Lennox International Inc (NYSE: LII) Q1 2023 Earnings Call dated Apr. 27, 2023
Corporate Participants:
Chelsea Pulisic — Investor Relations
Alok Maskara — Chief Executive Officer
Joseph W. Reitmeier — Executive Vice President & Chief Financial Officer
Michael Quenzer — Vice President, Finance
Analysts:
Joe O’Dea — Wells Fargo Securities — Analyst
Nicole DeBlase — Deutsche Bank — Analyst
Tommy Moll — Stephens — Analyst
Jeff Hammond — KeyBanc Capital Markets — Analyst
Julian Mitchell — Barclays — Analyst
Jeff Sprague — Vertical Research Partners — Analyst
Josh Pokrzywinski — Morgan Stanley — Analyst
Noah Kaye — Oppenheimer — Analyst
Ryan Merkel — William Blair — Analyst
Nigel Coe — Wolfe Research — Analyst
Joe Ritchie — Goldman Sachs — Analyst
Brett Linzey — Mizuho — Analyst
Steve Tusa — JPMorgan — Analyst
Chirag Patel — Jefferies — Analyst
Presentation:
Operator
Welcome to the Lennox First Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to Chelsea Pulisic [Phonetic] from Lennox Investor Relations team. Chelsea, please go ahead.
Chelsea Pulisic — Investor Relations
Thank you, Brittany. Good morning, everyone, and thank you for joining us for Lennox’s first quarter earnings results. I’m here today with CEO, Alok Maskara; CFO, Joe Reitmeier; VP of Finance, Michael Quenzer. Alok will discuss highlights for the quarter and Joe will take you through the company’s quarterly financial performance and our view on 2023 fiscal guidance. After that, we will have a Q&A session with Alok, Joe and Michael.
Turning to Slide 2. A reminder that during today’s call, we will be making certain forward-looking statements, which are subject to numerous risks and uncertainties as outlined on this page. Please refer to our SEC filings available on our website for additional details. All comparisons mentioned today are against the prior year period unless otherwise noted. Speakers may also refer to certain non-GAAP adjusted financial measures that management may consider to be relevant indicators of underlying business performance and trends. A reconciliation of all GAAP to non-GAAP measures is included in today’s earnings press release, SEC filings and in the appendix of this presentation. The earnings release, today’s presentation slides and the webcast archived link for today’s call are available on our website at www.lennoxinternational.com.
Now let me turn the call over to our CEO, Alok Maskara.
Alok Maskara — Chief Executive Officer
Thank you, Chelsea. Good morning and welcome, everyone. Allow me to start by sharing my appreciation for all of our employees whose hard work has enabled us to deliver exceptional performance this quarter, including record quarterly earnings per share. We take great pride in our team’s effort to gain share, expand margin and seamlessly transition our product portfolio to meet the new minimum energy efficiency regulations.
This successful quarter reflects our company’s product leadership, strong direct customer relationships and advanced digital platforms. These factors will continue to fuel our share gain and margin expansion for the foreseeable future. I want to also take this opportunity to thank our dealers and customers for their loyalty to Lennox as we improve our service levels while delivering the best HVACR products and solutions in North America.
Now please turn to Slide 3 where I want to highlight four key messages. First, Lennox is proud to report another quarter with record financial results First quarter 2023 core revenues grew 3%, our margin expanded 210 basis points resulting in our adjusted EPS increasing 15% to $2.83. Our free cash usage this quarter was $114 million, which is typical given the seasonality of our business. Second, we are pleased with the pace of margin recovery in our commercial business segment. Our profits more than doubled compared to last year as manufacturing operations stabilized and the benefit of price and mix outpaced inflationary cost increases.
Third, we continue to help our dealers and customers succeed during the transition to the new minimum efficiency regulations that went into effect on January 1, 2023. Our superior design and successful track record of executing during regulatory changes in conjunction with improved service inventory levels has put us in a strong position to gain share. Fourth, given the strong quarterly results, we remain comfortable with our previously issued full year financial guidance. We continue to closely monitor end market sentiments, track movements in commodity pricing and execute countermeasures including additional price increases. We are also optimizing our inventory levels given improved lead times and current sales outlook.
Now please turn to Slide 4 for our view on the current end market conditions. In the residential end market, we are experiencing destocking in our two step distribution channel just as we had expected. We anticipate the destocking to continue through the beginning of second half of this year. Volume in our direct to dealer channel was flat in Q1. However, we are expecting softness later in the year driven by fewer new housing starts in 2022. We are closely monitoring consumer confidence for any changes that may impact the replacement versus repair decisions, but we are also encouraged by the recent improvement in the new housing starts. There is no change in our full year outlook for mid-single-digit decline in residential unit volumes.
In commercial, our backlog is strong and our lead times have improved as the factory situation has stabilized. The industry lead time for commercial equipment remains extended due to the shortage of common components. We still believe that commercial sales will grow by high-single-digits this year. On the price versus inflation balance, we are price cost positive, but we are monitoring recent inflation in commodities such as steel and copper. To offset the higher material cost, we have implemented a targeted residential price increase that will become effective on June 18 this year.
Overall, we are well positioned to gain share with our success in seamlessly transitioning to the new minimum efficiency standards and given our improved service inventory levels. In addition, we are strengthening our go-to-market organization by adding more field resources and offsetting those investments by driving back office SG&A productivity.
Now please turn to Slide 5. To accelerate our profitable growth and to expand margins, we are investing in pricing excellence at Lennox. Over the past few years, we have managed to offset inflation with price, but there remains a significant opportunity for us to refine our pricing strategy to drive greater benefit from both price and mix. We are strengthening our pricing infrastructure by increasing price analytics, engaging outside experts and further developing our internal talent.
Recently, we have revised our company-wide contract signing authority to ensure appropriate scrutiny of our key account pricing and have redirected new business development on higher margin channels and applications. We also plan to expand our rebate auditing process and take all the necessary steps to increase price netting. Another priority of ours is to work with our larger key accounts to optimize our cost to serve so that we can establish win, win partnerships. In summary, we know that pricing excellence is an important step towards Lennox regaining our competitive margin advantage and thus, we are increasing our focus to meet or exceed our long-term margin goals.
Later in the presentation, I will provide an update on our long-term goals, but for now, I’m going to hand the call over to Joe Reitmeier who will go through our first-quarter financial performance.
