Lennox International Inc (LII) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Lennox International fourth-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded.

I would now like to turn the conference over to Steve Harrison, Vice President 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 2015.

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.

To give everyone time to ask questions during the Q&A, please limit yourself initially to a couple of questions or follow ups and re-queue for any additional questions.

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

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

We will archive the website on that site for replay.

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

These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements.

For more information concerning these risks and uncertainties, see Lennox International's publicly available filings with the SEC.

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

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

Thanks, Steve.

Good morning everyone and thank you for joining us.

Let me start with a quick review of 2015 overall, and then we'll discuss the fourth quarter in more detail.

2015 was a year of strong growth and margin expansion for Lennox International.

Both our residential and commercial businesses set new records for revenue, margin, and profit, and our refrigeration business saw strong growth and margin expansion starting in the second half of the year.

Overall for the Company, revenue was up 7% at constant currency, and total segment profit margin expanded 80 basis points to a record 10.9% for the year.

Adjusted EPS from continuing operations was up 17% from the prior year to a record $5.14.

GAAP EPS from continuing operations was at $4.11 for the full year, including the previously announced non-cash impairment charge in our Kysor/Warren refrigerated display case business.

2015 growth was led by our residential business.

Residential revenue was up 9% at constant currency, and margins expanded 130 basis points to a record 14.9%.

Revenue from both replacement and new construction business was up high single digits for the year.

We outgrew the North America market, captured price, saw improved mix, and reduced costs.

We drove record margins in residential while continuing to expand distribution and investment for future growth.

In commercial, revenue was up 6% at constant currency for the year, and margin expanded 60 basis points to a record 14.7%.

In North America, national account equipment revenue was soft as we discussed over the quarters, and finished down mid-single digits for the year.

On the service, side national account service revenue was up high single digits.

In our non-national account equipment business, revenue was up mid-teens in constant currency.

And in the second half of 2015 we saw increasing traction in the VRF market in North America, and momentum continues to build in that business.

In Europe, commercial HVAC revenue was up mid-single digits at constant currency.

In refrigeration, revenue was up 3% at constant currency for 2015.

On a full-year basis refrigeration margin was flat at 7.4%.

We saw significant expansion in the second half of the year on the ramp-up of major new supermarket business, and having the negative year-over-year comparison from the repeal of the carbon tax in Australia behind us.

For 2016, we continue to expect about 100 basis point of margin expansion to approximately 8.5% for our refrigeration business.

Turning to fourth quarter.

Total Company revenue was up 7% at constant currency, and total segment margin expanded 30 basis points to a fourth quarter record 9.7%.

Adjusted EPS from continuing operations was a fourth quarter record of $1.11, up 9% from the prior-year quarter.

GAAP EPS from continuing operations was $0.25 compared to $1 in the fourth quarter a year ago, including the Kysor/Warren impairment charges I mentioned earlier.

Let's talk about residential.

In residential business in the fourth quarter volume and mix were negatively impacted by the record warm weather in the US.

Residential revenue was up 8% at constant currency, and with more seasonal weather our growth would have even been greater.

Profit was flat and margin was down to negative Canadian foreign exchange.

Lower factory absorption than a year ago driven by last year's $77 million inventory pre-build to support the minimum efficiency regulatory change and unfavorable mix driven by a lower mix of furnace products and replacement business, both resulting from the warmer weather and the higher mix of residential national accounts and new construction.

A lot there, I know, but simply stated the record warm weather negatively impacted our residential business both in volume and in mix.

More recently we have seen weather cool down in the first quarter, and our residential business is off to a nice start.

We are seeing momentum for strong growth and margin expansion in the first quarter as well as for 2016 overall.

Turning to commercial.

In the fourth quarter revenue was up 7% at constant currency and margin expanded 70 basis points to 15.3%.

In North America, commercial equipment revenue was up high single digits at constant currency, with national account revenue down mid-single digits and non-national account revenue up more than 20%.

On the services side, national account services revenue was up low double digits.

In Europe, commercial HVAC revenue was up low single digits at constant currency.

In refrigeration, revenue was up 3% at constant currency in the fourth quarter, led by growth in North America supermarket business.

Refrigeration margin expanded 180 basis points to 8.8%.

From a regional perspective at constant currency, Asia was up more than 30%, North America and Europe were up mid-single digits, Australia was down low single digits, and South America was down low double digits on a slowdown in Brazil, as expected.

Looking ahead at 2016 overall for the Company, we expect another year of strong growth and profitability across all three of our businesses.

With a strong balance sheet and record cash generation, we continue to be well positioned to make investments to drive future growth, raise the dividend with earnings over time, and repurchase stock, including plans for $200 million in 2016.

Now I'll turn it over to Joe.

Thank you, Todd, and good morning, everyone.

