide the high level of Same Day/Next Day delivery that customers require for emergency replacement. We expect to have 32 commercial distribution centers in place by the end of 2013. 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 starting with Residential Heating & Cooling. In the first quarter, revenue from Residential Heating & Cooling was $315 million, up 15%. Currency was neutral, volume was up 15%, and combined price and mix was flat with the price up and mix down. Residential profit in the first quarter was $21 million, up 86%. Segment profit margin was 6.5%, up 250 basis points from the prior year quarter. Residential results were positively impacted by higher volume, favorable price and lower material costs with partial offsets from higher investments in our distribution expansion and higher SG&A and lower mix. Turning to our Commercial Heating & Cooling business. In the first quarter, Commercial revenue was $163 million, up 4%. Currency was neutral, volume was up 4%, and price and mix combined was flat on revenue. North America commercial equipment and service revenue was up high single digits in the quarter, led by strong growth in Lennox National Account Services. Europe Commercial HVAC revenue was down nearly 10% at constant currency. Commercial segment profit in the first quarter was $11 million, up 34%. Segment profit margin was 6.8%, up 150 basis points from the prior year quarter. Commercial results were positively impacted by higher volume, favorable price and mix and lower material costs, with partial offsets from investments in distribution expansion and higher SG&A. In our Refrigeration segment, revenue in the first quarter was $191 million, up 3%. Currency had a negative 1% impact. Volume was down 2%. Price was flat and mix was up 6% from our Australian wholesale refrigerant initiative. From a regional perspective in constant currency, Asia-Pacific was up more than 25%, South America was up low double digits, Europe was flat and North America was down high single digits. Segment profit was $17 million, up 18% from the prior year quarter. Segment profit margin was 8.7%, up 100 basis points. Refrigeration results were positively impacted by price and mix combined, as well as lower material costs, with a partial offset from higher SG&A. Looking at special items after-tax in the quarter, the company had $700,000 for the net change in unrealized losses on open futures contracts, $300,000 for restructuring activities and $200,000 for other items net. Overall SG&A was $136 million in the first quarter, up from $123 million in the prior year quarter on higher selling expenses and higher incentive compensation expense than in the prior year quarter. Within SG&A, corporate expense was $19 million in the first quarter, up from $14 million in the prior year quarter. However, for the full year, we continue to expect corporate expense of approximately $70 million. Cash used in operations was $137 million in the first quarter compared to cash used in operations of $34 million in the prior year quarter. Cash usage was higher in the first quarter this year as the company had higher accounts receivables from a strong first quarter, higher inventories as the company positions itself for higher demand in the seasonally stronger second quarter and a higher cash payout for incentive compensation based on 2012 results compared to the first quarter a year ago. Capital spending was $12 million in the first quarter compared to $7 million in the prior year quarter. Free cash flow in the quarter was negative $149 million compared to a negative $41 million in the first quarter a year ago. As most of you know, it is typical for the company to use cash in the first half of the year and generate cash in the second half of the year due to the seasonality of our business. Total debt was $516 million and our debt-to-EBITDA ratio was 1.8, ending the quarter within our target range of 1x to 2x. Cash and cash equivalents were $35 million at the end of March. Now before I turn it over to Q&A, I'll review our outlook for 2013. We continue to expect North American Residential HVAC shipments to be up low single digits for the industry for the full year. We anticipate North American commercial unitary shipments to be up low single digits in 2013 for the industry as well, and we continue to expect Europe HVAC and Refrigeration market shipments to be down low single digits for the full year. Based on the company's first quarter performance, guidance for our revenue growth is now 3% to 6% for 2013, with the low end up 1 point from the prior range of 2% to 6% growth. Foreign exchange is still expected to be neutral for the full year. We still anticipate about a $10 million headwind from lower mix in the Residential business this year due to more 13 SEER products, driven in part by faster growth in Residential new construction. We continue to expect approximately $30 million of material costs savings through a combination of sourcing initiatives and engineering-led cost reductions, and we are feeling good about our projection for $20 million of price and commodity tailwind in 2013 with, about half from price and half from commodities. We expect about 2/3 of the $30 million of material costs savings to be in the second half of the year and about 1/2 of the $20 million of favorable price and commodities impact to be in the second half of the year. We are raising the low end of our 2013 guidance for adjusted EPS from continuing operations from $3.15 to $3.55 to a new range of $3.25 to $3.55. GAAP EPS from continuing operations guidance incorporates the $0.02 difference in the first quarter and moves to a range of $3.23 to $3.53. Now to wrap up with few of the guidance points for 2013. We continue to expect net interest expense of about $17 million for the year. We still expect a tax rate of 34% to 35% on a full year basis. Our average weighted diluted share count for the full year is now expected to be approximately 50 million shares. And for capital spending, we continue to expect about $60 million in 2013. And with that, let's now go to Q&A.

