Lennox International Inc (LII) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Lennox International [fourth-quarter] (corrected by company after the call) 2014 earnings conference call.

(Operator Instructions).

As a reminder, this call is being recorded.

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

Please go ahead.

Good morning.

Thank you for joining us for this review of Lennox International's financial performance for the fourth quarter and full-year 2014.

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

Todd will review key points for the quarter and year and Joe will take you through the Company's financial performance and outlook.

Financial results in prior periods have been revised to reflect sold businesses and discontinued operations.

In the earnings release we issued this morning, we have included the necessary reconciliation of the financial metrics that will be discussed to GAAP measures.

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

We will archive webcast on that site for replay.

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

These statements are subject to numerous 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.

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

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

Thanks, Steve.

Good morning and thank you all for joining us.

Lennox International's strong business momentum continued in 2014 with record margin and profit.

Revenue was up 5% and EBIT margin expanded 70 basis points to a record 10.1%.

Adjusted EPS from continuing operations rose 18% to $4.38 and GAAP EPS from continuing operations rose 21% to $4.28.

Throughout 2014, revenue growth was led by our Residential business followed by our Commercial business.

Both businesses set records for segment margin and profit for the year.

In Residential, revenue was up 11% at constant currency and profit increased 31%.

Both replacement and new construction business saw strong growth in 2014 and we captured price and realized improved mix.

In Commercial, revenue was up 5% at constant currency.

Profit was also up 5% in a year of significant investments for future growth, including entrance in the VRF market, as well as FX headwinds.

Commercial growth was led by strength in national account equipment and service, as well as from our continued expansion in the emergency replacement market.

In North America, our high single digit shipment growth doubled the pace of the Commercial unitary market.

North America revenue was up high single digits for the year at constant currency.

In Europe, Commercial HVAC revenue was down low single digits in constant currency on soft macroeconomic conditions and political uncertainty over the course of the year.

In Refrigeration, revenue was flat at constant currency for the year.

Segment margin and profit were down significantly due to the repeal of the carbon tax in Australia, North America product mix, investments for future growth and FX headwinds.

Looking at 2015, we continue to expect revenue, margin and profit to be up.

The Australia year-over-year negative comparison will be behind us after the first half of the year and we expect the North American supermarket business to see strong top-line growth; although offset some by lower mix year-over-year.

Turning to the fourth quarter, the Company's momentum continued with a record fourth-quarter margin and profit.

Revenue was up 10% at constant currency and EBIT margin expanded 120 basis points to 9.4%.

Adjusted EPS from continuing operations was $1.02, up 32% and GAAP EPS from continuing operations was $1, up 47%.

In Residential, revenue was up 14% at constant currency and profit rose 57% from the prior year quarter.

Trends remain strong in both replacement and new construction business with a double-digit revenue growth in both businesses.

Prebuy of 13 SEER products by independent distributors was minimal adding under 2 points to Residential's growth in the quarter.

We believe the prebuy impact was more pronounced at companies that use independent distribution to a greater extent than we do.

For Commercial in the fourth quarter, revenue was up 8% at constant currency.

North America Commercial equipment and service was up low double digits.

We realized double-digit growth in both planned replacement and emergency replacement business.

Commercial new construction was up low single digits.

Lennox continued to win in the marketplace with four new national account wins in the quarter to total 29 for the full year, matching our best year ever.

In Europe, revenue was up low single digits at constant currency from the fourth quarter a year ago.

Commercial segment profit was flat in the quarter due to customer mix, foreign exchange and VRF investments.

In Refrigeration, revenue was up 8% at constant currency in the fourth quarter driven by improved North America supermarket business.

From a regional perspective at constant currency, North America was up high teens, China was up low double digits, South America was up mid-single digits and Europe and Australia were down low single digits.

As expected, profit was down significantly year-over-year due to the repeal of the carbon tax in Australia, North America product mix and FX.

At the investment community meeting in mid-December, I mentioned several of the Company's strategic initiatives that we're excited about.