I'll provide some additional comments and financial details on the business segments for the quarter and full year, starting with residential heating and cooling.

In the fourth quarter, revenue from residential heating and cooling was $431 million, which was up 7%.

Volume was up 9% and price and mix combined was down 1%.

Foreign exchange had a negative 1% impact on revenue.

Residential profit was a fourth-quarter record $57 million, which was relatively flat with the prior-year quarter.

Segment profit margin was 13.2%, which was down 90 basis points.

Segment profit was positively impacted by higher volume and lower material costs, with offsets from foreign exchange, unfavorable mix, strategic investments in distribution expansion, and lower factory absorption than the prior-year quarter, as Todd discussed.

For the full year, residential segment revenue was a record $1.87 billion, which was up 8%.

Volume was up 7%, and price and mix combined was up 2%.

Foreign exchange had a negative 1% impact on revenue.

Segment profit was a record $278 million, which was up 18%.

Segment profit margin was a record 14.9%, which was up 130 basis points.

Now turning to our commercial heating and cooling business.

Commercial revenue was a fourth quarter record $227 million, which was up 2%.

Volume was up 6%, and price and mix combined was flat.

Foreign exchange had a negative 4% impact on revenue.

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

Europe commercial HVAC revenue was down low double digits, including a negative foreign exchange impact, although up at constant currency, as Todd mentioned.

Commercial segment profit was a fourth quarter record $35 million, up 7% from the prior-year quarter.

Segment profit margin was 15.3%, which was up 70 basis points, and segment profit was positively impacted by higher volume, lower material costs, with a partial offset from negative foreign exchange.

For the full year, commercial revenue was a record $887 million, which was up 1%.

Volume was up 6% and price and mix combined was flat on a revenue basis, and foreign exchange had a negative 5% impact on revenue.

Segment profit was a record $130 million, which was up 5%.

Segment profit margin was a record 14.7%, up 60 basis points.

In our refrigeration segment, revenue in the fourth quarter was $176 million, and that was down 5%.

Volume was up 3% and price and mix combined was flat with foreign exchange having a negative 8% impact on revenue.

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

However, on a reported basis, Asia was up more than 20%, North America was up mid-single digits, Europe was down high single digits, Australia was down high teens, and South America was down more than 40%.

Segment profit was $15 million, which was up 18% from the prior-year quarter.

Segment profit margin was 8.8%, up 180 basis points.

Segment profit was positively impacted by lower material costs and higher productivity, with partial offsets from negative foreign exchange, unfavorable mix, and higher SG&A.

For the full year, refrigeration revenue was $713 million, which was down 5%.

Volume was up 4% and price and mix combined was down 1% on a revenue basis.

Foreign exchange had a negative 8% impact.

Segment profit was $53 million, and that was down 5%.

Segment profit margin was 7.4%, and that was flat with the prior year.

Regarding special items in the fourth quarter, the Company had net after-tax charges of $39.1 million.

This amount includes $32.6 million for the non-cash impairment charges related to the Kysor/Warren refrigerated display case business, as we had previously announced.

We also had a $3.8 million one-time inventory write down and a $2.7 million of other items net in the quarter.

For the full year the Company had net after-tax special charges totaling $47 million, and that was predominantly from the fourth quarter items mentioned.

Corporate expenses were approximately $27 million in the fourth quarter, and that was flat with the prior-year quarter.

For the full year, corporate expenses were $84 million, up from the $74 million in the prior year on investments to support Company growth.

Overall, SG&A was $151 million in the fourth quarter, compared to $148 million in the prior year quarter.

And for 2015, SG&A was $581 million, and that was up 1%.

The Company had record cash generation in the fourth quarter, with cash from operations of $224 million.

With capital spending of $23 million, the Company also had record free cash flow of approximately $202 million.

That was up from $134 million in the prior quarter.

For the full year, cash from operations was a record $331 million, with capital spending of $70 million.

The Company had record free cash flow of $261 million, up from $98 million in the prior year.

Total debt was $744 million at the end of December, and we ended the year with a debt to EBITDA ratio of 1.7.

Cash and cash equivalents were $39 million at the end of December.

Before I turn it over to Q&A, I'll review our outlook for 2016.

One month into the year, our underlying market assumptions for 2016 remain the same.

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 this underlying market environment and our targets for market share gains, revenue growth guidance for Lennox International remains 4% to 8% at constant currency for 2016.

We now expect a negative 1 point impact from foreign exchange for the full year, for revenue growth guidance of 3% to 7% at actual currency.

Foreign exchange and commodities have been moving quite a bit, with foreign exchange unfavorably and commodities favorably.

But the bottom line, our guidance for EPS from continuing operations for the full year remains a range of $6.10 to $6.60.

Now let me run through some of the key points in our guidance assumptions and the puts and takes for 2016.

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 negative impact.

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

We have a strong position in Canada, which was 6% of the Company's revenue last year.

