Lennox International Inc (LII) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for your patience in standing by.

Will come to Lennox International fourth-quarter 2016 earnings conference call.

(Operator Instructions)

Just as a reminder, this conference call is being recorded, and 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 2016.

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

Todd will review key points for the quarter and the 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 limits yourself 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 a necessary reconciliation of the non-GAAP financial measures that will be discussed to GAAP measures.

In addition, all comparisons mentioned today are against the prior-year period.

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

We will archive the webcast on that site for replay.

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

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

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

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 the Chairman and CEO Todd Bluedorn.

Thanks, Steve.

Good morning, everyone, and thank you for joining us.

Let me start with a quick review of 2016 overall, and then discuss fourth-quarter highlights and give some high-level thoughts on 2017.

2016 was another record year for Lennox International, with the Company establishing new highs for operating margin and profit, as well for cash from operations and free cash flow.

Revenue was up 5% for the year, and GAAP operating income rose 41% to a record $429 million.

GAAP EPS from continuing operations was up 54% to a record $6.34.

On an adjusted basis, total segment profit rose 24% to a record $470 million, and total segment margin expanded 200 basis points to a new high of 12.9%.

Adjusted EBITDA from continuing operations was up 35% to a record $6.95.

Revenue, margin, and profit were up in all three of our businesses in 2016.

Residential and commercial set new records in all three measures, and refrigeration top-line growth and margin expansion drove segment profit up 30% for the year.

The Company's performance in 2016 was led by our residential business.

Residential margin was up 7%, and profit rose 25%.

Segment margin expanded 250 basis points to 17.4% for the year.

Revenue from replacement business was up mid single digits, and new construction was up low double digits for the year.

We drove record margins in residential, while continuing to make strategic investments for future growth and enhanced profitability.

Investments range from new projects to distribution expansion, to leading information technology for dealers, technicians, and homeowners.

In commercial, revenue was up 4% at constant currency for the year, and profit rose 14%.

Segment margin expanded 160 basis points to 16.3%.

As in residential, our commercial business hit new record highs, even as we continued to make strategic investments in the business.

In North America, equipment revenue was up mid single digits for the year.

Non-national account revenue was up high single digits, of continued success with our initiatives in the emergency replacement market.

National account revenue was up low single digits.

Outside of retail, we saw strong revenue growth in our national account business, as our diversification efforts over the last several years continue to pay off.

The Company continued to win in the market with 31 new national accounts in 2016, a new record for us.

On the commercial service side, Lennox national service accounts service revenue was up mid-single digits.

In Europe, commercial HVAC revenue was flat at constant currency for the year.

In refrigeration for the year overall, revenue was up 2% at constant currency, and profit was up 30%.

Refrigeration margin expanded 210 basis points and 9.5%.

At constant currency, North America, Europe, and Asia Pacific was up low single digits for the year, and South America was up mid single digits in a very tough end-market environment.

Turning to the fourth quarter, Company revenue was up 8% to a new fourth-quarter record of $897 million.

GAAP operating income rose 233%, and GAAP EPS from continuing operations was up 276%.

On an adjusted basis, the Company has had new fourth-quarter highs for total segment profit and margin, as well as EPS.

Total segment profit rose 30%, and total segment profit margin expanded 200 basis points to 11.7%.

Adjusted EPS from continuing operations rose 35% to $1.50.

Our residential and commercial businesses established new fourth-quarter highs for revenue, profit, and margin.

In residential, fourth-quarter revenue was up 10%, and profit rose 43% as segment margin expanded 400 basis points to 17.2%.

[But] it was relatively warm to start the quarter in October, but the Team did a great job closing the quarters strong in December as weather turned cold.

Revenue from replacement business was up high single digits in the quarter, and residential new construction revenue was up low double digits.

Turning to commercial in the fourth quarter, revenue was up 7% and profit rose 11%, as segment margin expanded 60 basis points to 15.9%.

North America commercial equipment revenue was up 10%, led by low double-digit growth in non-national account businesses.

National account equipment revenue was up high single digits, and service revenue was up mid single digits.

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

In refrigeration, revenue was flat at constant currency in the fourth quarter.

From a regional perspective, at constant currency, North America and Europe were down low single digits, and Australia was down mid single digits.

South America was up more than 20%, and Asia was up nearly 30%.

Refrigeration segment profit and margin were also flat in the fourth quarter, after strong growth in the first three quarters of the year.

The [pods] for refrigeration in the fourth quarter reflects the timing of national count revenue and factory loading of our Kysor/Warren business.

