Steve Harrison - VP, IR Todd Bluedorn - Chairman & CEO Joe Reitmeier - CFO.

Jeff Hammond - KeyBanc Capital Steve Tusa - JPMorgan Jeff Sprague - Vertical Research Rich Kwas - Wells Fargo Securities Robert Barry - Susquehanna Josh Pokrzywinski - Buckingham Research Julian Mitchell - Credit Suisse Shannon O'Callaghan - UBS Mark Douglass - Longbow Research Walt Liptak - Global Hunter Keith Hughes - SunTrust Glenn Wortman - Sidoti & Company.

Ladies and gentlemen, thank you for standing by. Welcome to the Lennox International Fourth Quarter 2014 Earnings Conference Call. At the request of your host, all lines are in a listen-only mode. There will be a question-and-answer session at the end of the presentation. As a reminder, this conference 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 2014. I am here today with Chairman and CEO, Todd Bluedorn; and CFO, Joe Reitmeier.

Todd will review key points for the quarter and year and Joe will take you through the company's financial performance and outlook. Financial results in prior periods have been revised to reflect sold businesses and discontinued operations.

In the earnings release we issued this morning, we have included the necessary reconciliation of the financial metrics that will be discussed to GAAP measures. You can find a direct link to the webcast of today's conference call on our website at www.lennoxinternational.com. We will archive the webcast on that site for replay.

I’d like to remind everyone that in the course of this call to give you a better understanding of our operations, we will be making certain forward-looking statements. These statements are subject to numerous risk and uncertainties that could cause actual results to differ materially from such statements.

For information concerning these risk and uncertainties, see Lennox International's publicly available filings with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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

Thanks, Steve good morning, and thank you for joining us. Lennox International’s strong business momentum continued in 2014, with record margin and profit, revenue was up 5% and EBIT margin expanded 70 basis points to a record 10.1%. Adjusted EPS from continuing operations rose 18% to $4.38 and GAAP EPS from continuing operations rose 21% to $4.28.

Throughout 2014 revenue growth was led by our residential business followed by our commercial business. Both businesses set records for segment margin and profit for the year.

And residential revenue was up 11% at constant currency and profit increased 31%, but the replacement and new construction business saw strong growth in 2014 and we capture price and realized improved mix. In Commercial revenue is up 5% in constant currency.

Profit was also up 5% in a year of significant investments for future growth including entrance in the VRF market as well as FX headwinds. Commercial growth was led by strength in national account, equipment and service as loss from our continuing expansion in emergency replacement market.

In North America, our high single digit shipment growth doubled the pace of the commercial unitary market. North America revenue was up high single-digits for the year at constant currency.

In Europe Commercial HVAC revenue was down low single-digits to constant currency on soft macro economic conditions and political uncertainty over the course of the year. In Refrigeration, revenue was flat at constant currency for the year.

Segment margin and profit were down significantly due to the repeal of the carbon tax in Australia, North America product mix investments for future growth and FX headwinds. Looking at 2015 we continue to expect revenue, margin and profits to be up.

The Australia year-over-year negative comparison will be behind us after the first half of the year and we expect the North America super market business to see strong top line growth although offset some by lower mix year-over-year. Turning to the fourth quarter, the company’s momentum continued with the record fourth quarter margin and profit.

Revenue was up 10% at constant currency and EBIT margin expanded 120 basis points to 9.4%. Adjusted EPS from continuing operations was $1.02 up 32% and GAAP EPS from continuing operations was $1 up 47%. In Residential, revenue was up 14% at constant currency and profit rose 57% from the prior year quarter.

Trends remained strong in both replacement and new construction business with a double digit revenue growth in both businesses. Pre-buy of 13 SEER products by independent distributors was minimal adding under two points to Residential growth in the quarter.

We believe the pre-buy impact was more pronounced the companies that use independent distribution to a greater extent than we do. For commercial in the fourth quarter revenue was up 8% at constant currency. North America commercial equipment and service revenue was up low double digits.

We realized double digit growth in both plant replacement and emergency replacement business. Commercial new constructions are low single digits. Lennox continued to win in the market place with four new national account wins in the quarter to a total of 29 for the full year matching our best year ever.