The guidance for $20 million of headwind from foreign exchange assumes we continue to get some additional price in Canada to mitigate the effects of the stronger US dollar, and we're working to capture additional price in Canada in the first quarter.

On the commodities front, we now expect a $25 million benefit to earnings for the full year, which is up from our prior guidance of $15 million.

We now expect a $15 million benefit from price, up from our prior guidance of $10 million.

And to review our guidance points that have remained the same, we still target $35 million of savings from our sourcing and engineering led cost reduction programs.

We expect to see $11 million of incremental savings this year from our second plant in Mexico, and we continue to assume a $5 million benefit from residential mix in 2016.

A few other guidance points that are unchanged.

Corporate expense is expected to be approximately $85 million.

We still expect net interest expense for the full year of about $29 million.

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

And we continue to expect the weighted average diluted share count for the full year to be between 44 million and 45 million shares, which includes our plans to repurchase $200 million of stock this year.

Capital expenditures are expected to be approximately $95 million for the full year, and we're targeting free cash flow of $250 million in 2016.

And with that, let's go to Q&A.

(Operator Instructions)

Jeff Hammond with KeyBanc Capital.

Please go ahead.

Good morning, guys.

Just wanted to go back to the residential margins, and maybe just overall where the -- it seemed like top line was okay, so I just want to understand better where the shortfall came in versus the low end of the guidance and maybe just speak to the residential margin?

Let me unpack it a couple ways, Jeff.

What we said in the call, or in the script was the record warm weather impacted both volume and mix.

While we were up at 8% at constant currency, as we started the month of December, we actually thought we were going to do better than that and the continued warm weather hurt us.

My guess is you looked at heating degree days.

They were down 20% in December versus last year, 20% versus the quarter, down 30% versus normal in December.

So in December down 30% from a normal December, which we were betting that we might have.

Also affected the mix.

We make more money on furnaces than we do on air conditioners, and the furnace mix was down.

And typically the industry's order of magnitude 50% furnaces in fourth quarter and the warm weather really impacted that mix for us and for the industry.

Also, the foreign exchange hurt us, especially the Canadian dollar weakening versus the US dollar, and it weakened sharply from the beginning of the month of December to the end of the month of December.

So specifically on why we missed the low end of our guidance, it was the warmer weather in December than even we thought as well as the Canadian dollar depreciation.

Okay.

And then just on buyback, I think at the December meeting you talked about open market purchases, but clearly the stock's been under a lot of pressure here year to date.

How are you thinking the same or differently about that?

We're still thinking through the right way to do this.

And as I've said before, I don't want to surprise people on the what.

But I don't mind surprising you on the how, and we're still thinking through the right way to be most beneficial to our shareholders on the share buyback.

We're committed to doing a minimum of $200 million of share buyback, and to your point is where the stock is now it's a better deal than when it was at $135.

Great.

Thanks.

Our next question is from Steve Tusa with JPMorgan.

Please go ahead.

Good morning.

Could you just maybe unpack the ForEx impact on the actual margin performance in the fourth quarter resi maybe?

Yes, I'll even broaden it.

So if we look at on a year-over-year basis fourth quarter, we think FX had a negative impact of $3 million to $4 million.

We think the weather impact I talked about both on volume and margins had a $3 million to $4 million impact, and then we think that the lower factory absorption, because of the pre-build last year, had a $2 million to $3 million impact.

Now, all that being said, to just underline the good news is we're off to a nice start in Q1 with the weather cooling down and back on the trajectory we've been in over the last three or four years, which is margin expansion in residential.

Right, and that mix dynamic you're speaking to, you said price mix combined was negative 2.5.

When you say mix on that, I guess is that just furnaces are a higher price?

It doesn't say you're raising or at least you're reaffirming your resi mix forecast for this year, for 2016.

So it doesn't sound like it's necessarily a 2013, 2014, 2015 tier thing.

It's more product mix?

I just want to underline that hard.

It has nothing to do with the regulatory change.

What drove the mix impact in fourth quarter, simplistically is the weather.

So we have big fourth quarters in furnaces.

It's half of the industry.

We're a strong furnace Company.

It's even usually more than half for us.

The warm weather drove down the percentage of our product sales that were furnaces, versus a normal fourth quarter, and we make higher margins.

We define that obviously as mix.

The other impact was we make more money on replacement than we do on new construction, and the warm weather as a percentage of sales drove down the mix of add-on and replacement and drove up the mix as a percentage of sales of new construction.

It's all in a box largely speaking tied to weather, if not exclusively weather.

As we're going into first quarter and the weather's cooled down, as I mentioned to repeat myself, not be quite like Senator Rubio, but we're heading the right direction and margin expansion is going away.

It has over the last three or four years.

You went there.

Didn't think you were going to go there, but you went there.

I couldn't help it.