While the fourth quarter was flat in refrigeration, that business made nice progress in 2016, and we expect progress to continue in 2017.

We expect the North America refrigeration market to be up low single digits this year, and are targeting another 50 to 100 basis points in margin expansion for our refrigeration business in 2017.

Before I hand it over to Joe, let me take a moment to make a couple points on issues that investors have asked a lot about with the new administration: potential tax reform and border-adjusted tax or tariffs.

First, on the corporate tax rate.

Given our current 32% effective tax rate, we would be a significant beneficiary from a reduction to 15% or 20%.

We estimate that every 1% reduction in the tax rate equates to approximately a $0.10 benefit to EPS for us.

This would obviously be a significant near-term and long-term benefit.

With regard to a potential border-adjusted tax or tariffs, we are monitoring closely alternative proposals.

I would highlight that we have flexibility with our North American residential manufacturing footprint, especially with our low-cost assembly factory in South Carolina.

To add capacity in the US, investment factory automation strived productivity are continuing to make additional investments in Mexico, all depending on what path makes most economic sense.

The bottom line is, we have action plans in place depending on what policies are set to continue driving margin expansion in our residential business, and across LII.

While there a lot of headlines day to day, the overall perspective is another year of strong growth and profitability for the Company in 2017.

And 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, and repurchase Company stock, with $250 million planned for 2017.

Now, I will turn it over to Joe.

Thank you, Todd, and good morning, everyone.

I will 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 a fourth-quarter record $476 million, up 10%.

Volume was up 9%, and pricing mix combined was up 1%.

Foreign exchange was neutral to revenue.

Residential profit was a fourth-quarter record $82 million, up 43%.

Segment profit margin was a fourth-quarter record 17.2%, which was up 400 basis points.

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

Partial offsets included investments in distribution expansion, information technology, and research and development.

For the full year, residential segment revenue was a record $2 billion, up 7%.

Volume was up 6%, and pricing mix combined was up 1%.

Foreign exchange was neutral to revenue.

Segment profit was a record $349 million, up 25%.

And segment profit margin was a record 17.4%, up 250 basis points.

Turning to our commercial heating and cooling business, commercial revenue was a fourth-quarter record, $243 million, up 7%.

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

Foreign exchange was neutral to revenue.

North American commercial HVAC equipment revenue was up 10%.

National account services revenue was up mid-single digits.

Europe commercial HVAC revenue was flat, although up at constant currency, as Todd mentioned.

Commercial segment profit was a fourth-quarter record $39 million, up 11%.

Segment profit margin was a fourth-quarter record 15.9%, and that was up 60 basis points.

Segment profit was positively impacted by higher volume, lower material costs, and favorable foreign exchange.

Partial offsets included higher SG&A, investments in distribution expansion, and other product costs.

For the full year, commercial revenue was a record $918 million, up 3%.

Volume was up 3%, and price and mix combined was up 1%.

Foreign exchange had a negative 1% impact on revenue.

Segment profit was a record $149 million, up 14%.

Segment profit margin was a record 16.3%, up 160 basis points.

In our refrigeration segment, revenue in the fourth quarter was $178 million, up 1%.

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

Foreign exchange had a positive 1% impact on revenue From a regional perspective, Todd addressed revenue growth in constant currency.

On a reported basis, South America was up more than 40%, Asia was up more than 20%, Australia was flat, and North America and Europe were down low single digits.

Refrigeration segment profit was $16 million, up 1%.

Segment profit margin was flat at 8.8%.

Segment profit was positively impacted by lower material and other product costs.

Offsets included lower factory productivity and higher SG&A.

For the full year, refrigeration revenue was $723 million, up 1%.

Volume was up 3%, and price and mix combined was down 1%.

Foreign exchange had a negative 1% impact.

Segment profit was $69 million, up 30%.

Segment profit margin was 9.5%, up 210 basis points.

And as Todd mentioned, the fourth quarter reflects timing of national account revenue and factory loading at the Kysor/Warren business.

After a strong 2016 overall for refrigeration, we see the fourth quarter as a pause, and continue to expect solid growth of 50 to 100 basis points of margin expansion for that business in 2017.

Regarding special items in the fourth quarter, the Company had net after-tax charges of $24.5 million, with $20.5 million of that due to a previously-announced one-time lump-sum pension buyout program to certain vested participants.

For the full year, the Company had net after-tax special charges totaling $27 million.

Beyond the $20.5 billion pension buyout, other items included $4.1 million for asbestos-related litigation, and $1.8 million in special contingency charges.