[Operator Instructions] Your first question comes from the line of Jeff Hammond, KeyBanc Capital Markets.

So it looks like your guidance range is maybe reflecting more share gains than market because it looks like your market assumptions are unchanged.

I think that's one way to think about it. I think the other way to think about it is sort of cutting a little bit off the low end just reflects that we had a solid first quarter and sort of took some of the risk off the table from the first quarter.

Okay. But it does seem like your share momentum continues. I mean, how are you thinking about the sustainability of some of the share gains you've been seeing?

I think we're winning. I think we gained share last year and we're off to a good start this year. I think when you're gaining share because of things like building out distribution as part of a multiyear strategy and winning because your vitality index is over 40% on a multiyear basis, I think those are sustainable share growth. So it's not that we're winning with sort of one gee-whiz trick. We're building it sort of in the trenches with distribution and sustainable product advantages. I think you can continue to win for a while that way.

Okay. And then on price cost, we've seen some deflation in some of your inputs and pricing seems to be sticking. Why not raise that assumption?

At this point in time, we're 75% hedged in copper for the balance of the year. So a lot of our input costs are pretty much locked in. I'm also cognizant that if copper was a roller coaster, we'd be up and down to the point where I was about ready to throw up to the side, right? So I mean, it's down in the last 2 or 3 weeks, but it could just easily be up in the next month or 2 again. So I think it's maybe the first point, we're hedged out for most of the year.

Okay. And then finally, just a couple of questions around Refrigeration. One, it looks like this Australian business kind of drove the quarter. How sustainable is that? And then, one of your competitors talked about a headwind from a large national retailer. And I'm wondering if you have any kind of similar impact and how to think about that.

I'll sort of take them in 2 pieces business. Let me talk a little bit about Australia. We first talked a little bit about this on the fourth quarter call about some growth initiatives in Asia-Pacific. And we have a wholesale business there for Americans, sort of the equivalent of a United Refrigeration. That's our Australia business, wholesale refrigeration. And we've been making investments to expand our operations there, especially to grow our refrigerant sales. And last year, we made purchases of low-cost refrigerant and invested into decanting equipment and made ourselves vertically integrated in the sense of having a refrigerant, putting it into the jugs and then selling it through our wholesale distribution network. Order of magnitude, the benefit for the quarter was sort of about $5 million or so. And you have to remember that it's the Southern Hemisphere, so it's sort of the peak of the summer season. So that's sort of the -- think about it as a high level mark. But it's an ongoing initiative, and we continue to make investments to grow that operation. So I think we're going to continue to have good news there. In terms of your question about National Accounts or sort of a big retailer, maybe I sort of broaden the answer for you and just talk about what we're seeing in the National Accounts. On the Refrigeration side, we have seen some softness. You heard while we talked about in the script of sort of down in North America, we've seen some pushouts from supermarket customers, who are most sensitive to the macroeconomic uncertainty and consumer sentiment. But we're -- for the balance of the year, we're feeling better about order intake and backlog than what we saw in the first quarter. In our North America Commercial HVAC business, we had a solid quarter, have a solid start to the year and orders and backlog look pretty good entering Q2.

And the next question comes from the line of Keith Hughes, SunTrust.

I just wanted to dig in more in your comments on replacement Residential HVAC. It appears, though, in the comments that there might be some share gain going on there. Where do you think the overall state of that market is as we start heading into the season in terms of potential growth?

I think maybe a couple points about share gain. I mean, I said on the call or in the script that we were up low double digits in Replacement for the quarter. We've had bad quarters, I've said this. And I'll say when we have good quarters. I mean, it's dangerous, obviously, to look at share gain in 1 quarter. So I'd sort of make the horizon over the last 18 months. And there I think we're clearly gaining share. There's lots of uncertainty in the replacement market, Keith, and that's why we didn't really raise our market guidance. We're still seeing low-single digits. Maybe it becomes mid-single digits as we get into the summer and see things start to flow. While we had a good first quarter, we're cognizant that it's our lightest quarter. And some of that, while we sell through in the first quarter and we had a cold winter compared to a warm winter last year, which helped drive furnace sales in the quarter, air-conditioning, to a large degree, we're just getting the dealers ready for the summer season. We're going to have to see what they do with consumers as the weather starts to warm up.