On the Texas economy, anything you're seeing there that makes you nervous from the impact from oil?

No.

I mean, I -- it's not affecting -- even in Houston, there's still lots of new construction, still replacement taking place.

I understand the big overhang and the fear of the plunging oil prices, but we may be the only industry I guess that it's a benefit for.

We drive a lot of trucks around and that's down, and in some ways it's a tax decrease to consumers and that helps us.

So we have to look hard to find anything negative to us as an industry on lower fuel prices.

Okay.

One last question for you.

Tyco, JCI coming together.

I don't really know how resi fits there.

They haven't really opined on what they're going to do on that front.

Is there a -- perhaps you toggle the buyback a little bit in the near term just in case that gets spit out there?

I know you've talked about in the past that you think you could improve that business.

What's your take there?

I think I'd break it into three or four things.

One is as you said, we'd like to participate in industry consolidation and we think if we owned the York Unitary asset we could create value at the right price for shareholders.

Two is, it's really JCI's call on what they do.

My guess is they're pretty busy right now and will be for awhile.

Three is we think we can do both if we had to.

Okay.

But to tie to what Jeff asked earlier, given where the stock price is we're going to be fearless on share buyback.

Right.

One last quick one.

All the price increases, normal kind of pricing environment out there even with commodities down, everything kind of okay on that front?

Yes.

I mean, you heard Joe guide the price up a bit.

That reflects an additional price increase that we're putting in effect March 1 in Canada, given the weakening of the Canadian dollar.

So again, we're aggressively pushing price.

Okay.

That makes sense.

Thanks a lot.

Thanks.

Next we go to Robert Barry with Susquehanna.

Good morning.

Just wanted to follow up on a couple things first.

The Canadian dollar, it's been a pressure for a while, but honestly for you guys it seemed an underwhelming one.

Any reason it really ticked up this quarter?

Hedges?

Pricing cadence?

Anything?

I think it's been pressure all year.

The FX impact that we had -- and I have all the 2016 numbers in my head, but I think the 2015 number was close to $20 million, $25 million of FX, as I'm looking to my left here.

And a lot of that was the Canadian dollar.

Then within the -- just within the month of December the Canadian dollar weakened pretty severely versus the US dollar, I think 4% or 5%.

And that just had some impact because it takes us a while to pass the price on in response, and now we have another price increase March 1.

Did you guys say how much the RNC was up in 4Q?

I think you said mid-single for the year, but --

I'm looking around the room.

17%.

17%.

Yes.

I mean, I'd think that would be -- first of all what's happening there?

Is that just starts and completes?

Are you gaining share?

And you didn't call that out as one of the drivers of the mix headwind, but I think it would be.

Any thoughts there?

Short answer is it is absolutely part of the mix headwind.

I think he said it in the script, at least I meant to, maybe I didn't read it right.

We think the warm weather affected us both with furnaces being down and air conditioners being up, which hurts us.

Add on replacement down as a percent and residential new construction up, and both those had negative impacts to us for the quarter.

I'm not so sure we're gaining share.

I just think the warm weather allowed starts and completions to continue to flow in the quarter more than it did last year.

Got you.

So it's in the weather bucket.

Just one last one on steel.

I know you updated the commodities guidance, I was curious what was driving that?

And I know you had been concerned about perhaps some tariff regime changes on the steel front.

Any update there and to what extent is that driving the change?

Your speculation is correct.

We withheld some of the benefit of steel because we weren't sure it was going to be there, but given the softening economy and the unlikelihood of any kind of high tariff impact to us, at least within the year, we're getting more comfortable.

Also, we buy our steel prices a quarter in arrears.

Another way of saying is we know what the first four months of 2016 look like for our steel pricing.

So we're getting increasingly comfortable in the benefit, and that's reflected in the new guide.

Got you.

Okay.

Thanks, guys.

Our next question's from Ryan Merkel with William Blair.

First, it's nice to hear that the first quarter is off to a good start.

Can we think of that as partly delayed furnace sales shifting into the first quarter?

Is that fair?

Yes.

Okay.

And then secondly, maybe just an update on the refrigeration business, and the margins there are tracking nicely.

Is there perhaps maybe and upward bias to your guidance for over 100 basis points of margin expansion in 2016?

Look, I mean, the honest answer is our internal plans are to do better than that.

Also last year I guided up 50 points in 2015 and we were flat, so things can happen.

We're committed to getting 100 basis points or more in the refrigeration business.

It's the things that we've talked about, the ramp up in our Walmart business, at our Kysor/Warren factories, continued margin expansion and cost takeout, and a higher portion of our material cost reduction in 2015 and in 2016, is focused on the refrigeration business, and that's helping the margin improvements.

And then just lastly on Canada, just an update on the economy there and how are trends for you?

Getting worse?

Staying the same?