Corporate expenses were approximately $32 million in the fourth quarter and $97 million for the full year, up year over year, primarily on investments to support the Company's growth, some general wage inflation, and employee incentive compensation.

Overall, SG&A was $165 million in the fourth quarter, compared to $151 million in the prior-year quarter.

For 2016, SG&A was $621 million, compared to $581 million in 2015.

The Company had record cash from operations for the year at $355 million, up from $331 million in the prior year.

Capital expenditures were $84 million in 2016, compared to the $70 million in 2015.

Free cash flow was a record $270 million for the full year, up from $261 million in the prior year.

I would note that in 2016 the Company repatriated $50 million in cash resulting from tax planning initiatives, and made a discretionary pension contribution in that amount, which lowered cash from operations and free cash flow as reported for the year by $50 million.

In 2016, the Company also paid $69 million in dividends and repurchased $300 million of stock.

Total debt was $868 million at the end of the fourth quarter, and we ended the year with a debt EBITDA ratio of 1.6.

Cash and cash equivalents were $50 million at the end of the year.

Before I turn it over to Q&A, I will review our outlook for 2017.

One month into the year, our underlying market assumptions for 2017 remain the same.

For the overall industry, 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.

Based on this underlying market environment and our targets for market share gains, revenue growth guidance for Lennox International remains 3% to 7% for 2017, with a minimal impact from foreign exchange.

Our guidance for EPS from continuing operations for the full year remains a range of $7.55 to $8.15.

Let me run through the key points in our guidance assumptions and the puts and takes for 2017, which remain the same as we first set out in mid-December.

We continue to expect $35 million in savings from our sourcing and [engineering-led] cost reduction programs.

We expect $6 million in savings from our manufacturing operations in Mexico, from actions that have already been taken, and we expect residential mix to be a $5 million benefit for the year.

We continue to expect $10 million of headwind from commodities in 2017, and are targeting $20 million in price increases for the year.

We have assumed a minimal impact from foreign exchange, and we will monitor that closely as the year progresses.

Just a few more other guidance points that are unchanged.

Corporate expense is expected to be approximately $85 million.

We still expect net interest expense for the year of about $32 million.

Our effective tax rate guidance remains approximately 32% on a full-year basis.

We continue to expect the weighted average diluted share count for the full year to be between 42 million to 43 million shares, which includes our plans to repurchase $250 million of stock this year.

Capital expenditures are expected to be approximately $100 million for the year, and we're targeting free cash flow of $285 million for 2017.

And with that, we will go to Q&A.

(Operator Instructions)

Tim Wojs, Baird.

Nice job on the quarter.

I guess just to start, Todd, maybe you could comment a little bit on how Q1 is trending to date.

I know Q1 seasonally is a little bit of a weaker quarter relative to the rest of the year, but just how should we think of Q1 EPS as maybe a percentage of the full year?

On the first part of the question, we're off to a solid start in Q1, the weather has been a bit warmer in January than it was last year.

But you always, quite frankly, worry a little bit when you push -- not push, but have such a strong December that maybe you pulled something from the beginning of the year, but that's not the case.

Off to a nice start, but March is the most important month of the quarter with 40%, 50% of the revenue in that quarter.

In terms of the first quarter, I would just model it similar to what we've done in history.

You're right.

It's our lowest seasonal quarter, and I would just look at the last two or three years, the percentage of our profits in first quarter, and there's not going to be any different in any meaningful way this year.

Okay.

And then maybe just a bigger picture question, just with the 3% to 7% revenue guidance range for the year, what would be the swing factors to get to the top and bottom end to those ranges?

Weather always is a big swing factor.

You remember last year, we started out cool and then it got warmer as the year progressed.

So, weather is a swing factor.

And then the other is -- how's this for an understatement?

There's macroeconomic and political uncertainty (Laughter) So, there is some risk there, also.

Okay.

Great.

Good luck on 2017.

Appreciate it.

Steve Tusa, JPMorgan.

On the price cost side, is there any update to the price capture you guys are expecting in 2017?

Maybe just give us a little bit of color around what you are seeing out there as far as the range of increases that are out there and whether or not 2017 is forced to the high end of those ranges, given where commodities done.

As Joe talked about and reiterated our guide that we gave in December, that right now we are guiding that we are going to have $10 million of a headwind from commodities and $20 million of price benefit.

We announced the 5% price increase for Lennox commercial effective November 1 of 2016, and then a 3% to 6% price increase for Lennox residential effective January 1. And in our other businesses similar things.

Obviously, that's the big umbrella that we announced, but we are very confident we're going to get to $20 million.

You know and you've seen our competitors have all done similar things.

