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Operator
Ladies and gentlemen, thank you for standing by.
Welcome to the Lennox International Q4 2010 earnings conference call.
At the request of your host, all lines are in listen-only mode.
There will be a question-and-answer session at the end of the presentation.
As a reminder this call is being recorded.
I would now like to turn the conference over to Steve Harrison, Vice President Investor Relations.
Please go ahead.
- VP- IR
Good morning.
Thank you for joining us for this review of Lennox International's financial performance for the fourth quarter and full-year 2010.
I'm here today with Todd Bluedorn, CEO, and Bob Hau, CFO.
Todd will review highlights for the quarter and year and Bob will take you through the Company's financial performance.
An 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 corporate 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 us a better understanding of our operations, we will be making certain Forward-looking statements.
These statements are subject to numerous risk and uncertainties that could cause actual results to differ materially from such statements.
For information concerning these risk 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 the CEO, Todd Bluedorn.
- CEO
Thanks, Steve.
Good morning and thanks, everyone for joining us.
Let me touch on several highlights and then Bob will walk you through the financial details for the quarter and the year.
2010 marked return of growth for each of our end markets.
As we expected, the Residential market was up in 2010 while the Commercial and Refrigeration markets rebounded earlier than expected and were up for the year as well.
For 2010 overall, our revenue from Residential was up 10%, Service Experts was up 10%, Refrigeration was up 7% and Commercial was up 4%.
General Company revenue grew 9% for the full year.
On the profitability front, the EBIT margin was up 120 basis points to 7% for the year.
This is the same margin level as in 2006 for the Company but we achieved it at $566 million less in revenue than in 2006.
We continue on track with our target of 10.5% EBIT margin for the Company at the $3.8 billion revenue level.
Looking at the profit margin of each of our business segment for 2010, Residential increased 70 basis points at 9.3% for the year, Commercial was up 290 basis points to 11.2%, Service Experts was up 20 basis points to 3.3% and Refrigeration was up 160 basis points to 11.1%.
For the year, the adjusted EPS from continuing operations grew 36% and GAAP EPS was up 93%.
Our profit growth for the year was driven by higher volumes as end markets recovered, favorable price mix on the strength of our new product introductions, savings from our Global sourcing programs, saving from our restructuring initiatives and leverage on SG&A.
In 2010 we generated $186 million in cash from operations.
Free cash flow at $140 million was up-- was120% of GAAP net income.
For the year we bought back $144 million of stock and increased our dividend 7%.
We also engaged in our first acquisition of size in quite awhile with $138 million purchase of Kaiser/Warren, expanding our Refrigeration business in North America.
The acquisition closed on January 14 of 2011.
Turning to the fourth quarter, Company revenue is up 4%.
Total segment profit margin was 6.4%, down from 7.1% in the prior year quarter primarily due as expected to higher commodity costs.
Adjusted EPS was down 5% in the fourth quarter versus a year ago while GAAP EPS was up 200%.
Residential lead revenue growth in the quarter of 9%.
This is better than expected against the tough comparison of fourth-quarter 2009 when the Residential market first returned to growth.
As previously mentioned, the fourth quarter got off to a slow start due to the warmer than normal weather in October.
But December turned cooler than normal which was good for a strong finish for the quarter.
We believe there was some buying ahead of the expiration of the $1500 High-efficiency tax credit at the end of the year.
The tax credit will be at the $500 level in 2011.
We also saw some pull forward of demand in both Heating and Cooling product ahead of our announced price increases, which became effective January 1.
While these effects helped us in fourth quarter, we expect it will be somewhat at the expense of the first quarter.
For those of you not as familiar with HVAC industry, the first quarter is always a late seasonal period for us in the context of shipments and earnings for the full year.
Service Experts revenue was down 1% in the fourth quarter due to the difficult comparison to a year ago in the Canadian market where we have a significant business.
However, in Commercial Services we continue to do well with National accounts and grew revenues double digit again in the quarter.
Turning to our Commercial equipment business, after significant growth in plan replacement business with our Retail National accounts in the second and third quarter, we saw plan replacement growth flatten out year-over-year in front of the holiday season.
Given solid Retail sales over the holidays and continued strength in Retail sales in January, we remain confident we will continue to see growth in Retail National accounts business in 2011.
Europe HVAC revenue was up double digits at constant currency and was profitable for the third consecutive quarter as well as for the full year.
Following our restructuring activities in Europe through the downturn, we like our footprint and business model in that region and are well positioned as the market continues to show improvement.
Now Refrigeration business for the fourth quarter, revenue for North America and Europe was up double digit at constant currency as we continue to see strength in these markets.
Australia however was down more than 20% in constant currency due to our strategic exit of the third party Coil business, as well as the wet cool summer season in Australia.
The Kysor/Warren acquisition has been going well since we closed in mid-January.
And in 2011, Kysor/Warren has a very strong backlog position driven by the success of it's new STRATUS line of energy efficient display cases.
We are excited to have Kysor/Warren on board as part of the Lennox International team.
Now I'll turn it over to Bob.
- CFO
Thank you, Todd and good morning, everyone.