In Europe, revenue was up low single digits to constant currency from the fourth quarter a year ago. Commercial segment probably was flat in the quarter due to customer mix, foreign exchange and VRF investments. In refrigeration, revenue was up 8% at constant currency in the fourth quarter, driven by improved North America super market business.

From a regional perspective at constant currency, North America was up high teens, China was up low double digits, South America was up mid single digits and Europe and Australia were down low single digits. As expected, profit was down significantly year-over-year due to the repeal of the carbon tax in Australia, North America product mix and FX.

At the investment community meeting in mid-December I mentioned several of the company’s strategic initiatives that we are excited about. In Residential, we had expanded our manufacturing facility in Mexico and transferred certain furnace production there from the U.S. as well as insource sheet metal fabrication as part of our Mexico operations.

Production began ramping up in the second half of 2014 and we expect 4 million of savings from this in 2015. We expect the incremental 11 million of savings in 2016. In our Residential distribution expansion we are targeting 25 additional parts plus stores in 2015 to exit the year at 186. Our target for 2017 has had atleast 250 stores.

In our commercial distribution expansion we ended 2014 with 40 commercial, regional and local distribution centers as planned and we expect to add another 7 commercial distribution centers in 2015 and additionally we continue to add to the number of Lennox’s part plus stores that carry commercial products.

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

At the December investor community meeting I also highlighted our entrance in for the VRF market in North America in the second half of 2014. We’ve assembled a great team with years of experience in VRF to provide leading products with the best sales, service and technical support in North America.

We have three VRF training academies open to support our contract with customers in key regions and plan to open two more by the end of the second quarter, it is early but we are making good progress realizing [ph] sales and our VRF pipeline and backlog continued to grow. Our target is $100 million in VRF sales by 2018.

2014 was the year of strong growth in record profitability for Lennox and we expect more of the same in 2015, with strong cash generation for investments to drive growth as well as returning cash to shareholders. Now, I’ll 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 the full year starting with Residential Heating & Cooling. In the fourth quarter, revenue from Residential Heating & Cooling was $404 million, which was up 13%.

Volume was up 10% and price and mix combined was up 4%. Foreign exchange had a negative 1% impact on revenue. Residential profit in the fourth quarter was a fourth quarter record of $57 million up 57% from the prior year quarter. Segment profit margin was a fourth quarter record 14.1%, which was up 390 basis points.

Segment profit was positively impacted by higher volume, favourable price mix and lower material costs and reduced product warranty costs. Partial offsets in the fourth quarter included unfavourable foreign exchange, higher SG&A and strategic investments and distribution expansion.

For the full year, residential segment revenue was $1.7 billion which was up 10%, volume was up 9% and pricing mix combined was up 2%. Foreign exchange had a negative 1% impact on revenue and segment profit was a record $236 million which was up 31%. Segment profit margin was a record 13.6%, up 220 basis points.

Turning to our Commercial Heating & Cooling business, in the fourth quarter, Commercial revenue was $223 million, up 5%. Volume was up 8%, and price and mix combined was flat on a revenue basis. Foreign exchange had a negative 3% impact on revenue. North American Commercial HVAC equipment and service revenue was up high single-digits.

Europe Commercial HVAC revenue was down high single-digits including negative foreign exchange impact although up at constant currency as Todd mentioned. Commercial segment profit in the fourth quarter was $33 million, which was flat with the prior year fourth quarter. Segment profit margin was 14.6%, down 110 basis points.

Segment profit was negatively impacted by unfavourable mix, unfavourable foreign exchange and our strategic investments to under the VRF market as well as continued distribution expansion. Partial offsets included higher volume, favourable price and lower material cost. For the full year, commercial revenue was a record $879 million which was up 4%.

Volume was up 5% and price and mix combined was flat on a revenue basis. Foreign exchange had a negative 1% impact on revenue; segment profit was a record $124 million which was up 5%. Segment profit margin was a record 14.1% which was up 10 basis points. In our Refrigeration segment, revenue in the fourth quarter was $186 million, up 4%.

Volume was up 11% and price and mix combined was down 3% on revenue. Foreign exchange had a negative 4% impact on revenue. From a regional perspective Todd addressed revenue growth in constant currency.