Joseph W. Reitmeier — Executive Vice President & Chief Financial Officer
Thank you, Alok. Good morning, everyone. Please turn to Slide 6. Looking at the quarter for Lennox overall, the company posted strong revenue and profit growth. Core revenue which excludes our European operations was a record $990 million, up 3% compared to prior year. Both our residential and commercial segments experienced sales volume declines, but price execution and favorable product mix more than offset the volume headwinds. Total adjusted segment profit increased $24 million or 20% versus prior year.
Price and mix exceeded product cost inflation by $63 million with partial offsets of $17 million from lower volume and $22 million for inflationary effects and investments in distribution and SG&A expenses. Total adjusted margin was 14.4%, up 210 basis points with most of the margin expansion driven by performance in our commercial segment. In the first quarter, corporate expenses increased $6 million to $19 million due to the timing of incentive compensation expenses.
Moving on to net income and cash flow performance, starting on Slide 7. The first quarter not only achieved record levels of revenue and segment profit, but also marked record earnings per share with GAAP earnings per share rising 20% to $2.75 and adjusted EPS growing by 15% to $2.83. Our first quarter adjusted net income included a 21.4% tax rate and diluted shares outstanding were 35.6 million compared to 36.4 million in the prior year quarter. The company used $79 million of cash in operations compared to a use of $98 million in the prior year. Working capital optimization is a priority and we remain on track to achieve our 2023 cash flow target.
Capital expenditures were approximately $35 million for the quarter, an increase of $10 million compared to prior year. Capital investments will be higher this year as we fund growth and increase capacity, including a new factory for our commercial business. We used $114 million of free cash flow compared to a use of $123 million in the prior year quarter. In the quarter, the company paid approximately $38 million in dividends. Total debt was $1.67 billion at the end of the quarter and our debt to EBITDA ratio was 2.1. Cash, cash equivalents and short-term investments were $48 million at the end of the quarter.
Moving to the business segments, starting on Slide 8 where our residential segment delivered record fourth quarter revenue. Residential revenue was flat to prior year as sales volume declines of 8% were offset with 4% favorable price, 5% favorable mix and 1% unfavorable foreign exchange. Total sales which go direct to dealer represent about 70% of our segment revenue and were up mid-single-digits. The remaining 30% of our revenue goes to distributors where total revenues were down low-teens, the result of expected industry destocking.
Residential segment profit rose 3% to $111 million, a first quarter record. Segment margin expanded 50 basis points to 16.3% as continued pricing gains more than offset product cost inflation of our new minimum efficiency standard products drove favorable mix. Partially offsetting these gains were $12 million of lower volumes and $16 million from inflationary headwinds on distribution and selling and administrative expenses where we’ve made investments to fuel growth.
Turning to Slide 9 and our commercial business. As announced in our last earnings call, beginning in the first quarter of 2023, the commercial segment results will include our North American refrigeration operations. Our European operations will be reported in our corporate and other segment until we complete the divestiture of the European businesses. Revenue was $309 million in the quarter, up 10%. Combined price and mix were up 16% and volume was down 6%. Commercial segment profit was up 110% and segment margin expanded 770 basis points to 16.2%. We are pleased with the profit recovery in our commercial segment where price and favorable mix were the main contributors to profit growth early in the gear.
In the first quarter, we successfully transitioned our HVAC products to the new minimum efficiency standard, but industry-wide supply chain challenges constrained production output and continued to limit sales volumes. Demand from customers remains robust with a solid order backlog while supply chain challenges persist, lead times to our commercial customers are shortening and are competitive with the industry.
Turning to Slide 10, let’s review our 2023 full year guidance. Our outlook provided on our last conference call remains unchanged. As a reminder, I will reiterate a few guidance points. We expect core revenue to be flat to up 4% for the full year and earnings per share of between a range of $14.25 per share to $15.25 per share. Free cash flow is targeted within a range of $250 million to $350 million. We are planning capital expenditures of $250 million that includes investment in a second commercial factory and investments related to refrigerant transition to take effect in 2025.
Price benefit including price associated with the 2023 SEER transition is now expected to be $175 million and we now expect net material cost to be a $45 million headwind in 2023. The material cost headwind is driven by component cost inflation of $100 million net of $30 million in savings from cost reduction initiatives, along with $25 million from commodity cost benefits. Corporate expenses are still targeted at $80 million. We will manage SG&A tightly while continuing to manage necessary investments in the businesses to support growth initiatives and drive productivity. And finally, we still expect a weighted average diluted share count for the full year to be between 35 million to 36 million shares, which incorporates our plans to repurchase $100 million to $200 million of stock this year.
With that, let’s turn to Slide 11 and I’ll turn it back to Alok.
Alok Maskara — Chief Executive Officer
Thanks, Joe. Please turn to Page 11 for an update on the key initiatives reviewed during last year’s Investor Day to deliver on our long-term targets. As a recap, our 2026 target is to deliver an ROS of 18% to 20%, with revenues over $5 billion. We believe that our laser like focus on North America HVACR market, our direct to dealer business model and our superior technology portfolio will ensure long-term success. We are executing six self-help strategic imperatives outlined on the right hand side of this page to meet or exceed our 2026 goals.
First, growth acceleration to drive share gain will be achieved by optimizing our go-to-market effectiveness by improving our brand’s customer experience and by increasing growth capacity. Second, we will increase resilient margins through commercial recovery, productivity and pricing excellence, which was highlighted earlier in the call today. Third, to maintain execution consistency, we have introduced a balanced scorecard operating system. We are transitioning to a dual source supply chain and we are implementing lean digital processes like sales and inventory planning.
Fourth, we are reconfirming our commitment to 90% to 100% cash conversion and a healthy balance sheet while building a bolt-on M&A pipeline focused on North American HVACR. Fifth, we will enhance our technology leadership through the frequent regulatory transitions by winning in cold climate heat pump and investing in digital AI, ML adoption across all our business functions. Sixth and finally, we are reinforcing our high performance talent and culture by rolling out guiding behaviors to support our core values. In addition, we are undertaking sufficient planning and ensuring that our compensation scheme remains aligned with value creation. Once again I would like to thank our employees who are working hard to successfully implement this self-help transformation plan.