Just an update there would be helpful.

I think the Canadian economy, other than in Calgary and the oil areas, is fine and chugging along both on new construction and on add-on replacement.

The weather obviously in fourth quarter hurt us, but it's cooled down over the last 35, 40 days in Canada and it's heading the right direction.

We do over 10% of our residential business in Canada.

We're strong there.

And so when the Canadian dollar weakens that hurts us from a profitability viewpoint, but we're doing fine on share and I think the market's fine.

Great.

Thank you.

And next go to Rich Kwas with Wells Fargo Securities.

Please go ahead.

Hi, good morning, everyone.

Todd, just on -- I know you don't give quarterly guidance, but when we think about the first quarter I know your comments around tracking on margin feel pretty good at this point.

But last year at this time you had replacement demand that was pretty good in Q1, new construction was down.

So is that a -- do we think of that as a mix headwind when we're thinking about modeling this over the next couple quarters?

I think we're going to have margin expansion all year in residential, and the way we see it now we're going to have margin expansion in first quarter.

Even with the headwinds that you talk about, I think add on replacement, I think the earlier call sort of hinted at it is, there is some pull forward, if that's the right phrase, or I guess push back is a better phrase, of some furnace replacements that didn't happen in fourth quarter that are now happening in first quarter that should help us.

There's also the benefits of the ramp up of our [Sateo] factory and the material cost reduction benefit.

So we still feel good about resi margins.

Now, the one caution I put out there is always the case which is March is a the huge month for first quarter.

That's 40% to 50% of our revenue is during one month.

So we feel pretty good right now, but I'll feel better April 1.

And then just I think at the -- if I recall, about 40% of your product is financed.

Is that correct on the residential side?

I think that's order of magnitude, probably right.

Are you seeing anything around the edges around deterioration or maybe little bit less availability?

Any problems along those lines, or is it pretty much status quo?

I think it's status quo, Rich.

I'll be honest with you, I haven't had a detailed conversation with our team in a while on that subject.

They usually raise the red flag pretty early if there's any issues.

The silence indicates to me that there's no issue.

We just had a big sales meeting earlier -- or excuse me late last week, and I was with the sales guys and no one brought it up to me.

We're not seeing any issues there.

Last one on commercial.

So with non-national account as strong as it has been and national account moderating down, does that -- I would think that helps your mix in commercial, but if you can just help us understand that as we think about margins for commercial?

We actually make more money on national accounts than we do on non-national account business, if you can believe that.

And the answer is even though you think the buying power of the large retailers would cripple us, it's our absolute most technologically advanced product and they're willing to pay for the technology because we can do things that others can't.

It's actually the other way.

When national accounts are down that's a margin hit to us.

Okay.

Great.

Thanks so much.

Appreciate it.

And we'll go to Julian Mitchell with Credit Suisse.

Please go ahead.

Hi.

Thank you.

Just a follow-up around the commercial trends in North America.

If you'd seen any sort of order push outs or delays of conversion of pipeline into your orders, and any update on the push outs of planned replacement in retail that you talked about as a potential risk back in mid-December?

We actually did a little bit better in commercial than what we thought we were going to do when we gave that guide.

So some of those national accounts we were able to deliver in fourth quarter.

Commercial national account revenue was down mid-single digits in 2015.

We now expect it to be closer to flat in 2016.

So we don't see a bump-up, but maybe the deterioration slows down a little bit.

The non-national account revenue was up mid-teens at constant currency in 2015, and we continue to see broad momentum in that business.

It was up 20% plus in Q4.

As we've gotten into Q1, it's not up that kind of level, but we still think we're going to have a nice Q1 and be up in revenue.

Thanks.

And then on refrigeration, you talked earlier about the margin outlook, but how about just on the end markets by region?

You characterize the expected market growth back in December across five geographies.

Any changing view on those today?

No, I think it's still about semi, and our most important market is North America.

We think it's down low single digits.

We'll continue -- the Brazil market will continue to be challenging.

Europe we think up a bit, Australia sort of flattish, and China we think even in a slower growth rate we're still going to be up mid-single digits as an end market in China.

Thanks.

Lastly on refrigeration pricing, you talked about a healthy environment for HVAC pricing.

Is the same true of refrigeration, or is it more uneven?

It's more uneven.

It's just a more challenging market to get price than in HVAC.

But we continue to -- if we can take advantage of our cost -- material cost reductions and able to pass on some price, then that's a win for us and that's sort of where we're focused at.

Great.

Thank you.

Thanks.

Our next question's from Jonny Wright with Nomura.

Please go ahead.

Good morning.

Do you mind if I get an update on the VRF side of things, where you are with the investments right now and what contribution you're looking for in 2016?

Our best guess over the of last couple years it's been a net investment.

We think it's going to be breakeven or so in 2016, as we continue to grow the business.