I'll now provide some additional commentary on the business segments for the quarter and full year starting with Residential Heating & Cooling.
In the fourth quarter revenue from Residential Heating & Cooling was $349 million, up 9%.
Volume was up 4% and price and mix were up 4%.
Currency had a 1% positive impact.
Volume was up on solid replacement business despite the difficult comparison with the prior year quarter.
Price and mix were favorable on the strength of our new furnace platform introduced this year.
The segment profit was $34 million, down 12%.
Segment profit margin was 9.6%, down 230 basis points from the fourth quarter a year ago primarily due to higher commodity costs and distribution investments.
For the full year, Residential segment revenue was $1.4 billion, up 10%, including a 1 point favorable impact from currency.
Volume was up 8% and price and mix were up 1%.
Segment profit was $132 million, up 18%.
Segment profit margin was 9.3%, up 70 basis points.
Turning to our Commercial Heating & Cooling business, in the fourth quarter revenue from the Commercial business was $148 million, up 2%.
Volume was flat and price and mix were up 4%.
Currency had a negative 2% impact.
Segment profit was $13 million, up 20%, and segment profit margin was 8.8%, up 130 basis points from the prior year quarter.
Headwind from commodities was more than offset by favorable price and mix.
Our North American Commercial HVAC revenue was flat in the fourth quarter versus a year ago and European Commercial HVAC revenue growth was up double digits at constant currency.
For the full year, revenue in the Commercial segment was $620 million, up 4%.
Volume was up 3% and price and mix were up 2%.
Currency had a 1% negative impact.
Segment profit was $69 million, up 41% and segment profit margin was 11.2%, up 290 basis points.
Moving to our Service Experts business, in the fourth quarter revenue was $145 million, down 1%.
Volume was down 5% and price and mix were up 3%.
Currency had a 1% positive impact.
Residential replacement business was soft in the quarter while Commercial Services showed strong growth.
Segment profit was $5 million, down 28%, and segment profit margin was 3.5%, down 130 basis points.
Segment profit is down due to investment in our Commercial Services expansion as well as some bad debt expenses in the quarter.
For the full year, revenue in Service Experts was $590 million, up 10%.
Volume was up 5% and price and mix were up 3%.
Currency had a positive 2% impact.
Segment profit for the year was $19 million, up 16%, and segment profit margin was 3.3%, up 20 basis points.
In our Refrigeration segment, revenue in the fourth quarter was $139 million, down 3%.
Volume was down 7% and price and mix were up 2%.
Currency had a positive 2% impact.
Adjusting for the strategic exit of the third party Coil business in Australia, revenue would have been up slightly.
In constant currency North America and Europe saw double-digit revenue growth while other regions were flat to down.
Segment profit was $14 million, down 13%, and segment profit margin was 10%, down 120 basis points from fourth quarter a year ago primarily on higher commodity costs.
For the full year, revenue in the Refrigeration segment was $551 million, up 7%.
Volume was up 1% and price and mix were up 1%.
Currency had a positive 5% impact.
Segment profit was $61 million, up 26%, segment profit margin was 11.1%, up 160 basis points.
Looking at special items in the fourth quarter, the Company had net after-tax charges of $2.4 million.
This includes $2.8 million for the Kysor/Warren acquisition expenses and $400,000 in other gains.
For the full year, Lennox had after-- excuse me, net after-tax special charges of $16.7 million from restructuring activities and other items.
This impacted GAAP EPS from continuing operations by $0.30.
Corporate expenses were $17 million in the fourth quarter, down from $20 million in the prior year quarter.
For the full year, corporate expenses were $66 million, up from $63 million in 2009.
For 2011 our corporate expense guidance remains approximately $70 million.
SG&A was $173 million in the fourth quarter, up 1% from the prior year quarter.
And for all of 2010, SG&A was up 6%, primarily from higher selling expenses and variable incentive compensation.
Cash from operations was 168-- excuse me, $186 million for the full year, versus $225 million last year.
For the fourth quarter, cash from operations was $142 million compared to $12 million from the year ago quarter.
Cash from operations was up due to higher net income and improvements in working capital.
And in addition, the prior year quarter included $25 million of pension contribution and a $30 million repayment of an asset secularization line.
Capital spending was $46 million in 2010 compared to $59 million in 2009.
And free cash flow was $140 million for the full year compared to $167 million in the prior year.
Working capital as a percent of trailing 12-month sales for the Company was 17%, down from 18.2% in the year ago period.
The quarter end working capital ratio was 15.5% down from 16% at the end of the prior year.
Looking at liquidity, cash and cash equivalents were $160 million at the end of December.
Our debt to EBITDA ratio was 1.2 ending the year.
After paying for Kysor/Warren acquisition in mid-january, our debt to EBITDA ration will be close to the midpoint of our target range of 1 to 2 times.
Our total debt was $319 million at the end of the year, up from $232 million a year ago.
In the fourth quarter we payed down $52 million of debt.
We continue to be well positioned with our balance sheet to continue executing on our strategic initiatives and returning cash to shareholders.