To close our prepared remarks, I would like to summarize on Page 12 the reasons why I believe LII is an attractive investment opportunity. Lennox is a narrowly focused North American leader in the attractive industry of energy efficient, environmentally friendly HVACR solutions. We operate in high growth end markets with strong replacement demand that provides us with resiliency even during periods of economic uncertainty. The company has a unique direct to dealer network, which creates a sustainable competitive advantage and we have a history of robust execution with disciplined capital allocation. As I complete my first year at Lennox, I’m even more excited about Lennox’s future and continue to believe that our best days are ahead of us.
Thank you. Joe, Michael and I will be happy to take your questions now. Britney, let’s go to Q&A.
Questions and Answers:
Operator
[Operator Instructions] And we’ll take our first question from Joe O’Dea with Wells Fargo. Joe, your line is now open.
Joe O’Dea — Wells Fargo Securities — Analyst
Hi, good morning, everyone.
Alok Maskara — Chief Executive Officer
Good morning, Joe.
Joe O’Dea — Wells Fargo Securities — Analyst
Just to start on the commercial margins, certainly some encouraging progress there. Anything that you can talk about that you would consider sort of non-repeat in the quarter versus just some of the progress that you were expecting maybe coming through a little bit faster and kind of weave that into how you’re thinking about sort of the go forward from here? Is supply chain continuing to improve and those margins continuing to improve sequentially?
Alok Maskara — Chief Executive Officer
Yeah. So Joe, on the commercial, we are pleased with the progress. We had talked about earlier that we think there is a reset coming in the first quarter of this year given that many of our key accounts had to be reprice with the SEER change and the new product addition and you saw that loudly reflected in our P&L. So that’s consistent with what we expected. We had also talked about almost under a year ago $100 million in EBIT improvement. And over the past few quarters, we have already delivered $60 million of that $100 million.
So yeah, we are little ahead of where we expected and that’s a good thing. We remain on that journey. I think we are going to get to that $100 million faster than what we had originally talked about just given we are more than halfway through with that. And with supply chains improving, demand remaining strong, we still expect high-single-digit growth this year and we still expect margins to hold. And no, there was nothing unusual in Q1. We would expect that performance trajectory to continue going forward.
Joe O’Dea — Wells Fargo Securities — Analyst
Great. Thank you. And then on the resi side, can you talk a little bit about your sort of expectations for the year on the sort of direct to dealer versus to distributor kind of outline? And you gave some color on the first quarter, but curious sort of how you think about that if you’re able to talk at all about sort of your framework for the second quarter thinking about that. And then just generally, for the full year, how we should think about those varying trends?
Alok Maskara — Chief Executive Officer
Sure. So I think let me start with the end consumer, right, because that’s how we look at it. I mean, the end consumer demand seems to be holding pretty well from our perspective. As you know, this was not a great season from a heating perspective. It was unseasonably warm in quite a few parts of the country. Despite that, we talk about that in our direct to dealer business. We had flat units coming through and on our two step model, we had declines and that was largely destocking driven. So from our perspective, the end consumer demand remains healthy. There’s obviously slowdown in growth, but we don’t see any declines coming up because the replacement business is holding pretty steady.
For the rest of the year, Joe, I will expect decline in direct mostly because off residential new construction that’s low last year and that’s going to impact our demand now. On two step, I think the declines get better. So I think in Q2, we’ll see less destocking than we saw in Q1 and Q3, we’ll probably see little to no destocking as that gets behind us. We’re only in April. May, June are bigger months for us than in April. But overall, we remain confident in the full year outlook of mid-single-digit unit decline at 0% to 4% revenue growth for us as we look at all these factors combined together.
Joe O’Dea — Wells Fargo Securities — Analyst
I appreciate it. Thanks.
Alok Maskara — Chief Executive Officer
Thanks, Joe.
Operator
We will take our next question from Nicole DeBlase with Deutsche Bank. Your line is open.
Nicole DeBlase — Deutsche Bank — Analyst
Yeah. Thanks. Good morning, guys.
Alok Maskara — Chief Executive Officer
Hi, Nicole.
Nicole DeBlase — Deutsche Bank — Analyst
Maybe just going back to the commercial margins, obviously really strong this quarter. And with respect to Joe’s question, I mean, I think you usually see a step up in margins seasonally in commercial from 1Q to 2Q and then a smaller step up in the third quarter. Would you say that it’s possible that we could see a seasonal increase? It’s just kind of hard to gauge since 1Q was so strong. Thank you.
Alok Maskara — Chief Executive Officer
Yeah. I mean, commercial — listen, overall, over the long-term, we expect that business to be a 20% ROS business and Q1 was good, but we’re only at 16%. So I think there’s still room for improvement for us. I don’t want to accurately try and predict Q3, Q4 or Q2. I mean, we don’t have that level of precision, but I would see no reason why our typical seasonality trend won’t hold this quarter because remember this quarter, we also have some inefficiencies related to the CEO transition as we completed those. So stay tuned. I mean, I think we’re starting at a good spot and you expect to end in a few years at closer to 20%.
Nicole DeBlase — Deutsche Bank — Analyst
Thanks. That’s really clear. And then second question just on price cost, obviously, a benefit to margins in the quarter. How does that phase through the year especially given the new price actions that you talked about today? Thanks.
Alok Maskara — Chief Executive Officer
Yeah. So the new price actions that we talked about are on the residential side. On commercial, we had a reset going into this year, so I think the price cost benefit that you saw. We will see the levels to remain the same, but obviously we start going through more difficult comps because we had done significant price increases. So the year-over-year comps get difficult, but I think the levels on a as is basis remains. Where we have to do more pricing effort is on the residential side and that’s where we’re putting a lot of our emphasis and focus and that’s where the new price increase that we talked about goes into effect on June 18.
Nicole DeBlase — Deutsche Bank — Analyst
Thanks. I’ll pass it on.
Operator
We will take our next question from Tommy Moll with Stephens Inc. Your line is now open.
Tommy Moll — Stephens — Analyst
Good morning and thanks for taking my questions. We appreciated the insight you provided on the pricing excellence strategy and I wanted to drill down on a couple of the items in there specifically around the optimizing local versus central decision making. Can you bring us in on what that involves and to what extent was that related to the midyear price increase that you just announced on resi to us today or was there some other factor driving that decision? Thanks.
Alok Maskara — Chief Executive Officer
I think as we went through the tornado many years ago, as we went through COVID and significant inflation, we went into a more of a command and control move because we had to. Those were crises that we’re managing. Historically, we have really good territory managers. We have really good branch leaders. We have really good folks. We have good field intelligence and we need to act accordingly just like a distributor does, because although we are a manufacturer, our 250 outlets act more a distributor.