Everybody understands the increasing commodity costs and the need to go out and give price, so we are confident we're going to be able to go do that.

And then those are higher than normal type of numbers than previous years?

I think the announcement is we tend to announce 4% or 5%.

I think getting $20 million is higher than what we did last year, but in prior years we've gotten $40 million, $50 million in price when there's been commodity shocks.

What was the price you got in 2016?

Just price, not mix.

I'm turning to the Team.

You asked me a question -- I think for [resi] we said we were going to be flat, and then overall for the Corporation we had positive price.

And on the resi incrementals, obviously big question here in the fourth quarter; how much of that is coming from the new products that you've designed where you have done a great job of taking the cost out of those and not necessarily reinvesting all of that cost out?

And is there anything about the new product phasing in 2016 that was unusually strong?

I think the driver in fourth quarter was some of the drivers we've seen all year for our resi business, with one exception.

I think we had stronger mix up in fourth quarter, and so we had some nice mix tailwind for the quarter, and again, that reflects this move towards premium products.

The cost take out we saw all year, and again we've been at that for a while, so it did not bunch up in fourth quarter, so spread throughout the year.

And then we had another quarter of commodity tailwind, and obviously, as we go into 2017, maybe early in the year we will continue to have a little bit of a tailwind, but then as we get to the second half of the year it will start to be a headwind.

Again, just overall a strong performance from the Resi Team.

We're able to surge on revenue and not add a whole lot of cost in overhead or factory to be able to do that, just a well-run business.

One last question.

Seems like a lot of your peers, some of the smaller guys, have revamped their product lines.

Are you seeing that have any impact from a share perspective, maybe a little bit tougher to eke out market share with some of the guys that had been lagging historically, thinking the Yorks and the [Rings], are you seeing any initial impacts from their reinvestments here?

No.

The longer answer is from the time somebody launches a new product, given the distribution buffer and all the touch points you have with the dealer, it's not coming out with the iPhone and you swing a huge share, number one.

Number two is, I often joke, from the time something is announced at Mount Olympus, from one of our competitors, to the dealers tested and get comfortable with the quality and make sure it works and performs the way, it takes a while.

And so, they are refreshing their product, but guess what, so are we.

Our product innovation and our HVAC businesses are over 45% of product in sales from products we've launched the last three years.

So, we think the gap between our product and others is increasing, not closing.

Julian Mitchell, Credit Suisse.

My first question really on the commercial business.

You had a very nice acceleration in Q4 versus the preceding six months.

You're guiding for low-digit growth in North America commercial unitary this year.

Maybe just give us some sense around any shift you saw in recent months, in terms of the noises from customers, the distribution channel, how do you feel about that piece of your business in the US right now?

We feel good going in to 2017.

There's just a natural -- more of a natural chunkiness or choppiness of the business, given some of the large orders and some of the large customers, but again, we had a nice second half of the year in commercial, especially fourth quarter.

We had talked about earlier in the year some of the school business being pushed out to December, and that's what we saw.

But order intake and backlog remains nice and strong as we enter 2017.

My follow-up would be on refrigeration.

You emphasized a pause a couple of times in the fourth quarter.

When you are thinking about how refrigeration plays out in 2017, do you think that pause continues into the first quarter or first half, or you think we should see a fairly level loaded year in that business in terms of the revenue and margin progression that you had talked about?

I think similar to commercial, there can be some choppiness in the business.

I think I would highlight the change year over year from 2015 to 2016, and why quote-unquote we saw the pause was third quarter was a much larger national account quarter for us than fourth quarter was in 2016, and the opposite was true in 2015.

So, as we enter first quarter, we're optimistic with what we are seeing for order rates and backlog, and we think we're going to have a nice year in refrigeration.

Again, we have guided that the market is going to be up low single digits in North America, and add another 50 to 100 basis points of margin.

And just following up on refrigeration, the factory loading item you had talked about, anymore details?

Tied to the same point.

Large customer in Arkansas, the timing between third and fourth quarter last year versus this year, you are building a product, and so you get lots of factory absorption and benefit from those orders.

And then when it is in a different quarter the next year, you get the benefits at a different time.

Jeff Hammond, KeyBanc.

Just on residential, you guys talked certainly about weather issues at your Analyst Meeting, I just want to get behind a little bit what really drove the strength, given some of those dislocations, and really, maybe if you look more broadly at second half, really nice acceleration here.

What do you really see inflecting?

I think it's (technical difficulty) often the case, I think the market solid, strong.

New construction being up, replacement demand.