We will do this through M&A as with the Kysor/Warren acquisition and through dividends and stocks repurchases.
Although blacked out from repurchasing stock in the fourth quarter due to the pending Kysor/Warren acquisition, we did repurchase $155 million of stock in 2010.
We are targeting at least $100 million of stock buyback in 2011.
At the end of fourth quarter, we had $141 million remaining under our current stock purchase reauthorization.
Before I turn it over to Q&A, I'll briefly talk about our outlook for 2011.
One month into the new year, our market assumptions remain for 2011 the same as discussed at the Analyst Day in mid-December.
We expect a North American Residential market to be up low-single digits.
We expect North American Commercial unitary to be up mid-single digits.
And we expect Europe HVAC and Refrigeration markets to be up mid-single digits as well.
Based on these assumptions, our guidance for organic revenue growth is 5% to 8% including 1 point of positive Foreign Exchange impact.
Including 6 points of growth from the Kysor/Warren acquisition, our revenue growth guidance is 11% to 14% on an as reported basis.
With commodity prices running higher since our original guidance was set, we now expect commodity headwind in 2011 of $40 million to $45 million, up from the prior range of $15 million to $20 million.
The year-over-year comparison is more difficult in the first half since commodities are a headwind for us now but were a tailwind in the first half of last year.
As previously announced, we have taken pricing actions for 2011 and remain confident in offsetting commodity headwind on a full-year basis.
We reiterate our 2011 guidance for adjusted EPS from continuing operations of $2.80 to $3.10.
Our GAAP EPS guidance range remains $2.75 to $3.05, including the impact of announced restructuring.
As Todd mentioned earlier, we believe there was some pull forward of demand in fourth quarter from the first quarter.
Traditionally the first quarter is seasonably light for us and we expect that to be especially true this year given the strength of the fourth quarter and slower start in January.
On average, our weighted share count for the full year is 54 to 55 million shares and we expect our full-year tax rate to be approximately 35%.
For capital spending we expect about $65 million in 2011, focused on new product introductions and continuing transformational investments in the business.
With that, let's go to Q&A.
Operator
(Operator Instructions)We have a question from the line of Robert Barry, UBS.
Please go ahead.
- Analyst
Hi, guys, good morning.
- CEO
Hi, how are you, Robert?
- Analyst
Good, good.
So did you say that, at the Analyst Day I think you said that commodities was about a $15 million to $20 million headwind and now it's $40 million, $45 million?
- CEO
Correct.
- Analyst
And is the delta over the past 6 weeks or so, is that all just the rise in the spot or is there anything else going on there?
- CEO
No, it's a rise-- well it's a rise in the spot of Copper, which is, as everyone knows, has gone from about $3.80 to $4.50 on the spot, and so our projections out of what the spots going to be there in the second half of the year.
Just let me tie off on Copper for a second.
As we sit today, we're about two-thirds hedged for 2011 and we've follow our traditional hedging policy of where we start hedging 18 months out, so we're about two-thirds hedged as we sit here in February.
We also saw a run up on Steel prices.
From where we were sitting in December at the analyst day til now, the CRU pricing, up about 15% and our estimate on full-year commodities reflects that.
- Analyst
Okay.
Could you tell us actually what your estimate is for the year for pricing and Steel?
- CEO
We don't publicly sort of give the exact Steel numbers to be honest with you.
And it's complicated formula given all our different mixes of grades of Steel.
- Analyst
And given the guidance stay to flat, is an expectation that you can get better pricing than I guess you even expected back in December, it's a full offset of that or are there other things that might be offsetting that incremental commodity as well?
- CEO
We're confident we can offset the commodity headwind with price.
And we think about it in the following way.
I mean we announce a price umbrella to the marketplace 2% to 8%, and then you can imagine underneath that umbrella there's a lot of [toing] and [froing] with customers.
And when we saw commodity-- we announced a high enough umbrella to cover additional bad news, we've seen some of that bad news on commodities, and our sales force are focused on getting the price yield that we need to cover commodities and we're real confident that we're going to be able to do that.
- Analyst
Okay, and just to clarify, that went into effect Jan 1 and was that across all the businesses?
- CEO
Jan 1 across all the businesses accept for Refrigeration in North America, and I believe that's effective, Bob?
- CFO
End of March.
- CEO
I think end of March in Refrigeration.
- Analyst
Okay, excellent.
Thanks very much.
- CEO
Thanks.
Operator
We have a question from the line of Steve Tusa with JPMorgan.
Please go ahead.
- CFO
Are you there Steve?
Operator
Your line is open, Steve Tusa.
- VP- IR
Next call, please, Operator.
Operator
We have a question from the line of Jeff Hammond, KeyBanc Capital markets.
Please go ahead.
- Analyst
Hi, good morning, guys.
- CEO
Hi, Jeff.
- CFO
Good morning, Jeff.
- Analyst
Maybe just to go at the commodity issue a little bit different, so if you look versus December, you raised your commodity inflation number by $25 million, and the revenue guidance is unchanged, is this-- should we look at you eating up some cushion in contingency or are there other things you're doing to kind of offset that?