So as we are looking at this, we want to give more input, more say to local pricing decisions versus looking at things doing more centrally. And so obviously, we want to set our strategy centrally, but our local field force have a lot more market intelligence and look at every region behaving a little differently. So that was the comment was we’re going to optimize it and that’s a pretty typical thing for us to do because pricing in South Florida may be very different than pricing in North Dakota and we need to make sure that we appropriately account for those differences.
Tommy Moll — Stephens — Analyst
Thanks, Alok. I appreciate the context there. As a follow-up, I wanted to look at the residential profit contribution versus the commercial side, which was quite robust this quarter. But if we think about the full year trajectory there, your guidance does imply some growth in profitability year-over-year. Given the residential volume headwinds that you’ve articulated, should we assume that all or substantially all of the profit growth this year should come on the commercial side or is that not the right way to think about it?
Alok Maskara — Chief Executive Officer
No. I think it will be a balance between residential and commercial. Listen, commercial had a good start. I think residential has lots of room for improvement with the price, with the mixing, with the inventory level coming down. So I’m optimistic on residential and we’re driving that hard. Commercial did have easy comps too compared to where we started it Q1 last year. So we look at that, but no, I think the overall profit increase for this year would be balanced between those two as residential. The benefit of SEER change also is going to happen little slower than commercial because commercial we didn’t have as much finished good inventory sitting around. And in residential, we sold quite a bit of a lower SEER products in Q1 as we were finishing that inventory. So I think putting it all together, we are equally optimistic about residential improving for the rest of the year.
Tommy Moll — Stephens — Analyst
Appreciate it, Alok. I’ll turn it back.
Alok Maskara — Chief Executive Officer
Thanks.
Operator
We’ll take our next question from Jeff Hammond with KeyBanc. Your line is open.
Jeff Hammond — KeyBanc Capital Markets — Analyst
Hey. Good morning guys.
Alok Maskara — Chief Executive Officer
Hey, Jeff.
Jeff Hammond — KeyBanc Capital Markets — Analyst
Just want to come back on price. I guess, first, what’s informing another price increase kind of around this June 18? And then just as you talk to contractors and get feedback, any start — you’re starting to see — are you starting to see any pushback from contractors or fatigue from the consumer on kind of these multiple increases?
Alok Maskara — Chief Executive Officer
Yeah. I mean, listen, costs keep going up, I mean, it’s as you saw, steel has been up significantly, copper starting to go back up. And what we also did is just like you would expect good companies to we did a pricing benchmark on where we stand. So I think the price increase in June is a targeted price increase. We targeted areas where we think we have greater opportunities and that’s because for the past couple of years, we were sort of brute force price increases versus what I would call sophisticated price increases. So a lot of that is working with our own analytics and our teams to go through that and fully offset the inflation and make sure we remain competitive in the market and capture the adequate balance. So it’s a lot of details and analytics behind it, Jeff, but we remain confident that’s the right thing to do and supports the industry pricing level.
On the second part of your question, no, I mean, remember, the equipment price is only a small portion or less than half of what the consumer pays or sees in there and we have seen no pullback because the repair versus replacement dynamics, in fact, steel fee was replacement given that repairs are more expensive. Our 22 units are very hard to repair. Our — the cost of our 20 has gone up and cost of spare parts and labor has gone up more than the cost of equipment. So we haven’t seen any changes and I think that’s consistent with the industry. Well, obviously, we remain closely aligned with 10,000 dealers, then we keep getting their feedback and we’ll adjust if anything changes.
Jeff Hammond — KeyBanc Capital Markets — Analyst
Okay. Great. And then just as we look at it, it seems like you still have a lot of confidence in the resiliency res. It seems like commercial is running ahead.What kind of precluded you from kind of moving the guide at this point?
Alok Maskara — Chief Executive Officer
Yeah. Jeff, I think, you don’t want to give first and fourth quarters are seasonally our lightest. We’ve got a lot of still in front of us and just didn’t really want to –once again, we approach it was conservative — cautious optimism I think is the right way to characterize it. We remain confident and our gauging the underlying markets. But just wanted to get into the peak season before we made a call on a full year.
Jeff Hammond — KeyBanc Capital Markets — Analyst
Okay. Thanks guys.
Alok Maskara — Chief Executive Officer
Thanks, Jeff.
Operator
We’ll take our next question from Julian Mitchell with Barclays. Your line is now open.
Julian Mitchell — Barclays — Analyst
Hi, good morning.
Alok Maskara — Chief Executive Officer
Hi, Julian.
Julian Mitchell — Barclays — Analyst
Good morning. Maybe I’ll leave commercial margins in piece for the time being. Maybe just on the commercial kind of top line, I fully understand the excitement around the good margin performance. But on the top line, maybe remind us of some of these main sort of end market exposures for the commercial piece in terms of kind of end market verticals. Obviously, a lot of concern from people out there on things like office and retail and so forth in recent months. So have you seen any kind of shift in customer behaviors? Any color you could provide on sort of bookings or orders at all on the commercial side? And again, any sort of flavor you could give on how the end markets breakout for the business?
Michael Quenzer — Vice President, Finance
Hey, Julian. This is Michael. Yeah, on the commercial side, the backlog still is healthy. We are seeing good demand across most of our verticals. New construction is kind of 15%, 20% of that business. We’re not seeing any credit issues yet, but backlog is definitely still healthy going in — reaching into Q3. So we’ve really not seen a pullback on the demand yet. Backlogs are extended a little bit because of some of the lead times in the factory, but from a demand perspective, it still looks healthy.
Julian Mitchell — Barclays — Analyst
Thanks very much. And Michael, any color you could give on sort of vertical splits, I don’t know, education versus more commercial applications, anything like that?
Michael Quenzer — Vice President, Finance
Yeah. We’re seeing some good demand on the education side. That’s predominantly a summer season though when the schools are out of season and we can get in to do that replacement work. So schools are more of a Q2 kind of Q3 dynamic more than Q1. Right now, it’s still just executing our backlog that we’ve had for quite a while and we’re seeing good demand across most of the channels.