In Residential, we have expanded our manufacturing facility in Mexico and transferred certain furnace production there from the US, as well as insourced sheet metal fabrication as part of our Mexico operations.

Production began ramping up in the second half of 2014 and we expect $4 million of savings from this initiative in 2015.

We expect an incremental $11 million of savings in 2016.

In our Residential distribution expansion, we are targeting 25 additional PartsPlus stores in 2015 to exit the year at 186.

Our target for 2017 is to have at least 250 stores.

In our Commercial distribution expansion, we ended 2014 with 40 commercial regional and local distribution centers as planned and we expect to add another seven commercial distribution centers in 2015.

In addition, we continue to add to the number of Lennox PartsPlus stores that carry commercial products.

We ended 2014 with the ability to serve 75% of the North America commercial market on a same-day basis as planned and we are targeting 85% by the end of 2015 in support of our emergency replacement market initiative where we have been seeing double-digit growth.

At the December investment community meeting, I also highlighted our entrance into the VRF market in North America in the second half of 2014.

We have assembled a great team with years of experience in VRF to provide leading products with the best sales, service and technical support in North America.

We have three VRF training academies open to support our contractor customers in key regions and plan to open two more by the end of second quarter.

It is early, but we're making good progress.

Realizing sales in our VRF pipeline and backlog continue to grow.

Our target is $100 million in VRF sales by 2018.

2014 was a year of strong growth and record profitability for Lennox and we expect more of the same in 2015 with strong cash generation for investments to drive growth, as well as return cash to shareholders.

Now I'll turn it over to Joe.

Thank you, Todd and good morning, everyone.

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

In the fourth quarter, revenue from Residential Heating and Cooling was $404 million, which was up 13%.

Volume was up 10% and price and mix combined was up 4%.

Foreign exchange had a negative 1% impact on revenue.

Residential profit in the fourth quarter was a fourth-quarter record of $57 million, up 57% from the prior-year quarter.

Segment profit margin was a fourth-quarter record, 14.1%, which was up 390 basis points.

Segment profit was positively impacted by higher volume, favorable price and mix and lower material costs and reduced product warranty costs.

Partial offsets in the fourth quarter included unfavorable foreign exchange, higher SG&A and strategic investments in distribution expansion.

For the full year, Residential segment revenue was $1.7 billion, which was up 10%.

Volume was up 9% and price and mix combined was up 2%.

Foreign exchange had a negative 1% impact on revenue and segment profit was a record $236 million, which was up 31%.

Segment profit margin was a record 13.6%, up 220 basis points.

Turning to our Commercial Heating and Cooling business, in the fourth quarter, Commercial revenue was $223 million, up 5%.

Volume was up 8% and price and mix combined was flat on a revenue basis.

Foreign exchange had a negative 3% impact on revenue.

North America commercial HVAC equipment and service revenue was up high single digits.

Europe commercial HVAC revenue was down high single digits, including negative foreign exchange impact, although up in constant currency, as Todd mentioned.

Commercial segment profit in the fourth quarter was $33 million, which was flat with the prior-year fourth quarter.

Segment profit margin was 14.6%, down 110 basis points.

Segment profit was negatively impacted by unfavorable mix, unfavorable foreign exchange in our strategic investments to enter the VRF market, as well as continue distribution expansion.

Partial offsets included higher volume, favorable price and lower material costs.

For the full year, commercial revenue was a record $879 million, which was up 4%.

Volume was up 5% and price and mix combined was flat on a revenue basis.

Foreign exchange had a negative 1% impact on revenue.

Segment profit was a record $124 million, which was up 5%.

Segment profit margin was a record 14.1%, which was up 10 basis points.

In our Refrigeration segment, revenue in the fourth quarter was $186 million, up 4%.

Volume was up 11% and price and mix combined was down 3% on revenue.

Foreign exchange had a negative 4% impact on revenue.

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

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

Segment profit was $13 million, down 45% from the prior quarter.

Segment profit margin was 7%, down 630 basis points.

Segment profit was negatively impacted by lower mix, the repeal of the carbon tax in Australia, unfavorable foreign exchange and investments for future growth.