Or does this kind of shade us to the lower end of the range?
I just want to-- I'm trying to understand some of the moving pieces.
- CEO
On the revenue line or on the EPS line?
- Analyst
Just I mean if-- yes, on the EPS line just versus your initial outlook to now, it seems like the only change is really the commodity inflation, yet the EPS is unchanged.
- CEO
I would-- there was no intent to shade to the low end of the full-year EPS range.
- Analyst
Okay.
- CEO
So sort of our intent when we gave it quite frankly was for people to think about the middle point of the range we gave and we're unmoved from that.
I think it's just simple as the commodities have gone up, they've gone up for everyone in the industry, the industry has a track record of being able to pass on in the marketplace to offset it.
We and everyone else in this industry have announced price increases that could clearly offset the commodities that we currently see, it's a matter of getting the yield in the marketplace and we're confident that we'll do that.
- Analyst
Okay, so the offset rally to the $25 million, is that you think you'll maybe be able to get maybe better realization on your price increase than you would have may be planned for a couple of months ago?
- CEO
Yes.
- Analyst
Okay.
And then-- and that does not require you to go back to the market for another price increase if things kind of stabilize here?
- CEO
The plan right now is if they stabilize here, we won't have to.
But again all options are on the table, so if it continues to increase we'll clearly go back to the market to get more price.
- Analyst
Okay and then just on Steel, I think you've seen some inflation in your Steel, but if you go back to the past cycle, there were surcharges and contracts kind of being changed out.
Are you saying that happen again or how has steel been moving?
- CEO
We're buying Steel differently than we did on the last spike up.
The last spike up we had LTAs with fixed pricing and so the game was, with everyone was, to announce surcharges and threaten delivery and so in effect to rip up the LTAs.
What we have now-- the way we buy Steel now is on a lagging quarter CRU pricing for our mix of Steel with a discount that we've negotiated with the mills and the service centers.
So the answer is we're seeing it in the price, not on any surcharges or sort of the other ways that they did it couple years ago.
- Analyst
Okay.
Okay, that's helpful.
And then just final question, I know you don't give quarterly guidance, but you talked about commodities being a bigger headwind in the front half of the year, and I think you talked about some of the pull forward out of 1Q into 4Q.
Can you just give us a sense of, do we make money in the first quarter?
And then if you think of the 17% to 29% EPS growth for the full year, how does maybe the front half earnings growth look like versus the back half?
- CEO
I understand the question, and I'll talk here but I'm not sure I'm going to answer the question other than what I've said.
I'm mean it's-- we're confident in the full year, as I said earlier, on the midpoint of our guidance, if you had to stick a stake in the ground.
As we said on the call, there was clearly some pull ahead just not for us but for the industry.
Commodities impact is going to be 60% first half of the year, 40% second half of the year, and so more commodity headwind.
And first quarter is our seasonably lowest quarter.
So we're confident on the full year, but I think you hear what we're saying.
- Analyst
Okay.
Thanks, guys.
I'll get back in queue.
- CEO
Thanks.
- CFO
Thanks, Jeff.
Operator
You have questions from the line of Robert Wertheimer with Morgan Stanley.
Please go ahead.
- Analyst
Hi, good morning, everybody.
- CEO
Hi, Robert, how are you?
- Analyst
Good, thank you.
I want to apologize in advance you're going to get tired of the commodity questions I guess.
But commodity headwind worse in 1H, I'm not sure I understand why that is given your consistent hedging policy, that I would have thought that 1H would have been half covered or covered or whatever, and then 2H would have (inaudible).
- CEO
I think it's just a matter of looking over a multi-year period what happened.
So last year, given our hedging policies, we actually had tailwind during the first half of last year.
In other words we were buying Copper at lower pricing than we did the prior year.
And then as sort of-- and in the second half of the year we had significant headwind year over year.
As we flip into this year, it's more predominantly the first half of the year on a year-over-year comparison that the GAAP on commodity prices is higher during than the first half of the year rather than the second half.
- Analyst
Makes sense.
And then I assume you're hedging philosophy is unchanged even as the commodity spiked, you're not going to take a bet by not hedging?
- CEO
Correct.
We're agnostic.
- Analyst
I'm not sure you've ever said how many pounds of Copper and Aluminum you do, I've tried to guess that, I think you've told me, I may or may not feel that close.
It still seems like your commodities ought to be up more than $45 million year over year, and so I wonder if you're getting material saves on sourcing otherwise.
I mean are you able to-- the raw number what would have been up if you weren't doing better sourcing?
- CEO
I think $45 million is a big number and we're going to cover it with pricing.
But the short answer is, what's included in that number is the raw commodities that we buy, Steel, Copper and Aluminum, as well as our component purchases, we have some contracts where we have escalators that are tied to commodities, and that's all sort of all lumped into that $45 million.
There is another bucket of cost that we've talked about continuously and we talked about most recently in December of cost savings of material and that still remain solid, that's still the $25 million to $30 million that we've talked about, and that's taking the raw commodities out.
So that's reduction in our component pricing, ignoring the commodity escalators that we've already negotiated.