Alok Maskara — Chief Executive Officer
Yeah. And I’ll add a few more things, Julian. Where we’ve put a concerted effort was preserving our national account customers. Once again that strategy. I think is paying off for us. Once again the order rates and backlog remain strong there. And then as we continue to re-engage in the emergency replacement segment of the market that should provide us additional upside more in the second half than first half, but regardless of how the underlying vertical is performing, we still think given where our business is positioned today, we still have tremendous runway, particularly in the second half of the year.
Julian Mitchell — Barclays — Analyst
That’s helpful. Thank you. And then just my quick follow-up on going back to sort of residential volumes. So I understand that maybe Q1 is a bit noisy with the CEO transition just sort of happening and so forth and you had that — and so maybe some weather constraints. So you’ve got the down 8% volumes in resi and the quarter just behind you. As we think about how that plays out through the year and what you’ve seen in April, albeit, it’s a very small months for the quarter, but do we assume sort of the second quarter is down about the same amount or sort of volumes down high-single-digit in the second quarter and then by the fourth quarter, you’re probably growing volumes again? is that the way to think about the year for resi volume?
Alok Maskara — Chief Executive Officer
I mean, it’s hard to say in April. I mean, April doesn’t really give a trend. I mean, if you think about the key drivers of the volume decline in Q1, almost all of it was destocking, right? So I mean, if I take that destocking part and I would say Q2 will see some more destocking, I don’t know if it be as extensive as Q1, probably not because Q1 was the most pullback as people completed SEER transitions and knew that they were comfortable stock and that’s what we expected. I think Q2 there will be little less destocking. Q3 will be minimal to zero and then Q4 we should be done with destocking. So I think that’s the way to think about it.
End user demand seems to be holding just fine. There’s no growth that we saw — rapid growth that we saw during COVID and the places, but that demand seems to be holding just fine. And RNC, residential new construction, we can predict very well because the housing starts is what drive it. So I think the volume declines moderate. It won’t be 8% in Q2, Q3. But in Q4, to your specific portion, I’m not sure if we return turn to growth because that will depend on the residential new construction which is looking better. We started the year thinking it will be down 20%. Right now, it’s look like it’s closer to 10% from housing start perspective. We did need to watch and monitor that, Julian.
Julian Mitchell — Barclays — Analyst
That’s helpful. Thanks a lot.
Alok Maskara — Chief Executive Officer
Thanks.
Operator
We will take our next question from Jeff Sprague with Vertical Research Partners. Your line is open.
Jeff Sprague — Vertical Research Partners — Analyst
Thank you. Good morning, everyone. Hey, I wanted to come back to kind of and maybe it’s on Slide 5 kind of the pricing slide. Alok, can you dig a little deeper into maybe the opportunities? I guess, I’ll call them non-price actions, right, rebates, leakage, things like that. Is this scenario where the firm wants to have discipline and lost it or this is a new area of focus? And maybe you could give some or color insight on like how significant driving some of these “netting” actions might be?
Alok Maskara — Chief Executive Officer
Yeah. I guess, having done pricing back in my consulting days, I strongly believe that all three levers are important, setting, getting and netting. So I think it’s important. In some of these cases, yes, we had strong discipline and during COVID in other cases, as we pulled back on non-critical activities, some of these just had to give as we had to focus on other things such as recovery on COVID, looking at supporting the volume constraint. So I think we have that muscle. We got to kind of make sure we retrain it. We make sure we find it and deploy it. Lot of this is also around — we have structural advantages when it comes to serving some of the larger accounts, whether it’s we call it national accounts or key accounts and it’s going to be for us to work jointly with our customers to find the lowest cost way to serve them and create win, win situations there because we are direct, right?
We can optimize a lot of freight, distribution and make it win, win for us and these large growing often like sponsor owned be dealer network. So we think that’s a big opportunity where it’s less about what the list price is, but it’s more about what’s margin on both sides and we have an opportunity to optimize that. So we used to do it very well. We lost some ground just because we had to focus on other areas. We are bringing that back and we are excited about the structural advantage we have and going after larger accounts where the cost to serve would be lower on both sides.
Jeff Sprague — Vertical Research Partners — Analyst
And then just on inventories, you spoke to the channel destocking and the like. Just wondering if you could address your own inventories. I guess, we’re up 30% year-over-year and 20% sequentially. It’s not crazy given the inflation that’s out there, but maybe just address where your inventories are vis-a-vis where you think they should be. Any particular absorption or other issues embedded in the guide as you work through that or anything else to be aware of there?
Joseph W. Reitmeier — Executive Vice President & Chief Financial Officer
No. I think what you saw was our inventories definitely grew in Q1, but that’s normal with our seasonal nature of our business. We always grow inventory in the first quarter and then we’ll burn that off in Q2 and Q3. Built into the guide is that burn off of the inventory. We’re going to look to potentially do a little bit more. We think there may be some upside to exceed the free cash guide, but it’s normal to build inventory as we did in Q1.
Alok Maskara — Chief Executive Officer
And if I can just jump on that, I mean, if you go back again few years ago, when we were turning inventory at 5 to 6 times a year and we still had room for improvement there, I mean, right now, we are turning it at 3 to 4 times. So I think over the three-year planning period, you can expect us to go back to turning inventory at the historical levels driven by finished goods optimization that Michael mentioned, but also raw material. Supply chains became extended. We bulked up on raw material and we don’t want to do anything crazy here. But over the next two to three years in a very disciplined manner working with our suppliers and our customers, we are going to drive our inventory turns to be better.
Jeff Sprague — Vertical Research Partners — Analyst
Great. Thanks a lot. Appreciate it.
Operator
We will take our next question from Josh Pokrzywinski from Morgan Stanley. Your line is open.
Josh Pokrzywinski — Morgan Stanley — Analyst
Hi, good morning guys.
Alok Maskara — Chief Executive Officer
Hey, Josh.
Josh Pokrzywinski — Morgan Stanley — Analyst
Alok, I want to follow-up on, I guess, adjacent surprise, but really about share gain. If you think about where you see the biggest opportunity today is it more on kind of the larger dealers, bigger national accounts like homebuilders? Is it in the smaller guys? Maybe talk about where this kind of newer field autonomy is really designed to try to meet the market between different customer types?
Alok Maskara — Chief Executive Officer
Sure. I mean, Josh, I think the simple answer is all of them. I mean, we have an opportunity with smaller dealers because we underserved them post the tornado. I mean, we were known for our Dave Lennox Signature series products. We had really good partnerships and because we didn’t have enough inventory or service levels, many of them were forced to look somewhere else. So we need to win them back and I think that’s where a lot of the local autonomy, the improved service levels and all of that goes into right.