On a reported basis, North America was up high teens, Asia was up low double digits and South America, Europe and Australia were down high single-digits. Segment profit was $30 million, down 45% from the prior year quarter. Segment profit margin was 7%, down 630 basis points.

Segment profit was negatively impacted by lower mix, the repeal of the carbon tax in Australian, unfavourable foreign exchange and investments for future growth. Partial offsets included higher volume, favourable price and lower material cost.

For the full year refrigeration revenue was $752 million down 2%, volume was up 1% and price and mix combined was down 1% on a revenue basis and foreign exchange had a negative 2% impact. Segment profit was $55 million, down 39%. Segment profit margin was 7.4%, which was down 430 basis points.

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

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

Overall SG&A was $148 million in the fourth quarter, up slightly from the $146 million in the prior year quarter and for 2014 SG&A was $574 million up less than 1%. Cash from operations was $185 million for the full year compared to $210 million in the prior year.

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

The special inventory build amounted to $77 million. Capital spending was $88 million in 2014 up from $78 million in 2013 as we completed the expansion in Mexico with our second plant and began ramping up production mid-year.

Including $1 million for the disposal of PP&E, free cash flow was $98 [ph] million for the full year compared to $134 million in the prior year. Looking at liquidity, cash and cash equivalents were $38 million at the end of December.

Our debt-to-EBITDA ratio was 2.3, ending the year this is higher than our typical target of one to two times debt-to-EBITDA and that was due to the accelerated share repurchase program but we expect to be back down in that range as we progress through 2015. In total, debt was $926 million at the end of the year.

Before I turn it over to Q&A, I’ll review our outlook for 2015. One month into the year, our underlying market assumptions for 2015 remain the same as we discussed at the investment community meeting in mid-December. For the industry overall, we expect North America and Residential HVAC shipments to be up mid-single digits.

We expect North American commercial unitary shipments to be up low single digits and we expect North American refrigeration shipments to be up low single digits for the industry. Based on these market shipment assumptions and our targets for market share gains, guidance for our revenue growth remains 4% to 8% for 2015 at constant currency.

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

Foreign exchange and commodities have been moving quite a bit, foreign exchange unfavourable and commodities favourably, but the bottom line is our guidance for EPS from continuing operations for the full year remains between $5.20 to $5.60. Let me run through some of the key points of our guidance assumptions and the puts and takes for 2015.

First, the guidance points that have changed since mid-December. We now expect foreign exchange to have a $20 million negative impact on earnings, an increase from our prior guidance of $5 million of a negative impact. Most of this headwind is coming from the Canadian dollar with some coming from the Australian dollar.

We have a strong position in Canada which was 7% of the company's revenue last year. The guidance for $20 million of the headwind from foreign exchange assumes we are able to get some additional price in Canada to mitigate the effects of the stronger U.S. dollar. We are working to capture additional price in Canada now.

On the commodities front, we now see a $15 million benefit of earnings up from our prior guidance of $5 million. This includes the benefits we expected to see in 2015 from lower metal prices. Copper, steel and aluminum, brass as well as lower fuel cost.

To review our guidance points that remain the same, we still target $35 million of savings from our sourcing and engineering lead cost reduction programs. We continue to expect $10 million from incremental price for the full year and this is separate from the price we plan to capture to mitigate the negative foreign exchange.

We expect to see about $4 million of incremental savings this year from our second plant in Mexico that begin ramping up in the second half of 2014. And we continue to assume residential mix is flat for 2015.

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

$3 million is expected from VRF and ongoing investments for the expansion of our residential and commercial distribution network across North America. A few other guidance points that remain unchanged, corporate expenses are expected to be approximately $75 million up slightly from 2014.

We still expect net interest expense for the full year of about $25 million. Our effective tax rate guidance remains 34% to 35% on a full year basis. We continue to expect the weighted average diluted share account for the full year to be approximately $45 million shares.

And the accelerated share repurchase program is expected to be fully completed in the second half of 2015. Capital expenditures are expected to be $85 million for the year and we are still targeting free cash flow of about $265 million for 2015. And with that, let’s go to Q&A..

[Operator Instructions] And we will begin with the line of Jeff Hammond with KeyBanc Capital. Please go ahead..