- Analyst
The $45 million is raw, okay.
And if I can just ask one more, Todd, just generally speaking if you could talk about how the pricing environment evolves, I mean the industry has been very disciplined.
Historically do price increases announced, is the hard part getting the announced price increase through with everybody in the beginning of the year, is it March when you start to actually sell more units, is it at the dealer level, the Distributor level or the Retail, the Consumer level that what the hard part is?
- CEO
Your question was Residential focused, so I'll answer Res, which obviously slightly different than the Commercial businesses.
On the Res side, it's about announcing it and then it's about having the discipline, the processes to drive the yield during the year.
Because, in other words, you have, as any business, you have sort of a price book but you have discretion during the year where you can sort of deviate from pricing, and we're clear this year that there's a lot less deviation we can do.
And so in essence it's making everyone take the price increase.
On the Commercial side of the business, it's a little bit different as you can imagine where we're negotiating with some very large customers where are multi-year agreements, and so with some of our larger customers we have multi-year agreements, we give some-- the day we announced a price increase on January 1, all our national account customers aren't taking that and we work through with them customer by customer on the timing.
- Analyst
I'll stop there and get back in line.
Thank you very much.
Operator
We have a question from the line of Steve Tusa with JPMorgan.
Please go ahead.
- Analyst
Hi, good morning.
- CEO
Good morning, Steve.
- Analyst
I just wanted to walk through the pricing.
So just tell me if I'm off on this, if this is the right way to think about it.
So to cover the $45 million in your product business, you need about 2% of price to cover that if you strip out Service Experts?
- CEO
Order of magnitude, maybe a little less, but order of magnitude.
- Analyst
Okay.
You guys have announced 4% to 8% in Resi and 2% to 6% in Commercial.
So if I just kind of split that up and assume you get 50% of each of those announced price increases, is that the right way to kind of think about how you're looking at this?
- CEO
That's the right math.
- Analyst
Okay, and then I just wanted to make sure that I had all these numbers.
So the $45 million, that's just on the raw or that's -- what are you seeing on the components side?
I think you've said that 75% of your metals related by is components and then the 25% is raw.
I'm sorry, I might have missed this I was on another call, but is the $45 million just the raw or is that including components?
- CEO
The $45 million includes the raw.
It also includes the portion of the components where we have contractual escalators for commodities.
- Analyst
Okay, got you, got you.
What percentage of that components is escalators-- has escalators in it?
- CEO
I understand the question, I'm not going to answer it.
- Analyst
Okay, what are you seeing from the motors and the compressor guys, I mean are you seeing the same type of increases that you guys have or are they more than that or what's the pricing like from those guys?
- CEO
Competition is a great thing, and I think our strategy over the last 3 or 4 years of building more competitive supply base, going to Asia, getting Chinese competitors, getting Korean competitors helps a lot.
And so I was careful on my words, it's sort of contractual where we sort of have a contract, we will honor it maybe with some fighting and screaming, but we'll honor it.
Where we don't have a contract on commodity escalators, we'll use the competitive marketplace to not have to pass that on to our customers.
- Analyst
With regards to, obviously compressors are a huge part of your buy here, with regards to compressors, is there a- do these rolling contracts, or do you sign a three year contract with Copeland at some point with escalators, or how does those negotiations work and are you looking at different compression suppliers-(inaudible) again?
- CEO
I don't want to get too much in detail about our compression strategy.
We have a long-standing relationship Copeland/Emerson in a joint venture for Scroll compression for North America, and so we have firm agreements on how we handle pricing.
And with our other Compression suppliers around the world, we continue to negotiate and fine tune how we want to handle things.
- Analyst
Okay, one last question, sorry to take up so much of the time.
Refrigeration margin was clearly disappointing this quarter, I think it was a bit of a surprise for us.
You said most of the commodity hit was there, how does Refrigeration margin kind of play out next year, and of the $45 million, what's coming in Refrigeration?
And should we think about the price increases there I guess are a little bit less visible to us, do we think about the same type of dynamics in Refrigeration as we do in your Commercial business from a price perspective?
- CEO
Let me broaden my comments and then I'll address the question I think the question that you asked.
More broadly about Refrigeration, when I think about the reasons for the margins being down in the fourth quarter, I think it's clearly 2 things.
One is we had significant volume drop in Australia.
And in our Refrigeration business that's not an insignificant impact, that's-- it's a $200 million US dollar business for us and so for our Refrigeration business that's a material piece.
And it was down 20% on a constant FX basis, that's in part because of a business that we exited, it's also in part because just the core business in Australia, obviously they're a flip cycle from us and it's been a very slow summer for them.
I think people probably saw some of the floods on TV, so it's been a very wet and cool summer, that hurt us because we make good margins in Australia business.
The second piece was the commodity impact.
Our Refrigeration business is no more impacted, broadly speaking than our other equipment businesses.
And so I'd sort of tend to think about the $45 million being spread across the businesses based on volume.
And the strategy for Refrigeration in 2011 on price is the same as the other 2 equipment businesses.