Second part of that is just geographic based on legacy and driven. I mean, our market share in South Florida is much lower than our market share in Marshalltown, Iowa and that’s been for years and that’s where a lot of the efforts we have done including increasing our reach, investing in our distribution footprint, getting more heat pump coverage, all of that add. So I think second factor is geographic. Third, to come back to the national dealers or the larger dealers that’s where we have a structural advantage and it’s a different, more sophisticated approach of working with them on trying to make sure that we create a win, win partnership.
So Josh, we have opportunities in all three areas. And don’t forget, at the same time, our indirect business which is also doing very well, so when I talked about our direct. On the indirect side where we are targeting through Allied our independent distribution network and giving them a stronger, better value proposition that works well. So I think all four are important, right, smaller dealers that we lost unfortunately during and after the tornado. The truly looking at regional expansion, going into key accounts and getting to make sure we have a win, win value proposition and finally continuing to expand our two step model as well because we believe we have a unique value proposition. So those are kind of our four levers for market share gain.
Josh Pokrzywinski — Morgan Stanley — Analyst
Understood. And then just shifting over to the product side and the 2025 transition coming up. I know you reiterating guidance today, but it does look like you have a little bit of patent to start the year. So good performance in commercial. Anything that you’re able to pull forward on R&D, capex, anything else on your getting set for ’25?
Alok Maskara — Chief Executive Officer
Yeah. It’s a situation where I think we’re doing all we can. Once again, our priorities are elevating our service levels with our customers, making sure we’ve got the right mix of product to meet end market demand and then continuing to pull forward and we’ve done that to some extent, Josh. Our capital expenditures are $250 million. $50 million of that is associated with staying ahead of the 2025 transition. So we’re making those investments, pulling ahead those activities that we can to deliver that value to our customers. And once again much like we did with the minimum efficiency transition this year seamlessly attack what’s ahead of us in 2025.
Josh Pokrzywinski — Morgan Stanley — Analyst
Got it. Thanks for the color. Best of luck, guys.
Alok Maskara — Chief Executive Officer
Thanks.
Operator
And we will take our next question from Noah Kaye with Oppenheimer. Your line is now open.
Noah Kaye — Oppenheimer — Analyst
Good morning. Good to be with you. Thanks. I guess to start with interested in the commentary around the SEER benefit to mix. Alok, I think you said actually it was a fairly small amount of SEER product sold to the resi channel in 1Q. Is it possible to quantify the SEER benefit to mix in the quarter? How you would think about that into the seasonal uptick and what’s embedded for SEER specifically in the full year guide?
Alok Maskara — Chief Executive Officer
Sure. Michael will answer the question, but let me just clarify. Maybe I didn’t — what I was saying is that not all our sales in Q1 were the new SEER products. So about one third of our sales in Q1 were still the older SEER products as you’re going. But no, majority of the sale in Q1 did shift to new SEER. But Michael can actually break down the mix benefits for you.
Michael Quenzer — Vice President, Finance
Correct, yeah. In residential, we did see favorable mix. It’s predominantly for the SEER transition as we’ve talked about previously impacts more volume. The price dropped through at about a 30% drop through that we saw in residential. We should start to see that for the rest of the year at a similar 30% drop through on the benefit for the mix shift and a little bit higher margins on the drop through on the commercial as we’re able to do get some additional pricing on top of that, but should be about a 30% drop through that we see in residential.
Noah Kaye — Oppenheimer — Analyst
Okay. Great. And then what did you see from the e-commerce channel this quarter I think to the question around share gains overall? Just how did that channel factor in?
Alok Maskara — Chief Executive Officer
Yeah. We don’t break out e-commerce sales by quarter, but needless to say, as we talked in the Investor Day, it’s a very important channel for us. We look at over a third of our sales as we mentioned Investor Day go through e-commerce. We find that all of those are very sticky customers and that continues to grow. So I think the numbers we disclosed in December still hold or are better, but we don’t break that out quarterly, nor do we think it’s relevant to break it out quarterly, but it’s important part of our growth strategy. And what we’re even more excited about is to be able to leverage those data and the relationship and using artificial intelligence and machine learning to make critical decisions, everything from inventory planning to pricing, to also looking at making it easier for our dealers from predictive maintenance perspective and others. So huge investment for us, very important for us, but the quarterly breakdown of that is not something we think is relevant.
Noah Kaye — Oppenheimer — Analyst
Yeah. I appreciate the color. Thank you.
Operator
We will take our next question from Ryan Merkel with William Blair. Your line is open.
Ryan Merkel — William Blair — Analyst
Hey, everyone. Just a couple of cleanups for me. Just going back to commercial, Alok, can you put a finer point on why you’re so far ahead on the margin recovery because I think before you thought it was like three-year sort of a linear progression and now it looks like you might be there at the end of this year.
Alok Maskara — Chief Executive Officer
Well, first of all, I’ll say it really pays to have a conservative CFO. So I think that will be the first starting point on that, Ryan. Listen, the — it definitely helps. And when we said three years, we really looked at that being like our external commitment. Internally, obviously, we were driving it to a faster pace. I think the CEO transition worked well for us. I mean, as we looked at the factory converting over, the labor stabilizing, getting the new products which I give full credit to the team as we were also able to rationalize our SKUs. So we’re like 40% less SKU in the factories working through and simplify.
So lot of just a core discipline was restored. We make a step forward with SKU rationalization. We were able to work with our key accounts because these new SKUs are not covered by some of the legacy contracts. So all of those. So I think we — if there was a like an optimistic scenario and a conservative scenario, we were probably guiding you guys to the midpoint of that. And right now, we are fighting on cylinders to hit closer to the optimistic, but it’s within the range of what we thought, Ryan.
Ryan Merkel — William Blair — Analyst
That’s helpful. Thanks for that. And then just on resi, any differences in the quarter by geography? We obviously had some weather out West. Just curious there.
Alok Maskara — Chief Executive Officer
Not substantial. I mean, there is weather related, right, because the winter was mild in certain cases. Northeast did not do well, but I think that’s a industry-wide factor. Southern states did well, but I think it could also be because some of our competitors stumbled during the SEER transition and we had inventory. So I think some of the southern states we saw particular strength, but nothing that I could call out or give you a data base answer on, Ryan.
Ryan Merkel — William Blair — Analyst
Got it. Thank you.