And as we've talk about, we think we have a five-year road map to get this thing in the order of magnitude of $100 million revenue, high single digit RAS.

As mentioned in the script over the last quarter or so we've started to really gain traction with some specific end markets.

Where we find where we do the best is where we can package our rooftop business.

So schools, healthcare, low rise office buildings where they're sort of multi-use.

If we can specify both rooftops and VRF that gives us an advantage rather than going in purely with the VRF play.

But we're gaining traction and we think it will be breakeven in 2016.

Okay, great.

Thank you.

I know you always have some adjustments you put out below the line, but there's a step up this year even when you don't include the Kysor/Warren impairment costs.

Do you expect that to normalize in 2016, or is there anything else you think is worth calling out this year that had an impact there?

I think it will normalize.

These things tend to be chunky one way or another.

It was a chunky year in 2015.

All right.

Thanks.

We have a question from Tim Wojs with Baird.

Please go ahead.

Yes, good morning.

Just a couple quick housekeeping items.

On the Canada price, what's the expectation for that to be implemented just in terms of time frame?

March 1. Deliveries out on March 1.

And then what's the -- you're still unsure how you're going to do the buyback for the year, but what's actually embedded in the guide?

I think what's embedded in the guide is we do $200 million and then we gave you the share counts.

I think you can back into how we're thinking about it.

But and again, just to -- I think we know what we're going to do, we're just not talking about it right now.

We're still talking about it with the Board.

Fair enough.

Take care.

Thanks.

We'll go to Josh Pokrzywinski with Buckingham Research.

Please go ahead.

Good morning.

A follow up on some of the earlier questions about the step into 1Q.

Todd, I don't know if you mentioned it specifically, but I guess seasonally you always see a step down in residential profitability given the lower absorption in first quarter, but it sounds like if weather is starting to go your way, mix is starting to go your way, maybe there's some opportunity to catch up a little bit on price.

In Canada obviously only one month of it, but should we see a much lower than normal drop in the operating margin there in resi in the first quarter, or is there a chance that could be up?

Just any way to dimension some of that more qualitative commentary?

I think just the math of it would be -- our margins were down in fourth quarter, and I'm saying the margins are going to be up in first quarter.

So just I think those two facts would tell you that it's going to be closer than normal.

That's helpful.

And then just back to commercial.

I know you broke down the performance versus national accounts versus non-national accounts.

But I guess any shifts in the environment more broadly, never mind push outs specifically, but I guess anything you're seeing from customers in terms of trading down or any kind of caution that you're seeing on that front?

Price competition, anything of that nature I guess.

No.

I mean, I think, look, we're -- the world's spinning pretty fast right now.

And so we have our ear to the ground, mixing metaphors right, but we have our ear to the ground to see if the world's changing.

And so far it's steady as she goes.

The national account customers are lumpy and they push out and they pull in and things move.

In the non-national account business, which has been on a tear for 18 months or so, was very strong in fourth quarter and we haven't seen any changes to -- like I said, it's probably not going to be up 20% like it was in fourth quarter, but we're still feeling good about the non-national account business.

Pricing and mix continues to sort of chug along as we would expect.

Is there any expectation that some of that lumpiness on the national account side maybe becomes a little bit more stubborn?

What's going on with the retailers in the stores themselves?

Maybe some of that's tied to weather for them as well, but clearly a bit more choppiness on their fundamentals these days than maybe just lumpiness?

Fair enough.

We'll see how it plays out.

You can defer these things for a year or two, but the operating -- if you have the cash, the operating cost savings is so important to retail chains if you're going to spend the money.

As we talked about last year, part of the issue to us with some of the national account push outs was not only pressure on their top line, so therefore they didn't want to spend money, it was fighting for capital, for investments, for online, and IT investments they were making.

Again, I think the more pressure they're feeling on the bottom line, I think the more likely they're going to make investments, capital investments with us because we can make it a year-and-a-half, two year payback for them which is better I think than any other investment they can make.

So we'll see how it plays out.

We're cautiously optimistic for national accounts in 2016.

Thanks, guys.

We'll go to Shannon O'Callaghan with UBS.

Please go ahead.

Good morning, guys.

Hey, on the residential, right, it was up 8% even with the negative weather impact.

You said it would have been better without that.

What do you think you would have been up in a normal weather quarter?

I think we could have had another point or two.

Okay.

And then maybe just taking this commercial question again, in terms of that 20% growth in the quarter and even your other quarters this year have been pretty strong, any kind of key vertical markets that you think are particularly strong there or places where you've done particularly well?

We've done very well in schools this year.

Our school business is up 20% plus and I think that's a focus on them spending more money, but also us having a dedicated sales channel, dedicated salespeople, dedicated inside salespeople.

Light industrial has been reasonably strong, and some of the smaller retailers who aren't our national accounts we continue to sell to.