Partial offsets included higher volume, favorable price and lower material costs.

For the full year, Refrigeration revenue was $752 million, down 2%.

Volume was up 1% and price and mix combined was down 1% on a revenue basis and foreign exchange had a negative 2% impact.

Segment profit was $55 million, down 39%.

Segment profit margin was 7.4%, which was down 430 basis points.

Regarding special items in the fourth quarter, the Company had after-tax charges of $800,000, which were net and for the full year, Lennox had after-tax special charges of $5 million net, which included about $1.8 million for restructuring activities.

Corporate expenses were $26 million in the fourth quarter, down from $32 million in the prior-year quarter and for the full year, corporate expenses were $74 million, down from $88 million in the prior year primarily from lower incentive compensation than a year ago.

Overall, SG&A was $148 million in the fourth quarter, up slightly from the $146 million in the prior-year quarter and for 2014, SG&A was $574 million, up less than 1%.

Cash from operations was $185 million for the full year compared to $210 million in the prior year.

As previously announced and for the fourth quarter, we strategically built inventory to support customers in the minimum efficiency regulatory transition that took effect at the start of 2015 -- that will take effect for the start of 2015 for air conditioners in the South and Southwest regions of the United States and for heat pumps nationally.

The special inventory build amounted to $77 million.

Capital spending was $88 million in 2014, up from $78 million in 2013 as we completed the expansion in Mexico with our second plan and began ramping up production midyear.

Including $1 million for the disposal of PP&E, free cash flow was $98 million for the full year compared to $134 million in the prior year.

Looking at liquidity, cash and cash equivalents were $38 million at the end of December.

Our debt to EBITDA ratio was 2.3 ending the year.

This is higher than our typical target of 1 to 2 times debt to EBITDA and that was due to the accelerated share repurchase program, but we expect to be back down in that range as we progress through 2015.

Total debt was $926 million at the end of the year.

Before I turn it over to Q&A, I'll review our outlook for 2015.

One month into the year, our underlying market assumptions for 2015 remain the same as we discussed at the investment community meeting in mid-December.

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

We expect North American commercial unitary shipments to be up low single digits and we expect North American refrigeration shipments to be up low single digits for the industry.

Based on these markets shipment assumptions and our targets for marketshare gains, guidance for our revenue growth remains 4% to 8% for 2015 at constant currency.

However, we now expect a negative 3% impact from foreign exchange for the full year for revenue growth guidance of 1% to 5% at actual currency.

Foreign exchange and commodities have been moving quite a bit, foreign exchange unfavorably and commodities favorably but the bottom line is our guidance for EPS from continuing operations for the full year remains between $5.20 to $5.60.

Let me run through some of the key points of our guidance assumptions and the puts and takes for 2015.

First, the guidance points that have changed since mid-December.

We now expect foreign exchange to have a $20 million negative impact on earnings, an increase from our prior guidance of $5 million of a negative impact.

Most of this headwind is coming from the Canadian dollar with some coming from the Australian dollar.

We have a strong position in Canada, which was 7% of the Company's revenue last year.

The guidance for $20 million of the headwind from foreign exchange assumes we're able to get some additional price in Canada to mitigate the effects of the stronger US dollar.

We are working to capture additional price in Canada now.

On the commodities front, we now see a $15 million benefit to earnings, up from our prior guidance of $5 million.

This includes the benefits we expected to see in 2015 from lower metal prices, copper, steel and aluminum for us, as well as lower fuel costs.

To review our guidance points that remain the same, we still target $35 million of savings from our sourcing and engineering-led cost-reduction programs.

We continue to expect $10 million from incremental price for the full year and this is separate from the price we plan to capture to mitigate the negative foreign exchange.

We expect to see about $4 million from incremental savings this year from our second plant in Mexico that began ramping up in the second half of 2014.

We continue to assume Residential mix is flat for 2015.

Headwinds for 2015 that have not changed from our prior guidance include $8 million from the repeal of the carbon tax levy in Australia with most of this negative impact hitting us in the first quarter of 2015.