Operator
And we will take our next question from Nigel Coe with Wolfe Research. Your line is open.
Nigel Coe — Wolfe Research — Analyst
Thanks, good morning guys. We covered a lot of ground already. Hi, guys. Just on that last point, so obviously, we saw a pretty significant share shift due in the fourth quarter with the transition. It sounds like that continued perhaps not as a stream, but that did continue in the first quarter. Is that fair.
Alok Maskara — Chief Executive Officer
Yeah, that’s fair. And I think this tends typically given the abrupt nature of the regulations, but the difference between North and South, I think we all have got — maybe and all industry players have got sophisticated on starting to make them in Q4 and continue selling them through end kind of Q2 to make sure the inventory doesn’t become a E&O type excess and obsolete. So I think we have done — all done a good job with that.
Michael Quenzer — Vice President, Finance
Yeah. And I think I think our direct to dealer strategy benefits us due to the destocking in the two step channel. So once again, I think we were probably unjustly criticized for losing share as the two step channel stocked up once again as a destock. We’ll see some of that benefit in the form of additional share.
Nigel Coe — Wolfe Research — Analyst
Yeah, that’s very fair. Going back to commercial margins I know that this has been well bedded, but if you think about the Arkansas facility, where is labor and material productivity trending today relative to normal? And I’ll leave you to define normal. But where are you sort of target on that curve?
Alok Maskara — Chief Executive Officer
I’m glad you are going to leave us to define normal. I’m going to leave it to somebody else. So it’s hard to define normal, but here’s the thing, right? I mean, wages are not going back. So let’s put that perspective, but our factories are still fairly inefficient. Lot of the inefficiencies that opt in including expedited freight, including overtime, including line rates running below normal, those still persist. And Q1 was actually a little bit worse on that because we had to go through SEER change. So imagine retooling all your lines and getting to new products, which were completely new design for us. Remember, our three new models that we introduced the beginning of the year.
So I think there’s still room for productivity improvement for us going forward. Our priority is still output there, right? I think the more we can produce, the more we can sell. We’re still limited by output, but getting the output up, getting manufacturing productivity and working on the second factory, remember, all of this is still based on the existing factory. Once we have two factories and can clearly look at one being focused on make to stock, going after emergency replacement, making standard products at very high velocity, very high efficiency and the other being on made to order for key account specific, I mean, that’s out of our equation that hasn’t changed. We just got to the one factory improvement sooner.
Nigel Coe — Wolfe Research — Analyst
Okay. Thanks a lot. I’ll leave it there.
Operator
We will take our next question from Joe Ritchie with Goldman Sachs. Your line is open.
Joe Ritchie — Goldman Sachs — Analyst
Hey guys. Good morning. Hey, can you touch on just your visibility into the independent distribution channels? It looks like your Allied business was probably down. I’m guessing volumes were down like high-teens this quarter. Just what kind of visibility do you actually have to destocking being pretty much behind you in 2Q?
Alok Maskara — Chief Executive Officer
Sure. And when we say two step, you mean ADP and our Allied, so it’s combined together and you’re right. I mean, the volume was down in the range you mentioned. We have very good relationship with this channel and we have good visibility. That’s the reason we are kind of hinting at we would expect destocking to continue in Q2 and then beginning of Q3 or beginning of second half, we think that will be behind us. It’s hard to quantify because every distributor is different, right? I mean, nobody has the same exact operating rhythm as somebody else in a different state. But the amount of excess inventory that the distributors are holding is it should be complete with destocking by beginning of Q3.
Joe Ritchie — Goldman Sachs — Analyst
Got it. That’s super helpful. And I guess, maybe just a follow on, on commercial. I know we’ve talked about it and congrats on being way ahead of plan on getting that $100 million back. It’s probably unfair for me to ask this question, but how are you thinking about what — where the margin improvement is going to come post achieving the $100 million which seems like it’s going to come a lot faster than we originally anticipated?
Alok Maskara — Chief Executive Officer
So yeah, I mean, I’ll point out to a few different things, right? First of all, remember the $100 million we had said does not include the second factory benefits. So I think we’re still holding to that. So the second factory we have started construction, things are moving along well. We expect to be under roof by the end of the year. We would expect production sometime next year. So that will give us significant benefit as we have two factories very focused operating to serve our customers really well. So that’s going to be one part.
Second on that is I think there’s significant opportunity for us to continue looking at our service growth. Service is very attractive business for us and we were not fully focused on that given all the disruptions happening here. So getting service and increasing our service focus which is good margin, it’s repeatable, it’s predictable and gives us great insight for our equipment sales. So I think service would really help us well. And finally, going back to the manufacturing inefficiencies, I don’t want to rule that out.
I mean, we are in the early stages of working through manufacturing inefficiencies and getting all of those out of the system. So long-term, we are committed to 20% plus ROS across both the segments. And we are excited about all the steps and those are sort of the things I mentioned in the last page when I talked about the six key self-help initiatives we are working on. They kind of equally applied to both residential and commercial.
Joe Ritchie — Goldman Sachs — Analyst
Makes sense. Great. Thanks guys.
Operator
We will take our next question from Brett Linzey with Mizuho. Your line is open.
Brett Linzey — Mizuho — Analyst
Hi. Good morning all. Just wanted to come back to commercial briefly. So you noted the backlog remained strong and order rates were solid. What degree of visibility on those orders converting do you have for this year? And is there anything specific of mix, whether it’s national account versus other verticals that we should be aware of over the next two,three quarters?
Alok Maskara — Chief Executive Officer
I’ll take the second question first. So on the mix side, no, I mean, we don’t have large projects that funnel through the pipeline or anything, right? I mean, these are all projects and these all products that we price accordingly. So no, the margin in our backlog is no different than the margin we are expecting in Q1 if that’s your question, right? We have good visibility to that margin and it’s all good. Nothing to worry about there. On the overall demand visibility, it’s everything from some key accounts who want to plan 2025 volume right now post the low GWP to people on emergency replacement who wants product tomorrow, but our backlog is healthy. I mean, the industry lead times remain stretched. Today, if somebody places an order, whether it’s our sort of competition, chances of getting a product this year is low. I mean, you would likely get into queue for next year. So I think there’s some flexibility here and there, but that’s kind of the demand visibility we have is pretty solid going forward both from actual revenue, sales and also margin perspective.