I know you were at our industry trade show, when you walk around and talk to people, people feel very confident.

Number two is the weather got cold, and then three is I think we're performing.

All the things that we've talked about over the years just continues to be a virtual cycle.

We continue to build out PartsPlus.

We tend to put the PartsPlus stores front-end load them, and so we have them in place as we go into the second half of the year.

The investment in controls, the investment in LennoxPROs, our ability to convert dealers.

When you win dealers, you win them during the dealer conversion period, which is before the summer selling season, and then it takes five, six, seven months to ramp them up, and I think you see that in the second half of the year.

But again, I think our Resi Team is performing very well.

And then just on emergency replacement, you guys have done well there, been very focused.

I would say the observation at these shows is more people seem to be focused there, so are you seeing that space get any more crowded as you look into 2017?

I think others are involved and coming out with product.

I think the thing I would underline is things that we can do -- I think we're absolutely at the low-cost point and others I think could get close to us or match us, but I can't imagine they can get below us, given our factory in Arkansas, given the design of the product.

Two is the buildout of our PartsPlus strategy for [res], and our ability to serve commercial customer same day, I think is unique.

And third is, we've really increased our focus on serving that segment.

Carrier has been doing it forever, but some of these other folks are getting into emergency replacement.

They may have the product, they may even have physical distribution, but the marketing programs and the focus of having a separate salesforce for these smaller at-once emergency contractors, we've gotten better and better at it, and we said when we launched this it would be multi-year strategy, and it continues to be the case, and I know others are in it, but we continue to win.

Ryan Merkel.

First, I want to talk about incremental margins.

I know in 2017 you are targeting 30%, but should we expect stronger results in the first half versus the second half, just based on comparisons, and is there any other considerations you want to think about?

I think that's what I would do, just given the commodity profile that all of us can model when you think about the hedges.

I think that's the only thing that I would adjust for.

We -- the weather is the other wild card, but that's hard to model that, so I think I would check what we've done over the last couple years, maybe pull forward a little bit during the first half of the year, because of commodities.

Okay, great.

Secondly, on R-22 allocations going down again in 2017, I know it's not a big category for you, but with that, how are you going to offset that is the first question.

And secondly, do you expect a decline in R-22 availability to continue to push for more full replacements to R-410A next year?

I think we're really to the other side of that.

From a regulatory point of view, you are not able to do dry charge units anymore, and so when, really, the R-22 equation just becomes a question of if you have an old system and you want to limp along.

But typically -- not typically, what will happen would be those systems are old enough now, the efficiency is low enough, it would be silly if you had a catastrophic failure, compressor failure to try and fix the compressor and then have it limp along by recharging the system.

I think we're really to the other side of that as of mid-year 2016.

Okay.

Just lastly on Walmart's plans for commercial and refrigeration for 2017, any clarity there that you can provide?

No.

We continue to be a major supplier to them on the HVAC side, less a percentage of their business on refrigeration, but they are still a very important customer to us and our -- from their lips to our ears is in our full-year guidance.

I think they continue to rethink as they go along maybe what they are going to do, but their best guess us what our best guess is, and they're an important customer and we will see how it plays out.

Gautam Khanna, Cowen and Company.

Following up on the last question with the Walmart mix with refrigeration, is there anything structurally that prevents Kysor/Warren to get into the segment average refrigeration margin?

And if I recall, it finally broke even in Q3 or Q4.

So, maybe where are we on that journey at Kysor?

We've obviously had trouble with this business.

We took a write-down last year.

Clearly in the right direction, major driver of our 200-plus basis point improvement in refrigeration.

It can clearly be our overall margin in refrigeration is 9%, 10%.

It can clearly get to that level when you look at what Hill Phoenix, which is part of Dover, has done, and in prior years what Houseman has done.

So, we're focused on that, and think we're doing all the right things around cost reduction and focused on material cost reduction, as well as innovative product, alternative refrigerant systems.

So, we're confident we are doing all the right things to drive the profitability of the business.

Is it in the black now?

And how dependent is it just on customer mix?

You've already well along in the restructuring and the product rationalization, is it now just a function of you need [true] big customers to buy the stuff that you want them to buy and not some of the more commoditized product?

Without being too glib, I've never run a business where the customer mix wasn't the important thing.

And so, Kysor/Warren, just like all our other businesses, we have got to get customers, we have got to have profitable customers, and we are moving in that direction and we're focused on that.

And is it in the black now?

Not in low seasonal quarters, but we are making money in Kysor/Warren.

Last question just on M&A, can you talk a little bit about what you are seeing, if anything, in the pipeline, and what types of assets might interest you?