Hi, good morning guys..

Hi, Jeff.

Having trouble hearing you Jeff, can you - I don’t know I think it's on your end, operator, can you hear him?.

I cannot hear him either. Jeff, your line is open..

So on the FX it just seems like a high margin applied to the FX had something in it, and that would drive that?.

The impact that we're seeing on FX has to do primarily with Canada and Australia. We saw a negative FX impact to EBIT of approximately $5 million in fourth quarter and as Joe talked about, we are now expecting $20 million in 2015. And that assumes we get some price in Canada. And obviously with the issues in Canada we're producing a product in the U.S.

and U.S. dollars, then we’re selling it in Canada at Canadian dollars since Canadian dollars weakens then we get less pack. And Canada is one of our obviously largest furnace markets, we make very nice margins there and so when we have this weakness it impacts us. As Joe talked about in the call, it's meaningful to us.

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

Okay. And then on Refrigeration the growth in the quarter is that U.S.

grocery - and how sustainable is that?.

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

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

Okay. Thanks guys..

And next we will go to the line of Steve Tusa with JPMorgan. Please go ahead..

Hello, can you hear me?.

Yeah, I can..

Hey sorry about that. Well some weather issues here, working from home.

So, just on the Resi stuff, how much pre-build benefit your margin in the fourth quarter?.

No, we think from absorption of pre-build, it was a $0.02 in the quarter..

Okay.

And is something - I guess the $77 million in inventory kind of gets you to - the industry has been talking about a million one of pre-build, so you know just kind of apply your market share to that, that's kind of the right unit number?.

To answer you Steve we haven't back, we done the math on that. But let us take it offline, we’ll do the math and see if that sort of gets us close..

Okay. And as far as the view of next year, what should be on - you said flat mix in Resi next year.

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

Our expectation on 2015 is -- look a lot like 2014 where we and the industry will have 13 SEER to get through the summer selling season.

And from your comment about 1.1 million units and - our sense of what others are doing in the industry, people are doing what we did which is there is a lot of 13 SEER pre-build and we’ll be able to have a normal transaction as we go into 2016..

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

What's your sense of the underlying trend in your commercial business heading into next year? Do you feel better, worse or the same as you did a few months ago?.

We feel the same. What we called at on December was - low single-digits for the commercial market and that still feels about right. I mean Christmas season was okay, not great. I continue to be convinced that low fuel cost is good for the American consumer even though we haven't quite seen all that playout yet. And so I think that will help us too.

So yeah, we're about the same as we were in December..

Okay, great. Thanks..

All right. Next we'll go to the line of Jeff Sprague with Vertical Research. Please go ahead..

Thank you. Good morning, John. Just a couple questions back at the cost structure.

Could you update us on where you're at on copper and aluminum, the size of your buy and how you're hedged for the year? You gave us the benefit obviously in dollars that you're expecting, but how does that really play through? I assume you're partially hedged for the year?.

As we entered the year we’re probably 70% or so hedged in copper and aluminum. We don’t hedge steel. So we’ve locked in our corporate pricing at this point, we do have some exposed to the market. But as things move, we'll benefit from that. We’ve factored all that in our guidance..

Can you drive any color on millions of pounds, the size you buy or anything?.

We've talked about the number of pounds by historically..

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

And then just back to the refrigeration on grocery, where are you seeing that strength? Is it - it sounds like - could be fairly broad based, but is there anything that stands out regionally or kind of large players versus medium size any of the color you could add there?.

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

Right. Thank you..

Thanks..

All right. Next we’ll go to line of Rich Kwas with Wells Fargo Securities. Please go ahead..

Hi. Good morning..

Hey, Rich..

Just a follow-up on the Refrigeration, so I think, Todd back in December you talked about modest margin expansion for the full year? Can you just remind us on the cadence of that as we think about first part of the year versus second half of the year?.

We’re going to see all the margin expansion in the second half of the year, Rich. So first half of the year we’re going have – still have significant headwind from Australia, and the majority of that will be in first quarter, but some of them will be in second quarter.

We also won’t see the benefits or the full benefits of some the fixes we’ve done in our North America business, and revenue ramp up in the North America grocery segment, although up this quarter and will be up first half, we’ll have even more benefit second half.