$3 million is expected from VRF and ongoing investments for the expansion of our residential and commercial distribution network across North America.

A few other guidance points that remain unchanged, corporate expenses are expected to be approximately $75 million, up slightly from 2014.

We still expect net interest expense for the full year of about $25 million.

Our effective tax rate guidance remains 34% to 35% on a full-year basis.

We continue to expect the weighted average diluted share count for the full year to be approximately 45 million shares and the accelerated share repurchase program is expected to be fully completed in the second half of 2015.

Capital expenditures are expected to be $85 million for the year and we are still targeting free cash flow of about $265 million for 2015.

With that, let's go to Q&A.

(Operator Instructions).

Jeff Hammond, KeyBanc Capital.

Hi, good morning, guys.

Having trouble hearing you, Jeff.

I think it's on your end.

Operator, can you hear him?

I cannot hear him either.

Jeff, your line is open.

Hi, can you hear me, guys.

Yes, I can.

Okay, so on the FX, it just seems like a high margin applied to that FX headwind.

Is there something unique (technical difficulty) that would drive that?

The impact that we're seeing on FX has to do primarily with Canada and Australia.

We saw a negative FX impact to EBIT of approximately $5 million in fourth quarter and as Joe talked about, we're now expecting $20 million in 2015 and that assumes we get some price in Canada and obviously, what the issue is in Canada is we're producing a product into US and US dollars.

Then we're selling it in Canada at Canadian dollars and as the Canadian dollar weakens, then we get less back and Canada is one of our, obviously, largest furnace markets.

We make very nice margins there and so when we have this weakness, it impacts us.

As Joe talked about in the call, it's meaningful to us.

We did about 7% of our revenue last year in Canada and so it's an important market for us.

Okay.

And then on customer refrigeration, the growth in the quarter, is that US grocery --

Yes.

-- and how sustainable is that metric?

The major driver of the growth was US grocery and we think it's sustainable as we go into 2015; although more second half of the year than first half of the year, but up full year significantly year-over-year.

But as we've talked about multiple times that will be offset and we'll have headwinds both from Australia on the carbon tax change and we'll also have headwinds in North America from North American grocery mix.

Okay, thanks, guys.

Steve Tusa, JPMorgan.

Hello, can you hear me okay?

Yes, I can.

Sorry about that.

Some weather issues here; working from home.

So just on the Resi stuff, how much did the prebuild benefit your margin in the fourth quarter?

We think from absorption of prebuild, it was a couple cents in the quarter.

Okay, okay.

And something along I guess the $77 million in inventory gets you to -- I think the industry has been talking about $1.1 million of prebuild.

So just kind of apply your marketshare to that, that's kind of the right unit number?

To be honest with you, Steve, I haven't backward done the math on that, but let us take it off-line.

We'll do the math and see if that gets us close.

Okay.

And as far as the view of next year, what is your view on -- you said flat mix in Resi next year.

So does that basically mean that you're going to have enough 13 SEER to get these guys through most of the season next year?

Our expectation on 2015 is it will look a lot like 2014 where we and the industry will have 13 SEER to get through the summer selling season and from your comment about 1.1 million units and our sense of what others are doing in the industry, people are doing what we did, which is there's a lot of 13 SEER prebuild and we'll be able to have a normal transition as we go into 2016.

Okay, great.

And then one last question just on the underlying tone of the commercial market, you guys have a lot of stuff going on that's specific to you and you're executing extremely well there.

What's your sense of the underlying trend in your commercial business heading into next year?

Do you feel better, worse or the same as you did a few months ago?

I think we feel the same.

What we called out in December was low single digits for the Commercial market and that still feels about right.

Christmas season was okay, not great.

I continue to be convinced that low fuel costs is good for the American consumer even though we haven't quite seen all that play out yet and so I think that will help us too.

So yes, we are about the same as we were in December.

Okay, great.

Thanks.

Jeff Sprague, Vertical Research.

Just a couple questions back at the cost structure.

Could you update us on where you're at on copper and aluminum, the size of your buy and how you're hedged for the year?