Okay. And also in Residential, you mentioned price was up, mix was down. Specific to the mix, where do you stand on the dry ship and are you seeing mix within the R-410a refrigerant down and products down as well?

Yes, I mean where we really see the R-22 dry charge effect is when in we get into the summer months, so it's sort of hard to see much right now. The mix pressure that we felt in the quarter is what we talked about back in December when we gave guidance, which is what we saw, which is, one, RNC outgrew -- Residential New Construction outgrew add-on and replacement. And we on average make lower margins there because it's a more entry-level product. And there continues to be sort of trade-down within our brands and within our SEER levels, within the add-on and replacement market, so sort of the pressure in the consumer.

And the next questions from the line of Steve Tusa from JPMorgan. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Your inventories were up a little bit more than normal. I guess that's just the build in anticipation of what's to come here. And I guess I don't know if you just discussed it. Sorry, I've hopped off for 1 second. But kind of the -- so far through April, what you are seeing out there?

Yes. Sort of the commentary on working capital is we're about where we planned to be. And I think the short answer is that it reflects a strong first quarter and then sort of a build getting ready for second quarter. And we'll sell the inventory and cash out the receivables between now and the end of the year, so we're still confident on the first year cash flow. And then I didn't really give much commentary yet on April. I mean, it's building on the strong first quarter. We're off to a solid start here in second quarter, reasonable order rates both in Commercial and Residential. But I think everyone understands that nearly half of second quarter is June. So it's really early. But so far, so good. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: And then on the share gain front, I guess is this why -- I know you're not going to call out competitors. But I guess, can you maybe give us some color on what parts of the market are you seeing? And is there any -- I guess, you don't have to answer it directly this way, but maybe we can just tie the 2 together ourselves. Are you seeing any kind of change from the Daikin acquisition of Goodman? Any kind of dynamics there to highlight in the marketplace at a high level?

I'll answer them in reverse order. I'll answer the Daikin one first, and then I'll get to share gain. Short answer is, no. We haven't seen much change in Daikin behavior in the marketplace or Goodman-Daikin's change in the marketplace. We continue to look and see. I think they're probably smart acquirers, which is you don't want to sort of rattle things too quickly in the field. And so far, we haven't seen much of any changes. In terms of share gain, the answer is what I would want to say. But it helps that it's actually true, which is I think it's a sort of a broad share gain. I mean, because I think with our innovative product, we came out with 25 SEER air-conditioner, highest efficiency in the market, a new iHarmony Zoning System to go with our icomfort controls. I think we're doing well on the high end, and I think you can fill in the blanks about what OEM or OEMs also play on the high end that we might be gaining share from. And then I think we're making impact with our PartsPlus and rollout of distribution network and ability to reach more entry-level dealers. I think we're doing well on sort of with a different segment of end customers and dealers, sort of the mid-tier and low tier. And I think we're winning there, too. And again, I think you can sort of identify which OEMs you might think would be in our crosshairs there.

And the next question is from the line of Rich Kwas of Wells Fargo Securities.

Todd, just a question. Now with -- you got rid of Service Experts. Hearth has been gone for a while. What are you seeing in the M&A environment area that you might have interest and others, maybe parts of Residential you'd like to bolster, parts of the Refrigeration, et cetera? What are you seeing out there with multiples, et cetera?

I think we remain consistent on this point, Rich, which is you think about the platforms we'd want to grow. We really like our Refrigeration business, and that gives us a global platform. And we've looked -- we did the KW deal here in the U.S. sort of vertical integration in display cases. We found that to be a success. We have a strong management team there. So we continue to look on bolt-ons for our Refrigeration business. And then in our HVAC businesses in North America, I think we have good management teams, and we're doing well. And I think industry consolidation can always create value. But there's only a handful of assets, and someone would have to decide they wanted to get out. So I think it's more likely we're going to be doing deals in Refrigeration in the HVAC businesses in North America. Someone would have to decide they wanted to change strategies, with the caveat of we really like our North America Commercial Service business. We had a strong quarter there, as I sort of talked about in the script. That's a business we have grown with acquisitions, smaller acquisitions, so we don't talk much about them. But that's a business we continue to try and grow both organically and with acquisitions.

And then on the Refrigeration front, as it relates to international assets, are you seeing any pickup in activity of assets that are being offered or valuations that look more compelling versus, say, 6 months ago?