Brett Linzey — Mizuho — Analyst
Okay. Great. And just to follow-up on the news this week with one of your peers making a portfolio move into European heat pumps. Could you maybe just speak to your appetite to compete internationally, be it organically, be it inorganically? And then may be just -how much investment do you think is required to maybe reinvigorate that part of your portfolio?
Alok Maskara — Chief Executive Officer
As you know, we made a decision last year to make a portfolio move which includes divestment of our European operation. We like being laser like focused on North America HVACR business. It’s a very large industry. We have low share. I think our focus is going to help us win. So no, I think we are currently 100% committed to remaining an North America HVACR player. We still have lots of bolt-on opportunities here, whether it’s about surveys or expanding our line card, so stores can be more efficient and looking at other opportunities.
So I think for us, never say never, but currently, we like our laser focus and I think that will help us win share. That will help us through the transition. Everybody at Lennox gets up every morning and is focused on winning in North America HVACR and all our 11,000 employees focus in that direction. We are confident that’s a winning formula for us. And if you guys want to diversify for other international, you can always buy shares and other international companies.
Brett Linzey — Mizuho — Analyst
All right. Thanks a lot and best of luck.
Alok Maskara — Chief Executive Officer
Thanks.
Operator
We’ll take our next question from Steve Tusa with JPMorgan. Your line is open.
Steve Tusa — JPMorgan — Analyst
Hi, good morning. Thanks for squeezing me in.
Alok Maskara — Chief Executive Officer
Good morning, Steve.
Steve Tusa — JPMorgan — Analyst
I didn’t quite — I’m not sure I heard this before. I’ve been to a lot of calls this morning. But did you guys comment at all on how April is looking relative in resi to what you guys posted for the first quarter?
Alok Maskara — Chief Executive Officer
We don’t comment specifically on April, but I’ll tell you it’s consistent with what we expected and April is a hard month given that most of the summer sales starts in kind of May and June. But there’s nothing in April that would have caused us to change our full year outlook.
Steve Tusa — JPMorgan — Analyst
Okay. And then I think you mentioned there were some production inefficiencies in the fourth quarter on new products coming up to speed. It was my understanding that you guys didn’t really do like a major clean sheet kind of redesign for this SEER go around. I thought you were maybe taking a legacy product and you’re talking about the outdoor unit kind of advantage there. Can you maybe just explain how your product strategy kind of progressed through that?
Alok Maskara — Chief Executive Officer
Sure. So let’s start with the two segments separately, right. So on the commercial, we did redesign our product and that’s what we were referring to earlier. So we launched three new models and replaced most of legacy that included significant SKU rationalization, more modular design and more modern. So commercial, we did redesign our product line. On residential, we had to redesign our outdoor unit just because those are air conditioning and heat pump, but that’s what regulation does.
We did not re-launch an indoor unit because our indoor units are still very new. They were launched just a year or so ago and they’re already very high efficiency and they’re compatible. So we believe that gives us competitive advantage in the marketplace is that our new higher SEER air conditioning and heat pump units are backwards compatible with our existing furnaces and air handlers indoor. So that’s the piece I think the product strategy we had mentioned earlier.
Steve Tusa — JPMorgan — Analyst
Got it. Okay. And then one last one on this price increase, how much in total is the price increase? And then can you just remind us of how that works with your distribution channel? I mean, are you selling — does that price increase independent versus your captive, like is there a difference between what the contractor is seeing and what your independent distributor is seeing?
Alok Maskara — Chief Executive Officer
Yeah. We call it a targeted price increase, Steve. And I think a lot of the discussions the customers are starting now. So I’d rather not go into tons of details in that one, but the answer is we can always believe that this is a right step for us to be more competitively priced in the marketplace. From a consumer perspective, this is a small portion of the overall cost and all we’re doing is making sure we can offset inflation. You’ll notice in our full year guide we now talk about $175 million in pricing benefits. Earlier we had given a range with the high end at $175 million and we took our commodity inflation up by offsetting $10 million. So that’s kind of where we are on the numbers.
Steve Tusa — JPMorgan — Analyst
Got it. So it’s embedded in that $175 million now that your realization, whatever you expect to get in June?
Alok Maskara — Chief Executive Officer
Yeah. I mean just to remove the range and stuck with the high number.
Steve Tusa — JPMorgan — Analyst
Yeah. Okay. Great. Thank you.
Alok Maskara — Chief Executive Officer
Thanks, Steve.
Operator
And we’ll take our next question from Chirag Patel with Jefferies. Your line is open.
Chirag Patel — Jefferies — Analyst
Thanks. So I just wanted to cover the Allied piece just one more kind of a blush here. One, I was just kind of looking at what the opportunity kind of seems like for you guys over time. I know in the past, we’ve talked about the idea of share gains of $300 million or so to get to that 2025 target. How much of that is Allied? Where do you kind of see the growth? Is there acceleration opportunity in that? Is there opportunity to partner with additional distribution channels to kind of expand our product? Just trying to get a little bit more sense for where you see is that particular piece of the business growing versus the core Lennox brand.
Alok Maskara — Chief Executive Officer
So first of all, we’re very proud of Allied. I mean, they have done great over the past many years. I mean, the business has grown up 4 times. I mean, the margins have expanded beautifully. And I think Joe Nassab and the team have done a fabulous job taking that. At the same time, we don’t think we’re anywhere close to being done. We have significant room for improvement. I can easily see that business doubling again over the next five years as we continue to add distributors, have a very focused product portfolio that wins a lot of awards and we truly focus on best serving these independent distributors.
So excited about Allied. We think there’s a lot of growth potential ahead. At the same time, I don’t want to break down $300 million an opportunity between business A and B. Ideally, both of them will get it, right? I mean, ideally, we both get the $300 million targets and we deliver more to the shareholders. We’re super excited about Allied. I think the shared gain opportunities are in direct and in indirect. And we will keep driving both of them.
Chirag Patel — Jefferies — Analyst
I appreciate that. Would there be a mixed shift if that were to grow a little bit faster or slower on the margin side I just mean?
Alok Maskara — Chief Executive Officer
No. And we don’t break-out margins. I just — we remain committed to 20% margin on residential overall and it’s hard to kind of break-down margin artificially because remember we share the same infrastructure for manufacturing, product development and all of that. So that just becomes allocation game, right?
Chirag Patel — Jefferies — Analyst
Okay. Thank you.
Operator
[Operator Closing Remarks]