You gave us the benefit obviously in dollars that you're expecting, but how does that really play through?

I assume you're partially hedged for the year?

Yes, as we enter the year, we're probably 70% or so hedged in copper and aluminum.

We don't hedge steel.

So we've locked in our copper price at this point.

We do have some exposed to the market, but as things move we will benefit from that and we've factored all of that into our guidance.

Can you provide any color on millions of pounds, the size of your buy or anything?

I don't know that we've talked about the number of pounds of buy historically.

It's about 300 million, right?

Sorry?

Sort of order of magnitude, we do 35 million or so pounds of copper and order of magnitude 45 million or so pounds of aluminum and that's based on 2014.

And then just back to Refrigeration on grocery, where are you seeing that strength?

It sounds like it could be fairly broad-based, but is there anything that stands out regionally or large players versus medium size, any other color you could add there?

What we've been talking about, Jeff, in our North America grocery business is we need to diversify and have a broader portfolio of customers and we've been focused on doing that, but it's also driven by a couple of large customers who we won last year and one of them is in Arkansas and that's helping us as we go into 2015.

Great, thank you.

Rich Kwas, Wells Fargo Securities.

Hi, good morning.

Just to follow up on the Refrigeration, so I think, Todd, back in December, you talked about modest margin expansion for the full year.

Can you just remind us on the cadence of that as we think about the first part of the year versus the second half of the year?

We're going to see all the margin expansion second half of the year, Rich.

So first half of the year, we're going to still have significant headwind from Australia and the majority of that will be in first quarter, but some of it will be in second quarter.

We also won't see the benefits or the full benefits of some of the fixes we've done in our North America business and the revenue rampup in the North America grocery segment.

Although up this quarter and it will be up first half, we'll have even more benefit second half.

So we still have another two quarters of margin deterioration in Refrigeration on a year-over-year basis and then second half of the year is when we should start to see the pickup.

The cadence of the Arkansas customer, is that playing out as expected here?

Yes, so far.

And then on FX, are you benchmarking where we are just now here in the last few days in terms of euro, C dollar, etc.?

Yes, the foreign exchange rates that we use are the current spot rates, so that's what we're using in our forecast and our guidance.

Okay.

And then, Todd, I know first quarter is really not all that important, but just early read on furnace season and what you're seeing in terms of underlying demand trends?

We're seeing solid business trends continue in Resi and Commercial.

Orders are solid and we have some good momentum, but especially in Resi, half the quarter is the month of March so that's still in front of us.

In Refrigeration, as we talked about, supermarket business will continue to grow in the top line, but we'll have some headwinds in Australia in mix, but we are where we hoped we would be at the end of January for first quarter.

Thanks.

I will pass it on.

Robert Barry, Susquehanna.

Hey, guys, good morning.

So I just wanted to clarify, it sounds like what's changed in the guidance is a net negative of $5 million at the EBIT line, is that right, currency and commodities?

Correct.

And is that $20 million FX headwind going to be felt mostly in the Refrigeration business?

Or how would you apportion it?

I'd really proportion it to Resi and Commercial.

So the biggest impact to us isn't what you're seeing in other multinationals where it's the euro.

Where we're having the biggest impact is in the Canadian dollar and in our sales of Residential and Commercial into Canada from our US factories.

To a lesser degree, it's refrigeration in Australia and then to a lesser degree Europe.

Got you.

And the degree shifting to Commercial and Refrigeration margins saw I think flat in Commercial, down a lot in Refrigeration.

Are those tracking to your plan?

Yes.

What we saw in Commercial was, as you suggested, essentially flat in dollars, down a little bit in margin and that was from FX headwinds in the quarter, in fourth quarter, investments we're making in VRF and we also just have some customer mix issues.

We had higher volume with lower profitable customers and sometimes we have that; it's sort of a lumpy business.

But underlying the profitability margin expansion in Commercial, we had a record year and as we go into 2015, it's all lined up to have another record year.

In Refrigeration, it's more complicated.