Not much change from our perspective from 6 months ago. Again, in sort of the areas that we would want to do deals, the markets remain reasonably solid and strong. And so I don't -- we haven't seen a crash in valuations. And again, we're reasonably selective on what we're looking for.

And the next questions from the line of Josh Pokrzywinski of MKM Partners.

Just a couple of questions. Most of mine have been answered. But I guess first on Commercial, you talked about strong order intake exiting the quarter. I'm just wondering how that compares to the mid-single-digit guidance. Are you running kind of ahead or in line with that and how we should think about that through the year from like a comps perspective?

I have to look at the script. Hopefully, I said solid instead of strong, sort of trying to nuance the words on you. So what I meant to say is we entered in Commercial HVAC sort of with a solid start to the year. And again, when we give guidance on low-single digits, that's on the market; that's not on our share, right? And so -- or on our revenue growth. So we had a nice quarter in Commercial, up sort of mid-single digits in revenue. And I think that's consistent with our call-out of the market and on our ability to outperform it with things like the RAIDER, things like our growth in National Accounts.

Okay, that's fair. And then back to Residential, I know we've talked a lot about mix. But thinking about the core Replacement business, obviously, this time of year, RNC is more impactful, and I get that that's mix down. And R-22 is also a mix-down product for you. But within R-410A equipment, is that migration to 13 SEER ongoing or has a lot of that already played out?

I think we'll know. Without being cute about it, I think we'll know more in September, right? So we've given our guidance. We believe it's going to continue to mix down. There's clearly different forces going on in the marketplace right now. And so we'll know more when we get to September. We think it's going to continue to mix down, and that's why we've given the guidance that we've given of a headwind of $10 million mix headwind in Residential.

And the next question from the line of Brian Langenberg of Langenberg & Company. Brian K. Langenberg - Langenberg & Company, LLC: I have no questions. Just take a pass.

And the next question from the line of Glenn Wortman of Sidoti & Company. Glenn Wortman - Sidoti & Company, LLC: Can you just give us, I guess, touched on it a little bit, but just an early read on sales for your RAIDER product?

Too early to call. I think the way I think about it is no quantification. I'll just talk about it anecdotally, which is we have dealer meetings across the country, 6, 7, 8 different locations who bring us thousands of dealers at each location and that's one of the hot -- one of the most exciting products we talked about this year. People are excited about this, to be able to get their -- to be able to sell to contractors and drive business with this entry-level product. So as we go through the summer season, because that's when we're really going to sell it, and quite frankly, we just sort of started selling it or producing it in March or hitting the street in March, as we go through the summer season, we'll give some more updates. But we're excited by the RAIDER product. Glenn Wortman - Sidoti & Company, LLC: Okay. And then can you just remind us, is there much margin differential on the RAIDER system versus your more traditional products?

We think we get up comparable margins because we've got the cost right on this product, and it has lower SG&A associated with it. So we like this product. We're sort of agnostic. We like selling it.

And the next question is from the line of Rob Wertheimer of Vertical Research.

Lots have been answered, but I think, Todd, you mentioned a little bit of caution in the grocery store segment. I'm just -- out of pure curiosity. When did that start and has it backed off at all or not? I mean, there's been a lot of different uncertainties throughout the last quarter. I'm curious what drove it.

Yes. We started seeing pressure on the North America grocery segment for us about midyear last year. And it's continued is the short answer. So maybe 3 quarters of pressure and push out and sort of stretching. But underlying that is it feels different than when the crisis hit in 2009. It feels like people were just deferring and we're reasonably confident that second half of the year is going to pick up, and that's sort of what's baked into our guidance, and we feel pretty good about that.

Great. And I know a lot has been asked on the resi. Is there any way to parse out if people -- maybe they saw units fail or pushed off replacement in the last summer and that's starting early this spring? Or is that too -- I mean, the new is higher than the replacement? I'm just curious if you can parse anything about whether that base has started to fail and people have sort of come into it.

It's hard to know, is the honest answer, Rob. I mean, we'll know more, again, without being cute, in September, because then you're able to do more of a postmortem of what drove demand and where it came from. I'd just sort of -- to me, the way I think about the Residential market right now is RNC continues to be strong, that we had a good year in that -- or a good quarter in that on replacement, I think in large part driven by we had a cooler winter than we did a year ago, and in combination with that, with our share gains, with what we're doing in the marketplace. And in April, given that we've had, given that on a year-over-year basis, it was much warmer last year than it was this year, we're off to a solid start. But 50% of the volume or 45% of the volume is in June. And so we'll know a lot more in June.

[Operator Instructions] You have a question from the line of Nicole DeBlase of Morgan Stanley.