We are very selective, and I think we have this luxury that we continue to expand margins in our businesses that we own, and we play in end-markets that are growing low- to mid-single digits, and we can grow revenue like we did this year and in the last four or five years, of 5% to 6% a year.

Our focus on M&A has not changed, if we can consolidate to North America unitary HVAC market, we would love to do it, but it is only a handful of assets and someone would have to decide they wanted to get out.

For the right business, we would do something in Europe.

We have improving team there, and if we could grow our business in Europe through acquisitions, we might want to do something, and then the third one would be in commercial service.

We've done some deals over the years, but organically we are growing, so again, we'd be very selective there.

Rich Kwas, Wells Fargo

This is Deepa Raghavan for Rich Kwas.

I've a question on refrigeration trend.

One of your competitors called out a [nice headwind] from pricing there.

Not all translates to you, I understand that, but trying to get a sense for the confidence you have in getting 50 to 100 Bps margin expansion potential.

How much of that is internal initiatives versus how much of that is macro-dependent?

I think it's a little bit of both.

Our competitors, I'm sure -- I assume you are talking about Hill Phoenix.

That a display case business that's maybe 20%, 25% of our refrigeration business.

We do a lot of other things: cold room storage, international business, convenience stores, and those businesses continue to grow and margin expand, and we have the right customer.

So, again, from an overall perspective, it's obviously a combination both of self-help and customers.

But we feel pretty good about the margin expansion in refrigeration.

We said at least 200 basis points this year, and we did 210 basis points.

Residential revenue is pretty strong in Q4.

Just given weather was not favorable early part, and obviously, just curious, was demand more December-weighted, or did you experience any election-related pause, or was it an even quarter?

Any color on trends within Q4 would be helpful.

It was driven by the cold weather, second half of November and December.

I don't think the election had any impact at all.

I think it was just it got cold and the dealers were waiting for it to get cold, and it got cold, and we sold product.

Any updates to your outlooks post your Analyst Day, anything you are seeing, including activities on the nonresidential side or a residential, or any vertical that you think picked up pace or anything that slowed since your Analyst Day?

No.

I think it's steady as she goes.

Joe reiterated all the financial guidance points and it's early in the year, so as we get into the season, we will find out more.

But as we talk to our customers and we are getting ready to start dealer meetings, people feel very confident as we go into 2017.

Robert McCarthy, Stifel.

Congratulations on a solid quarter.

Two questions.

One, I think that Steve spoke to it, but is there anything particular in the quarter, you mentioned the mix, obviously they could compare, but anything else that you would cite in terms of incremental market share gains, or anything [that points] to strength across the board in terms of the revenues?

No.

It's what I said.

In our residential business, we heard some of our other competitors announce, I think we gained share in the fourth quarter, that's certain.

In commercial, I think we probably gained share.

Again, it reflects all the good things we're doing in the business.

There is no silver bullet to our strategy.

It is three or four things we have talked about over a multi-year period, that we continue to do to innovate to build out distribution to focus on our channel partners, and we had nice momentum in fourth quarter as we did in the full year.

Yes.

I know you love talking about the Internet of Things and pie-in-the-sky technology investments.

That being said, maybe you could talk about the investments you are making in distribution that are technology or productivity related, and do you think this is going to continue to be just a strong market share driver over the next couple of years?

Anything to add there would be helpful.

Not to be Sean Spicer, but just for the record, I don't like to talk about Internet of Things and pie-in-the-sky investing, but -- (laughter).

What I like to talk about is investments that we're investing to allow for ease with our dealer contractors.

And you were at our December Analyst Day and saw what we're doing with LennoxPROs to do prognostics and diagnostics and training, and that's just part of our business now.

And we have a strong team on the IT side and the engineering side, and in our sales and marketing side.

So, that's a big part of the investment and how we will continue to gain share going forward.

Drive safe.

Shannon O'Callaghan, UBS.

Todd, relative to the scenario planning and ability to deflect or pivot, depending on tax law changes, how fast could you do that, what's the capacity in South Carolina and how difficult is it to maneuver maybe just a little bit more color on what it would take?

We've been very purposeful, even before all this happened to make sure that we had balance between US and Mexico, just given risks, prior risks and concern about Mexico.

If you look at hours worked for our equipment business for residential, a little under a quarter of our business comes out of South Carolina today, so it's a well-run large factory.

The other thing to always think about is we build product prior to the demand.

We build inventory, and so, if things changed, we could ramp up the factory and start building inventory for the following season, prior to what we would normally would do, and we could trade inventory load for product cost.