It's what I've talked about over and over that we have the Australia headwind, we had North America mix and as I answered earlier on the call, I think it was with Rich, it's probably going to be second half of the year before we start to see margins pick up in Refrigeration.

Fair enough.

But it sounds like the scale of the pressures in 4Q were kind of in line with your plan when you gave the outlook in December.

Yes, I'll answer it directly.

No surprises for us.

It's as we expected; maybe even a hair better in Commercial.

Okay.

And then I apologize if you touched on this in the prepared remarks.

I jumped on a little late, but at the Analyst Day in mid-December, I remember you joking about people at football games in short sleeves, which didn't bode well for the Resi business, yet it seemed to have pulled through pretty strongly despite the headwinds you were mentioning in Canada both on the revenue and the margin.

So any incremental color there and is this tracking ahead of your plan in December or is it also in line?

No, we had a good December in Resi.

We were up -- maybe what you missed was we were up 14%.

We said 2 points of that was prebuy through our [Allied] bands or independent distribution.

So 2 points of the 14 were prebuy, but 12 points was just underlying growth in the business and we continue to have momentum.

I think we're gaining share as we have over the last couple years and I think we saw that in fourth quarter.

Yes, the margin was almost what it was in third quarter, which is a seasonally strong quarter.

Yes, we did well.

Okay.

The Residential business did well.

And is that also in line with your expectation or is that ahead of the plan?

The margins were as we hoped they would be.

That wasn't a big surprise.

I think we got a couple points in revenue more than what we were talking about in December and I think that's why we were a little higher in the range than what we thought we might have been on the December call.

Okay, thanks, Todd.

Josh Pokrzywinski, Buckingham Research.

Hi, good morning, guys.

So I guess just first question on the price cost dynamic.

Should we expect that to layer in more second half than first half and then thinking back to first quarter of last year where it was more investment heavy, should we think of more pronounced weakness in early margins then strengthening through the year?

On the material cost side, we always tend to have more second half of the year than first half of the year and I think that will continue to be the case.

Same with price.

You set price early in the year and then as volume comes into the business, you're able to get price in the peak season second and third quarter.

So we'll see less price in first quarter, less material cost reduction in first quarter.

We'll see it more as we get into the middle of the year.

Should we think of the investment spending being more first quarter directed on top of that?

I think what happens is, on the distribution side, we make the investments and you don't see the payback till we get into the volume part of the year, which is midyear.

I think something like VRF, I think it's equitable throughout the year.

Got you.

Then the numbers you gave on price cost, I want to say it's $10 million positive versus where you were before, if I wrote that down correctly.

Let me do the math as I -- I think that's -- yes, so commodities are $10 million better than what we thought.

Price is the same and then FX is $15 million worse than what we thought.

Got you.

So on the price cost side or on the material equation, is that at current spot prices?

I guess where is the float or are you guys assuming that numbers move around at all between now and 4Q or 3Q when you're not hedged?

I think it's based on what Joe said where mathematically what we do is we have -- we know what our hedges are and so that's order of magnitude 70% of copper and aluminum is hedged.

We know what that is.

Then we take the futures of what it would be in the out periods and that's what we use to calculate the math.

Got you.

And then just one last cleanup, ending share count for the fourth quarter?

People are whispering to me 46, so I will say 46 until someone corrects me.

46.2.

Oh, I thought that was average.

Is that --?

We can follow-up off-line.

Yes, let's follow up to make sure we give you the right number.

All right, thanks.

Julian Mitchell, Credit Suisse.

Hi, thank you.

Just a question on the margin profile.

Last year, obviously, you had a very good EBIT margin expansion firmwide.

All of it really coming from leverage around SG&A with gross margins being flattish.

I just wondered when you look at this year, all the moving parts around price, mix and so forth, do you think it will be the same trend again or do you think your gross margins can start to move up?

Well, I guess sort of underneath the hood, I would have characterized 2014 a little different than just SG&A leverage.

I'd say at the gross margin level, there were conflicting forces.

We did another great job of material cost reduction and a nice job in price and then we had extreme headwinds in Australia that flew into gross margins.