I just have one left. You answered all the others. Can you just talk a little bit about the magnitude of any recent price increases and the degree to which those are sticking in the market?

We, in both our Lennox Residential and our Allied Residential, as well as our Commercial HVAC and Refrigeration business, we've announced price increases in all those businesses within the last -- gone into effect over the last 6 months. Our major HVAC competitors -- Carrier, Trane, Goodman, and Nordheim -- sort of on the entry-level product have all announced similar price increases. Note that the price umbrella that we announced was 6%. We're obviously not going to get the 6%. It depends on the business; it depends on the market. But so far, so good. I mean it feels like it's sticking in the marketplace, and we'll know more as we go through the summer season. But as we gave in our guidance, we're still saying $20 million net pricing commodities, which reflects confidence that we're going to get some pricing.

And the next question from the line of Steve Tusa of JPMorgan. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Just one other one. The new product that you're going out with, what are the -- who's serving that market right now and what are the competitive dynamics? I mean, is this kind of an area that you believe is not being served the right way? It's underserved? I mean, how are you guys going to just kind of plan the march in here and take share?

I think about it this way. The emergency replacement is driven by 2 things: It's having low-cost and having equipment on the ground to be able to serve it. So this is Frank's Bowling Alley and the unit breaks and it's all, I guess, and Frank has to replace it within 24 hours to do business. And there's often an intermediary, which is a building owner, who's not really carried about -- cares Frank's operating cost. He just wants to contractually put an air conditioner back on the roof. So you have to have low op, low first cost, trade-off efficiency, and you have to have it in the field. This market -- and then the other point to think about is different manufacturers have different footprints of their units, different inlet and outlet, airflow piping. And they're not the same. And so if you have a different unit that has a different footprint than the existing unit that's on there, you have to do what's called a curb adaptor. And depending on the size of the unit, that can be up to 15% of the total first cost you have to spend on this adaptor. And historically, our units only fit on our roofs; they didn't match up against anybody else's. This new RAIDER unit no longer needs a curb adaptor for Carrier footprints. And we think Carrier, as the industry leader, probably has -- not probably -- has the largest share of this installed emergency replacement base. So we now have a unit that fits on a Carrier roof with no curb adaptor, and we're no longer 15% penalty, plus we we've redesigned the product to take -- to make it low-cost even without the curb adaptor being in the consideration. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Okay. That's great. And then one last question, just on the consumer behavior dynamic. I mean, it sounds like they are -- the repair versus replace that's been going on, I mean, it sounds like you've seen a little bit of a turn in that.

I don't know if I'd put that much color on it, Steve. I mean, we had a good first quarter. But really, the repair-replacement phenomenon is really a summer thing, right? So I think what we saw year-over-year it was colder. More furnaces had to be replaced than a year ago and that was good news for us. But I think we'll have a better feel on repair and replace when we get into the summer season.

And the next question is from the line of Sanjay Shrestha with Lazard Capital Markets.

It's Aditya Satghare in for Sanjay today. Two questions. By follow up in prior comments on the RAIDER product and the light commercial market, can you sort of elaborate in terms of what has been some of the competitor response from other folks in the market? And you touched on Carrier, but we also understand that the folks like Ingersoll-Rand are going out there and talking a lot about multiple plug-and-play products specifically designed for the light commercial market. So are there any comments on competitor response?

No is the short answer. I mean, we have -- we think we have a great quality product that even though we've taken costs out it, there's a level of quality that's associated with Lennox. We're also supporting it by over a multiyear period tripling our wholesale distribution part, our points. By the way, all these Residential PartsPlus stores we've been bragging about also carry Commercial parts. And so our ability to service and support dealers who sell our rooftop product line has been very successful. And what we found is, we've won in national accounts for a long time, and people know what we do and we still win. So if you build a good product and you service it and you have a good sales force and you're focused on it, you can win. So we have a lot of contractors who want to do business with us in this segment of the market, where we haven't had the product, we now do. And so let's see what happens.

Okay. And I'm turning it back to Todd Bluedorn for final remarks.

Great. A few points to leave you all with: Our largest seasonal periods are still ahead of us, and there's still lots of macroeconomic uncertainty. But we have good business momentum, and the year is off to good start with growth across all our businesses, led by strength in Residential, both new construction and the replacement business. We look forward to the summer selling season and remain focused on driving our growth initiatives and capitalizing on the market opportunities before us in 2013. Thank you for joining us today. Have a good day.

Okay, thank you, and that concludes our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.