They've announced a 4% price increase effective, as Bob said, in March, and we're going to drive to yield against that price increase.
- Analyst
Okay and then one last question, sorry.
What do you think-- what kind of volumes do you think were pre-bought in the fourth quarter?
How much was pulled into the fourth quarter, it's kind of a seasonally light quarter, so even though you're up 9%, that's great, but on an annual basis, even if it was all pre-buy, it's really-- it doesn't seem to be that big of a deal.
So how much do you-- how much of demand do you really think was pulled into-- what would it have been without the pre-buy, would it have been down?
- CEO
That's a great way to frame the question.
The answer is I don't think it would have been down, but I honestly don't know how much is pulled forward.
I mean it's clear that some was, and as much from the price increase as from the tax credit.
So short answer is, some was pulled forward.
And the other thing I would say about first quarter, is the weather right now across the country here in February is not helping either in the sense of, it's tough to get equipment moving right now given everything that's happening on the weather in the country also.
- Analyst
Yes, sure.
So it's a 1Q issue.
Okay, guys thanks a lot.
I really appreciate all the detail, sorry I took up so much time.
- CEO
Thanks.
Operator
We have a question from the line of Keith Hughes with Sun Trust.
Please go ahead.
- Analyst
Okay, enough on the commodities.
On special--
- CEO
Compared to some of the companies you cover, we're in good shape probably, Keith.
- Analyst
You can say that again.
The-- on the Commercial now you had said in the prepared comments Europe was up double digits and you had saw a pause in your Retail replacement, is that correct?
- CEO
Correct.
- Analyst
Is that-- is that pause is that going to continue into the first half of the year, any sort of view you have on that?
- CEO
I think it's just a pause because of the holiday season.
I mean our-- what we saw in second and third quarter was major retailers, not emergency replacement, but for planned replacements, let's upgrade these stores proactively to lower our operating costs.
And retailers just don't do those sort of things in the holiday season or very close to the holiday season.
So fourth quarter tends to flatten out.
We saw that this year in our conversations with our retailers in our major national accounts as we roll into 2011, we continue to be optimistic and consistent with the guidance that we gave in December which is a mid single-digit increase.
- Analyst
Of that mid single-digit increase, would you anticipate that Europe and the United States would look relatively similar or is it-- is Europe going to be the leader here?
- CEO
I think in our minds we sort of have them calibrated about the same way.
I mean we had a strong up tick in Europe last year, quite frankly it continues to defy sort of common expectations given the uncertainties and sovereign debts in Europe.
But the short answer is, big picture guidance, we're tracking both of them about the same.
- Analyst
Okay.
And the-- you targeted $100 million of share repurchase.
Could you just remind us, when you look at share repurchase, are you trying to do this on a consistent basis, are you looking for dips in the stock, what's the methodology there?
- CEO
Yes, and again I think the exact words Bob used was at a minimum we would do $100 million.
And the way we'd do it is as you suggested, which is-- I think we're a steel at $50 also but-- so we just tend to dollar cost average it.
- Analyst
Thank you.
- CEO
Thanks.
Operator
We have a question from the line of Glenn Wortman from Sidoti & Company.
Please go ahead.
- Analyst
Yes, good morning, everyone.
- CEO
Hi, Glenn.
- CFO
Good morning, Glenn.
- Analyst
Just ask the pricing question a little differently, how many percentage points of price are included in your guidance?
- CEO
I understand it and again I'll just reiterate what we said, which is, we think-- we're real confident we can offset the $45 million commodity cost increase.
- Analyst
Okay.
And then you did explain why Residential was so strong in 4Q as some [buyage], do you think there was any pickup in share during the quarter?
- CEO
I think the short answer is, yes, we probably gained a little bit of share.
I think the longer answer is, it's tough to look at share in Residential on a quarterly snapshot because of the difference in distribution, whose loading, whose unloading, who sells directly to customers.
I think it's broadly-- more broadly speaking on a full-year basis is what I've said before, I think we gained some share on the Lennox brands and lost share on our low end Allied brands.
- Analyst
Okay and then just lastly, looking at Commercial in 2011, can you just maybe give us a better sense of how you expect your various end markets to play out in Retail education, and the ways you've got to strengthen relative weakness?
- CEO
We continue to be optimistic about the verticals that are most important to us.
And so as I said earlier, we continue to be optimistic about the National account Retail end of our market.
We continue to think Schools, at least for us, will continue to be a growth market as we continue to make penetration with our energy and it's rooftop product.
We also continue to be focused as we have been for several years now but continue to make investments in physical distribution for the at once replacement market which are sort of broader end markets.
But it's the customer who has a unit, emergency replacement breaks and needs it replaced.
So we continue to make investments in physical distribution inventory in the field for our at once replacement and our landmark product that we came out with last year, is it the right configuration and price point to compete in that market against the industry leader Carrier.
- Analyst
All right, thanks for taking my questions.
- CEO
Thanks.
Operator
We have a question from the line of Adam Samuelson with Goldman Sachs.
Please go ahead.
- Analyst
Yes, good morning.