Then we also had negative mix in North America grocery that flowed into gross margins.

So I think 2015 will look a lot like 2014 where we'll have nice material cost reduction, decent price.

Now we're signaling a material amount of lower commodities, volume on the high end to get SG&A leverage, but we'll still have some Australia and negative mix that offsets that North America grocery.

Got it.

Thanks.

And then on Australia, I understand the currency moves and so on, but just how you're feeling about the organic outlook there because I guess we heard from some other building products companies like Tyco last week that Australia organic is looking worse for them again having seemed to stabilize four or five months ago and just what you're seeing there.

We're seeing some pressure on Australia business and we're obviously tied to the weather.

We're having a decent summer there right now, but when I think about Australia, it's more the pressure that we're seeing on the year-over-year comp on the carbon tax in the underlying organic markets.

We think our organic revenue will be fine in the Australian market.

Thanks.

Then lastly on the capital allocation, you have the $450 million cash out for buyback in Q4.

You talked about leverage coming down steadily through the year.

So should we expect it to be very quiet on capital allocations or maybe the year-end?

Yes, I think I would view the $450 million share buyback that we announced I guess in December, our third-quarter call or whatever it was when we announced the $450 million share buyback.

In my mind, I would view that as our share buyback in 2015 and then when we get to the end of the year and we delever, we'll revisit the subject.

Great.

Thank you.

Shannon O'Callaghan, UBS.

Just a little bit more on this fourth-quarter Residential margin.

Even if you take out what seems like a fairly modest benefit from prebuild, that's some pretty strong year-over-year margin expansion for us all to assume it continues at that run rate.

As you think through 2015, does the mix benefit ease through the year as 14 SEER becomes the new bottom or are there other things that would cause that conversion rate to moderate?

I think we've signed up for another nice year in Residential next year.

It's half our business that's implied in our guidance.

Also when you look at our three-year targets for Residential, we've set some healthy targets there.

So I think it implies that we need to continue to do the things we've done in fourth quarter more broadly speaking that what we've done during all of 2014 to drive margins in our Residential business, investment we're making in distribution, in product and our ability to support our dealer network I think is paying off and I think we're getting paid for it.

Okay.

And then in terms of the share gains, was there any difference in terms of SEER level or geography or anything in terms of those share gains where you think you're having the most success or what helped drive such a strong finish to the year?

No.

I think geographically where you'll see us where we're putting in PartsPlus stores, I think it's clearly tied to the strategy that we put in place to go to the market.

I also think we're seeing nice mix up on the equipment side and so we tend to win where we make our investments.

Whether it's in product innovation or distribution, that's where we tend to win share.

Okay, great.

Thanks, guys.

Mark Douglass, Longbow Research.

Hi, good morning, gentlemen.

On Canada, given that a lot of the competitors also import into Canada, I would think you should be able to get a lot of the pricing you want.

But what about the Canadian consumer with oil prices down?

I would think that -- are you facing a volume headwind in Canada as well that you anticipate you put into your guidance?

Everything is in the guidance, so there's parts of Canada, obviously, Calgary for example, where you have the headwind from the drop in the oil and gas industry, but obviously there's large swaths of Canada both in the East and on the far West that aren't impacted by that.

To the point around price, we're focused on getting additional price in Canada.

To review what we've done so far, back in January of 2014, so a year ago, we had a North America wide price increase of 3% to 5% that included Canada.

In April of 2014, so April of last year, we had a 5% increase in Canada only and effective March 1 of 2015, so coming up here, we've already announced an additional 6% Canadian price only or Canadian only price increase.

So we're trying to be aggressive in the market, to your point balancing what's happening with the consumer.

Carrier, Trane, Daikin, Goodman have all announced Canadian-specific price increases effective early 2015.

So again, we're, as you suggested, we're focused on trying to offset the FX impact by getting price in Canada.

Great.

And then looking at US Residential, you say you're thinking Resi mix flat, but it seems that there's been a mix up even outside of the regulations.

Are you thinking there's going to be some mix, just not material in 2015 or is that just upside?