And then over a longer period of time, we can move production there.

We have the people, we have the capabilities.

We build everything we build there in terms of our residential product line.

So, again, we'll see how it plays out.

What I wanted to convey in my comments is, we have action plans, and have looked at the different scenarios, whether it is moving more South Carolina, as you asked and I answered, or invested in factory automation both in Iowa and in South Carolina to lower our costs, or continue to make investments in Mexico depending on which way the policy goes.

But almost under any scenario, we're going to continue to drive margin expansion in our residential business and across LII.

And then just one follow-up on the cold weather end of the quarter.

I know a lot of was riding on December for the heating business.

Was that -- how usually strong was that versus a typical December?

Was it relative to the last couple Decembers?

I know last December was notably warm, but relative to normal, would you characterize it as extra strong?

If you look at heating-degree days, it was actually a little warmer than average, about 4% warmer than average, but it was 36% warmer than last year.

So, when I think about the comps going into next year, which I assume is why you are asking the question, it was a normal December.

It was just so warm in 2015 that the year-over-year comp was very good.

Josh Pokrzywinski, Buckingham Research.

On the (inaudible) meetings that you alluded to, Todd, how are those discussions going?

Are your dealers bringing up any of their own personal contingencies or thoughts around Mexico production?

Does that factor into the equation, or is that out of their orbit yet without any specifics in policy?

They could care less, Josh.

My read as we move down to Mexico, five, six, seven years ago, and when Carrier moved to Mexico before that -- dealers what a high-quality product at the right price.

It could be made on the moon for all they care.

And we've done that with Mexico, and they are fine.

And then our sense was UTX and Carrier took a lot of public browbeating over their announcement in Indianapolis.

From everything we can tell, that had zero impact on any of their market share.

The dealers see through all that, and they understand it is a global economy.

Now, if we try and raise prices for Mexico by 30%, they will knock down our door, but we would never do that.

I would not recommend making anything on the moon.

I think there's an atmosphere-adjusted tax being proposed.

Just a follow-up on some of the energy efficiency initiatives that get enacted on the commercial side in 2018, I think.

What percentage of the commercial portfolio do you think would get impacted, those being sold at the minimum today that would move up and be calibrated with what that looks like, and any signs that maybe you could get a pre-buy later this year on that basis?

I don't think there will be much of a pre-buy at the end of the year, because commercial -- whether emergency replacement, national account, any scenario, people buy it when they need it.

Because we're selling to dealers.

If you're selling to the independent distributors, they may carry some minimal load, so I don't think there will be any pre-buy.

In terms of the impact, we have always focused to high efficiency, and we'll tweak up our entry-level product to meet your requirements, and we think we are well down the curve of doing.

Part of this always is, when the new minimum efficiency comes out, you want -- anyone can get there, obviously, but you want to be there at the lowest cost, and we're pretty good at that, and we think we are and will be.

Walter Liptak, Seaport Global.

I wanted to ask about the guidance on the mix, the $5 million.

I think in 2016 you had a great year for that zero mix with 14-plus.

The fourth quarter, I know it is low for cooling, but how did this year's mix end, and what's your thoughts on 2017?

Is it a tough comp now that we've moved up the way we have?

We are guiding as you suggested $5 million of residential mix in 2017, and we got some tailwind second half of the year as the minimum efficiency went from 13 to 14 in the south.

We will get less of a tailwind, but some tailwind in the first half of the year, but really the focus has been and continues to be to mix people up beyond 14 SEER or the minimum efficiency to 15, 18, 20 SEER.

We had some natural headwind this year that muted the benefits in the sense of -- it is a good problem to have, but residential new construction, the market and our sales grew faster than the replacement market, and we tend to make higher margins on our replacement business.

So, we think we are doing all the right things to continue to drive mix up in 2017, and it should be another good year.

In refrigeration, there's been some C-store expansions that were announced, and I wonder if you factored that in, I don't think there was a change from the December Analyst Day.

How are you viewing that C-store business?

I think net net, the guide is still the same.

There's movement there, but then there's -- Walmart is a big driver of refrigeration sales for all of us, and so some movement on convenience stores gets dwarfed by what Walmart is going to do or not do, certainly into the display-case business.

But again, just to underline, we continue to be confident in the market being up low single digits, we're going to expand our margins 50 to 100 basis points, and we try to wrap all those breaking news into her current guidance.

Robert Barry, Susquehanna.

I think at the Analyst Day you adjusted the guide, and I think it implied 4Q was maybe $0.06 or $0.08 lower from where it came in.