I want to-- a lot of ground has been covered here, but I first want to talk about your view on channel inventories.
Obviously entering the year you had a strong December dealers pulling up product, but where do you think the inventory in the channel is today and how do you think that's positioned as we get into the March, April period when dealers and distributors make a call on spring demand?
- CEO
I think from where we sit, we're in very good shape.
As you know, 80% of our business that are Lennox brands, we sell-- we own our own distributors and we sell to dealers.
Even when dealers pull forward some, dealers don't carry much inventory.
And so some of the larger ones made some buys, but all that as we go into the selling season will clearly be flushed out.
And then on our 20% of our Allied brands that sell through independent distribution, their distributors continue to be cautiously optimistic, but they-- while they bought some ahead of the price increase, and the energy efficiency tax credit really didn't affect them because it had to be installed by the end of the year and so they weren't buying inventory, they're buying inventory ahead of the price increase.
But again their-- the channels remain lean, and we'll-- if end use demand picks up as we expect, we'll see it in our shipments.
- Analyst
Okay, that's helpful.
And then shifting gears, I just wanted to talk a little bit more on the Commercial side and maybe talk about the competitive landscape you've seen Goodman make a bigger effort to push into Commercial, you've been strong with national accounts, maybe talk about how you think the competitive landscape in the Commercial side has shifted at all, and how Lennox brand is positioned?
- CEO
I think we're very well positioned with National accounts.
And competing with National accounts, as we've talked about, I mean it's the whole business model that you have, so it's having the right product around energy efficiency and serviceability that reduces lifecycle cost for the owner.
It's having flexibility around configure to order, in some cases engineered to order products.
In other words, these large customers, they want what they want, not what we have, so whatever they want, we will in effect give them, to- if they're listening, with some caveats.
And then have a manufacturing process that allows you to have a couple week lead time on these very exotic, if you will, orders and then having a field force that gets the equipment there at the right time with no delays.
And so if Wal-Mart is looking to open a store, they don't want to have it delayed because we couldn't get our unit there on time.
So all that has to be in the channel to be able to compete.
My experience in the industry is to do that, you have to make investments over multiple years and consistently continue to invest in your business, and we've done that at Lennox.
I think others get in and out of it.
So it's more than having a product that you display at an ASHRAE show, it's all those things that I mentioned that takes years to build the muscle.
- Analyst
Yes, sure that all makes a lot of sense.
Thanks very much for the time.
- CEO
Thanks.
Operator
We have a question from the line of Joe Gagan with Atlantic Equity Research.
Please go ahead.
- Analyst
Yes, I just have a couple of questions.
Did you lower any reserves this quarter like a Bad Debt reserve or inventory reserve or a Warranty reserve or something like that?
- CFO
Yes, Joe, this is Bob.
Across the board, obviously we look at all of our reserves at the end of the year to make sure we're trued up and accurate from an accounting perspective.
Nothing of any particular sense, we actually took some small bad debt charges, so increasing the reserve for some bankruptcies in our Commercial services business as well as a couple of other places.
From an inventory standpoint, at the end of the year, we look at our LIFO reserve as part of our standard practice.
So nothing of any particular substance one way or another.
- Analyst
Okay.
And then now you said that the commodity headwinds going to be $40 million to $45 million, and Copper went up like 19% , 20% since September, and has gone up $1.70 a pound in Q1 2009 to $4.20 recently.
Why is the community headwind only $40 million to $45 million?
It just-- mathematically it does-- it seems kind of small based on what percentage of your cost is sold as raw material and how big your business is.
So my question is why is it so
- CFO
Because that's how the math works.
I don't-- I mean it-- what we do is our hedging policy that we described and so everything is not at the current price, I mean we're hedged out 18 months, number 1.
Number 2, is our commodities are Copper, Steel and Aluminum, probably in that order of priority.
And Aluminum and Steel may have behaved differently than Copper although they're both up.
So I mean it's-- it is what it is.
- Analyst
And the last question I have is, somebody, I forgot which one of you said earlier that the industry has had the ability to raise prices.
And when I compare your industry to others, the 3-- my feedback is the opposite, that your industry is very competitive and there's like little to no pricing power.
Like last year, I think there is no pricing power.
In 2008 when commodities were going up, it was-- you raised prices like 5%.
So is that how you want to depict it, I mean that your industry has good pricing power, and you can raise prices, is that how you want to present it?
- CFO
That's not how I want to present it, that's how it is.
I mean in 2008 in the midst of the madness, when Copper and Steel went up, we announced as you suggested a 2% to 5% price increase, we got it to stick, so did the industry.
If you look over time, we've been an industry that's been able to get price to offset commodities over the cycle of the business.
So it's not how I'm presenting it, it's how it is.
- Analyst
Okay.
All right, thank you.
- CFO
Thanks.
Operator
We have a question from the line of Michael Coleman with Sterne, Agee.
Please go ahead.
- Analyst
Hi, good morning.
- CEO
Hello, Michael, how are you?
- Analyst
Doing well.
We've covered price and cost, I wanted to go to some other components of the walk.