Yes, I think the answer is it could probably be the upside.

When we gave that guidance in December, I think I put words around it of there's a lot of moving pieces in 2015 with the regulatory change.

We have a pretty good view and so far it's playing out like we had hoped, which is there's enough 13 SEER that the bottom end stays 13 SEER and we're able to get price on 14 SEER.

So the mix looks the same, but there are some scenarios where all that doesn't happen and so we thought it was prudent to guide to no mixup and if we're able to do better, then that's upside to the numbers.

Okay, great.

Thank you.

Walter Liptak, Global Hunter.

Hi, thanks.

Good morning, guys.

I wanted to follow up on the marketshare discussion.

Have you been able to quantify the 2014 share gains and percentage and you've been gaining share with PartsPlus and products for a couple years now.

Is there a point at which we start to see the share gains decelerating?

I think we continue -- this is an industry where if you gain half a point of marketshare a year you're doing very well and if you do it with systemic changes like building out distribution and innovating a product and focusing on taking care of your dealers with innovation and investments, I think it's share that you continue to grow.

And so as we've talked about in our PartsPlus, we're not reaching diminishing returns yet.

We're still putting these stores in and still winning where we put them in and we're winning with our product innovation.

We have another great suite of new products that we're launching in first quarter.

So yes, I think our momentum in the marketplace continues in Resi.

Okay, great.

And I just wondered about your thoughts on the $77 million inventory build.

I think you've got 18 months to liquidate that.

Is there any change on timing on when that converts to cash?

Are you seeing anything early in the year?

I'm sure it's already too early, but any thoughts on the cash conversion?

Yes, short answer is it's early.

The guidance we gave in December of cash conversion or cash generation for 2015 we still think is the right number.

We've just got to play it through and again, as we talked about, the prebuild in effect was taking a spike in production that you would typically have in first quarter and move it into the fourth quarter of the prior year, which is what we've done.

Also, it's not lettuce; it's not going to go bad.

The product that we build we can sell in the north if we need to.

So the short answer is we built it, we have it and we have 18 months to sell it in the South and if we need to sell it in the North we will.

Okay, great.

Thank you.

Keith Hughes, SunTrust.

Thank you.

You had listed in the press release and the prepared statement some of the problems you had in Refrigeration in the quarter.

Can you put those in just a list of the biggest impacts?

Margin (technical difficulty).

I think carbon tax in Australia was the biggest issue.

The mix in North America was a close second and then third was FX in sort of all low to mid-single millions of EBIT impact.

The mix issue, once you anniversary the -- you mentioned the large customer earlier -- once you anniversary that, does that start to move back in a different direction?

Yes, we'll better state it.

Once we get to full volume with them, then it starts to be grandfathered or lapped, but as I talked about, we're sort of ramping up that volume through 2015.

So we'll be whining about mix headwind in North America as we go into 2016.

Australia goes away first half of the year and we're also have some nice volume tailwind in North America, as well as operational improvements around the enterprise.

So second half of the year, we'll see margin improvement although we'll still have mix headwind.

2016 is the year where we should really start to see the benefits, correct?

Correct.

Thank you very much.

Glenn Wortman, Sidoti & Company.

Yes, good morning, everyone.

How much is left on the share repurchase program?

It looks like most if not all of it was completed in the fourth quarter.

Yes, the way the program worked was we delivered $450 million in cash in the fourth quarter.

70% of the shares were delivered in the fourth quarter and then we have 30% that will be completed in the second half of 2015.

Okay.

That's all I had.

Thank you very much.

There are no further questions.

Okay, great.

I want to thank everyone for their time and for their questions.

A few points I want to leave everyone with.

We're well-positioned and expect another record year in 2015 with EPS from continuing operations in the $5.20 to $5.60 range, remain focused on capitalizing on growth in our major end markets, capturing additional marketshare and driving increased profitability through our operational initiatives in 2015.

Thank you for joining us today and we look forward to the year ahead.

Thank you, operator.

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

Thank you for your participation.

You may now disconnect.