So I think it's strong across multiple verticals, but probably the strongest has been schools and most meaningful has been schools.

And that up 20% obviously is going to be a very tough comp.

But generally do you think you're going to still be able to grow against these comps?

Is there any big market share that's visible, or you just think overall those schools and those more institutional markets are going to remain strong?

We're gaining share.

It's not a vertical, per se.

It's more of a buying pattern, but our whole initiative emergency replacement continues to yield dividends and investment that we made in the radar product line and our investments and distribution continue to pay dividends.

So 10 years ago or even five years ago we were mainly viewed as a national accounts player, and all the investments we've made both in product and distribution allow us to play in non-national accounts and grow the business pretty significantly, and we're seeing the benefits of that.

Okay.

Great.

Thanks, guys.

We'll go to Jeffrey Sprague with Vertical Research.

Please go ahead.

Thank you, guys.

Good morning.

Just a couple cleanups here I guess.

First, just coming back to price, so the bump on price from a $10 million benefit to $15 million, Joe described the change as Canadian dollar related.

Was any of the $10 million related to FX or other factors?

I guess what I'm trying to get at is there actual like-for-like price increases going on inside the business, adjusting for the FX and maybe other noise?

A portion of the $10 million was associated with FX.

Not all of it.

So we're getting sort of net-net price and then we're offsetting -- partially offsetting the FX this year.

What we find is, when the FX moves as quickly as it has, we're not able to get it in one year and so we're getting a piece of it this year and we'll get some more of it next year.

And then you broke down all the related headwinds on the margins pretty thoroughly.

You didn't actually mention -- or if you did I missed it, but how significant was the actual headwind from the investment activity that you were talking about?

And how does that play out as we look into the new year?

I don't think the investment -- the investments, we had investments last year, we had investments this year, so on a year-over-year basis, that wasn't that big a driver.

We missed on our guide on corporate expenses, and I think that just reflects timing of some of the bills coming due and rising healthcare costs.

We got surprised quite frankly on a few things at the corporate line.

I think about it more evenly over a year-to-year period.

Our rate of investments are about the same.

And just one last one.

What was the inventory write down in the quarter?

Was that in refrigeration or something else?

It was in refrigeration.

It was an adjustment to the market value of the inventory in one of our foreign subsidiaries.

It was a situation where it was a one time event; it was completely resolved in the fourth quarter.

Thank you.

Our next question's from Keith Hughes from SunTrust.

Please go ahead.

You've talked about buyback a few times here.

I think we know where you're heading.

I guess what's the Board's appetite at this point for leverage,?

How far would you take it up if you could do the shares that are attractive?

We've talked that our debt range is 1 to 2 times debt to EBITDA, and over the longer term it's certainly closer to 2. And I've said in this industry, you can even go higher than 2 and sleep at night.

We had record cash flow in fourth quarter.

We had record cash flow in 2015.

And we think we'll beat that in 2016.

So I think we have lots of cash.

I also though think it's important to keep some flexibility if an acquisition would come along.

And I also think, especially in the uncertain world we live in, we're investment grade, we like being investment grade, and so we would want to work with our rating agencies to make sure that would be the case.

That being said, I'll repeat what I said earlier, we're going to be fearless on share buyback.

All right.

Thank you.

We'll go to Walter Liptak with Seaport Global.

Please go ahead.

Hi, thanks.

Good morning.

Wanted to ask about your comments with the new construction as well as replacement HVAC.

I assume that being stronger, that was down in the southern region of the US.

I wonder if the strength you saw there has any implications for the spring construction season up here in the north?

I don't know if I'd extrapolate in any major way.

What I was trying to make the point was that the building season gets extended when the weather remains warm, and that's what we saw.

And from a mix point of view we make less on residential new construction than add-on or new replacement.

No thought about it with regard to construction?

I don't think there's a big -- at least in my mind, not a big read-through, it's more of a weather point.

Okay.

I think you covered this before, but SEER 13 inventory that you're still holding, any impact on margin in the spring?

No, I think it's -- we're in a good position.

We're entering the year with some 13 SEER, and we think that's important to have inventory as we carry through the final transition that takes place mid-year.

The transition from 13 to 14 SEER in the south has gone well.

We'll know more when everybody's out of 13 SEER, quite frankly.

But so far so good.

Is there any price delta between 14 and 13 now, or is it about the same?

There's still a price delta.

All right.

Thank you.

Next question's from Robert McCarthy with Stifel.

Please go ahead.

Good morning, everyone.

I guess just back to your comments around the outlook, good start to 1Q.

But granted 40% to 50% is in March.

What specific things are you looking at to give you confidence?

It's 1Q of a pretty seasonal business in the context of the full year.

Is there anything that's pointing to your confidence around 1Q and the persistence of the trends in terms of quoting activity, orders.

How would you characterize it?