So, just curious, what was better than you expected?

Was it really just the weather?

It was.

It's that simple.

And can you quantify how much you think the weather helped the resi growth?

I'm not sure I'd put a revenue -- I think we overshot the consensus revenue number by about $10 million and we overshot by a nickel or so on EPS.

To be consistent, I would tie that to weather.

Any impact --

Again, to repeat what I said to the earlier question, I think it was cooler than we thought it would be, given how warm it did early.

But again, the whole quarter was really just an average coolness for a winter, so as we go into 2017, I think the comps will still be fine.

Got you.

Any impact from maybe some buying ahead of these price hikes, either in resi or in commercial?

No.

I don't think so.

Again, we have a price increase every year, January 1, so we have the year over year (inaudible).

There was a pull-forward that happened last year, too.

The other point is, what I had mentioned earlier, is January started off nice, solid, I guess is the word I would use, and you get concerned, maybe you pull something forward, but I don't think that's the case.

I think they just needed the product to meet demand when it got really cold.

Got you.

The refrigeration factory loading, how much did that weigh on the margin in the quarter?

I under the question, I'm not going to answer it directly.

I think I would do this -- I would answer it this way.

There was no surprises to us.

We guided 200 basis points for the whole year, and even in mid-December we said 200 basis points, so we knew how fourth quarter was going to shake out, and had built that into our plans.

Got you.

Maybe just lastly a strategic question.

I think you mentioned earlier productivity or vitality is tracking in the 40%s, maybe even in the near 50%.

I see the benefits of that, but it does is also imply from fairly rapid obsolescence.

Might there be an opportunity to moderate that investment, just given the high level now and still have a very competitive offering?

I don't think so, Robert.

In the sense of R&D is 2%, 2.5% of our P&L, and that's the lifeblood.

I don't think you can be a premium player if you can't be able to say to your customer -- what we say in our residential product is true.

Highest efficiency, lowest noise, best reliability, best control systems, and when you go into a town and you want to convert to premium dealers, you need to be able to say that.

We have industry-leading claims.

That's a big part of our strategy.

Now, if R&D was 10%, I might have a different answer, but I don't think the leverage is there.

I think the difference between 1.5% and 2% points of R&D is well worth the market share gains that we are getting that are being driven by the product innovation.

And also, Robert, I think part of that vitality is also tied to lower cost products that we continue to introduce to enhance profitability.

That's a good point.

Steve Tusa, JPMorgan.

Todd, just one more question for you.

I usually have a pretty reasonable view of what's going on out there, and I guess we're all looking for a little bit of direction.

And I don't expect a precise answer to this question, but obviously, you guys are a bit in, I would not say in the cross hairs, but in the middle of this big debate around taxes, et cetera.

What do you think and what are the experts telling you on the likelihood of this actually getting through in the end?

What's your high-level view on the ability for them to execute this in Washington?

The honest answer is, I have no idea.

I think the more constructive answer is, I've gotten to the point professionally and personally that I'm not going to listen, I'm going to react to what's done.

From a business point of view, I have implied it in my comments, or maybe even explicitly stated, is we've scenario-planned about every option we can think of, and all those options turn out to increase profitability for us.

The flexibility of our manufacturing, the ability to build inventory, the fact that we have low cost in South Carolina, you lay it all out.

What will happen will happen, and we're a small flea in this overall environment, the administration or the government is going to do what it is going to do, and then we will adjust accordingly, and we have a path we're going to continue to drive profitability, make money, regardless of the scenario.

Have your experts and consultants and whoever else is running around for you, any -- what's your view on timing of any of this?

And any unrelated news?

Again, our -- I don't want to bash our experts, but maybe they read the same papers I do.

Same experts said that we would be talking about President Clinton, so I'm not sure what all that means, so again, I try not to try and read tea leaves that I know I cannot read.

We are ready.

We're ready for any scenario, and we're going to be prepared.

I just respect your opinion, and so I just wanted to see if there was something a little differentiating what you were thinking.

I can make up an answer trying to crush it, but I don't know.

We don't know.

All right.

I will follow your Twitter feed, your Twitter handle very closely in the coming months.

Maybe something will come out of that.

Thanks a lot.

To wrap up, the fourth quarter was a strong finish to a record year, and we have seen momentum continue into the first quarter of the new year.

Overall, we expect strong growth and margin expansion in 2017, and another year of record profit and cash generation.

Thank you again for joining us.

Ladies and gentlemen, that does conclude the conference for this morning.

We do thank you very much for your participation, and for using our Executive Teleconference service.

You may now disconnect.