In terms of 2010, you had some outsized operating expense increases due to reinstatement of benefits and so forth.
I think at the beginning of the year it was targeted at about $30 million, maybe you did a little bit better.
But how does that look on an incremental basis in 2011?
- CEO
I don't remember giving the $30 million, so I'll answer the question but I'm not taking ownership for the $30 million.
I think you will see our SG&A was up 6% year over year and our sales were up 9%.
And what we said over long term, our target was to have SG&A grow no more than half of revenue growth.
And the fact that we were a bit more SG&A growth this year than half of our revenue growth although less than our revenue growth was because we were reinstating things like sales guys are getting commissions and our Executives were getting bonus payments at the end of the year.
- Analyst
So I guess on a year-over-year basis though, this is not an incremental headwind?
- CEO
2009 to 2010?
- Analyst
2010 to 2011, yes.
- CEO
No, 2010, 2011, I don't view it as an incremental headwind.
I think we, for lack of a better phrase, reloaded in 2010, so year over year it's no more headwind than any other normal year.
- Analyst
Okay.
What are you targeting in terms of restructuring benefits in the coming year?
Was it-- I believe it might have been $5 million, is there an update on that?
- CEO
I'm looking around the room to make sure I got the right answer.
- CFO
$5 million is what we suggested back in the December analyst meeting in New York and that is consistent, no new restructuring projects announced.
- Analyst
Okay.
In the second quarter of 2010, you had a favorable Warranty reserve of about $6 million.
I think it was a headwind on the year-over-year basis by $4 million.
Is there-- do you have any kind of view into the second quarter of 2011 on what that Warranty reserve might look like this year (inaudible) cost adjustment?
- CEO
Short answers, no.
Longer answer is, we do all of the accounting that you'd expect us to do with our auditor, KPMG.
The good news is, in 2010 that reflected all the improvements quite frankly we've done in product quality both in design and in manufacturing.
But as you can imagine, very confiscated analysis.
And anytime we true it up, we assume we're truing it up forever at the right spot, that's sort of the definition of how you do accounting, right, and so we'll see how the year plays out.
- Analyst
Okay.
And on Kysor/Warren, is there an estimate for amortization for 2011 associated with Kysor/Warren?
- CFO
What we've said was that the benefit for Kysor/Warren would be about $0.03 overall, we didn't get into details specifics about the amortization, obviously you can go through the typical acquisition accounting and you amortize off the step up, et cetera.
But overall we expect a net $0.03, which is included in our overall guidance range up $2.80 to $3.10.
- Analyst
Okay.
One last question, the working capital turns improved.
As you kind of look at your working capital today, and what do you see as potential sources of further improvement or do you think that working capital as a percent of your trailing 12-month sales has been brought down to above industry benchmarks and so forth?
- CEO
No, I don't think it's above industry benchmarks.
We continue to think we have lots of opportunity both in inventory and receivables and working with our supply base, whether it's 3 PL or consignment to drive down payables.
So we're excited by the progress we've had in the last few years, and quite frankly we're excited to have ended the year at 120% of net income when our revenue went up 9%, free cash flow being 120% of net income when our revenue was up 9%.
And we continue to be focused on progress in 2011 and beyond.
- Analyst
Okay, thanks.
- CEO
Thanks.
Operator
Our last question comes from the line of David Lim with Wells Fargo Securities.
Please go ahead.
- Analyst
Hi, good morning.
Just a couple on the supply chain electronics, are you guys seeing any kind of difficulties there?
- CEO
No .We had some issues last year with some components that hurt us.
But so far, so good.
But that being said, I mean we're at a seasonably light part of the year, we tend not to find these things out until the summer season starts, but we continue to pulse our suppliers.
And it's less quite frankly about the direct parts that we buy, it's electronic components being Tier 1 or Tier 2 suppliers to component manufacturers who we buy from, and so we're trying to move upstream in the chain working with our suppliers and our supplier's suppliers to make sure we're set.
- Analyst
Got it, understand.
And finally, there was just some talk about LG making a move for Goodman possibly.
How would that affect your component buy from LG, or would it at all?
- CEO
I don't think it would necessarily hurt it.
I mean, LG is a very large company with lots of different arms.
And we quite frankly compete with Emerson in different parts of the Refrigeration market and we still buy compressors from them and they still sell them to us.
So I don't think it would dramatically impact it.
- Analyst
Great, thank you very much.
- CEO
Thanks.
Operator
Please continue.
- CEO
Okay, that's the last question, Operator?
Operator
Yes, correct.
- CEO
Okay, great.
Thanks, everyone.
For 2011 we're excited about the improved conditions we are seeing for each of our end markets.
While commodities will be a headwind for this year, especially in the first half, we have taken pricing actions and are confident we lost that commodity headwind on a full-year basis.
Remain focused on productivity across the enterprise in driving revenue growth and profitability.
We continue to invest in growth initiatives for the Company and use our strong cash generation and balance sheet to drive shareholder value.
Thank you, everyone, for joining us today.
Operator
That does conclude our conference for today.
Thank you for your participation and using AT&T Executive Teleconference service.
You may now disconnect.