Because it sounds like you're bullish at what is debateable a tough pivot point?

I think I'd point to in our commercial businesses what we're seeing in backlog and order rates, and so we have some visibility there, albeit shorter.

On the residential side, it's a little -- we have one month down, so I know what actuals are for at least one-third of the calendar month.

Part of it's softer, just what are your customers saying, what are your salespeople saying, and we had an opportunity to spend time with the salespeople and we have dealer meetings coming up, and we'll see how all that goes.

I know there's lots of doom and gloom on the horizon right now on a macroeconomic viewpoint, but the American consumer is still in pretty good shape.

Unemployment is still in pretty good shape.

Existing home values still in pretty good shape.

The lower fuel costs, while sort of doom and gloom in many industries, are giving people more disposable income.

We had some weather-related issues in fourth quarter for resi on the mix side, and the pre-build year-over-year impact, you take those away, revenue's still up 8% in a weather headwind.

We still feel good -- our residential business is still chugging along, and we're confident for first quarter and for full year.

Just as a follow up to that, and obviously we know that obviously 2Q [chum], et cetera are critical pivot points, but is there anything in terms of the compare that we should just be reminded of either in the April or June time frame in terms of sell-through or anything along those lines?

Just what you're looking to get a better sense of the trajectory of this year in terms of seasonality and weather?

I'll be honest with you, I'm spooled up in my head on fourth quarter and first quarter.

I haven't thought so much about all the trends in second quarter.

So I forget when weather broke last year.

I think as I recall it was a cereal start to the summer than it was the year before, so we didn't get much weather in April, May.

But then it started to get warm end of June and was very strong in July, and so I think that's the weather impact.

So if it gets warmer earlier, then I think we'll have an earlier start to the summer selling season.

All that being said, I think the economic indicators of add-on and replacement have been existing home values, unemployment, consumer confidence.

If people are willing to spend money we're able to give them a value that if you're going to stay in your house two or three years you get to breakeven pretty quickly due to the energy efficiency.

So we're feeling -- we don't feel like there's -- even though the margins indicate in fourth quarter there was, I think they're weather related, Canadian FX related, ramp-up related, and that the trajectory that we're on in residential, fourth quarter is the outlier, and first quarter will get back on track.

Thanks for your time.

And we'll go to Samuel Eisner with Goldman Sachs.

Please go ahead.

Good morning, everyone.

Just on the pricing comment there, I think down at the AHR expo it sounded as though the SEER pricing was coming in.

I know that you had that embedded in your original guidance.

Can you maybe talk about, going back to Jeff's question about individual product line pricing.

Can you tell us what's going on with SEER 14 and above pricing and how you think that's going to play out throughout the course of the year?

I think we've announced price increases at the beginning of the year for all North America.

We announced another one March 1 in Canada, and it's always our goal to not only mix up but price up, and we're committed to try and get that.

Our guide is $15 million in price, a portion of that is Canadian FX, a portion of that's getting price in the marketplace.

But we're committed to doing both.

And the SEER 14 price downs that you guys were expecting, I think you alluded to that in multiple calls prior.

Is that compressing in line with your expectation?

So far it's done better than what we had thought.

That's why we had positive price in -- more positive price in 2015 than we originally guided to.

I understand the question.

We really won't know the answer until we get into the summer selling season and everybody's 13 SEER has evaporated.

Then we'll get a better read exactly how it's going to be.

I'm cautiously optimistic; it's gone much better than we thought to date.

But we'll know for certain when we get into summer selling season.

Our guide assumes there is some compression.

Let's see what happens.

Going back to the mix comment, it sounds as though first quarter you're going to get a nice benefit from the push out in furnace shipments.

You're going to have a pretty easy comp in the fourth quarter when it relates to comping against more new construction, as well the easier furnace comps.

I guess what am I missing in more of the positive commentary on mix?

Why is that still saying around $5 million?

Thanks.

Good question.

I think it's early in the year and we've just got to see how it plays out.

The regulatory change could change things.

We just have to see how it plays out.

And quite frankly we haven't baked in everything that happened in fourth quarter in resi to the guidance.

Let's see what happens.

But I agree with you.

If everything breaks our way there will be upside in mix.

Got it.

Really appreciate that.

Thanks.

With no further questions in queue, I'll turn it back to presenters for closing comments.

Thanks, operator.

A few points to leave you with.

In fourth quarter momentum continued in our commercial and refrigeration businesses.

Residential margin had a lull from the impact of record warm weather in the fourth quarter.

We're off to a nice start and are seeing momentum for strong year-over-year growth and margin expansion in the first quarter.

Overall we expect strong growth and margin expansion across all thee of our businesses in 2016 and another year of record profitability.

I want to thank everyone for joining us today.

Ladies and gentlemen, that does conclude your conference.

Thank you for your participation.

You may now disconnect.