So, we still have another two quarters of margin deterioration in refrigeration on a year-over-year basis than second half of the year when we start to see the pickup..

The Cadence of the Arkansas customer, is that player out as expected here?.

Yes, so far..

Thanks.

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

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

Okay.

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

Yes. We’re seeing solid business trends continue in Resi and Commercial. Orders are solid. We are in good momentum. But especially in Resi half the quarter is the month of March so that’s still in front of us.

In refrigeration sort of as we talked about supermarket business will continue to grow on the top line, but we’ll have some headwinds in Australia in mix, but we would hope we would be at the end of January for first quarter..

Thanks. I’ll pass it on..

Thanks..

Next, we’ll go to the line of Robert Barry with Susquehanna. Please go ahead..

Hey, guys. Good morning..

Hey, Robert..

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

Correct..

And is that $20 million FX headwind going to be felt mostly in the Refrigeration business? Or have it would apportion it?.

I really proposition it to the Resi and Commercial. I mean, so the biggest impact to us is in where you’re seeing another multinationals where it’s the euro. Where we’re having the biggest impact is in the Canadian dollar and our sales of Residential and Commercial in the Canada from our U.S.

factories to a lesser its Refrigeration in Australia and then to a lesser degree Europe..

Go you. And the degree shifting Commercial on Refrigeration margins saw I think flat in Commercial, down a lot in Refrigeration.

Are those tracking to your plan?.

Yes. What we saw in commercial was as you suggested essential flat and dollars down a little bit in margin. And that was from FX headwind in the quarter – in fourth quarter, investments we’re making in VRF and we also just have some customer mix issues.

We added higher volume of lower profitable customers and sometimes we have that, it sort of a lumpy business. But underlying the profitability, margin expansion in Commercial we had a record year and as we go in the 2015, its all lined up to have another record year.

In Refrigeration its more complicated, it sort of when I’ve talked about over and over that we have the Australia headwind, we had North America mix and as I answered earlier on the call, I think with Rich, its prior going to be second half of the year before we start to see margins pickup in Refrigeration..

Fair enough.

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

Yes. I’ll answer directly. No surprises for us. It’s as we expect to maybe even a hair better in Commercial..

Okay. And then, I apologize if you touched on this in the prepared remarks, I jumped on a little late. But at the Analyst Day in mid December I remember you joking about people at football games and short sleeves, which didn’t bode for the Resi business.

Yet it seems to have pulled through pretty strongly despite the headwinds you were mentioning in Canada both on the revenue and the margin.

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

I mean, we had a good December in Resi. We were up maybe what you miss was, we were up 14%. We said two points of that was pre-buy with our Allied brands [ph] in independent distribution. So two points of the 2014 were pre-buy, but 12 points was just sort of underlying growth in the business. We continue to have momentum.

I think we’re gaining share as we have over the last couple of years. And I think we saw that in fourth quarter..

Yes.

I mean the margin was almost what it was in third quarter which is the seasonally strong quarter?.

Yes, we did well..

Okay..

Residential business did well..

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

The margins were as we hope that would be. That wasn’t a big surprise. I think we got a couple of points in revenue more than what we were talking about in December, and I think that’s we’re little higher in the range than what we thought we might have been on the December call..

Okay. Thanks, Todd..

Thanks..

All right. And next we’ll go to the line of Josh Pokrzywinski with Buckingham Research. Please go ahead..

Hi, good morning, guys..

Hey, Josh..

So I guess, the first question on the price cost dynamic, should we expect that layer in more second half and first half and then thinking back to first quarter of last year where it was more investment heavy.

Should we think of more pronounced weakness in early margin than strengthening through the year?.

On the material cost side we always tend to have more second half of the year than the first of the year and I think that will continue to be the case. Same with price, you set price early in the year and then as volume comes in to the business we able to get price in the sort of the peak season second and third quarter.

So, we’ll see less price in first quarter, less material cost reduction in first quarter, we’ll see it more as we get into the middle of the year..

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

Well, I think what happens is on the distribution side, we make the investments and sort of see the payback so we get into the volume part of the year, which is mid year. I think something VRF I think it’s equitable throughout the year..

Got you.

And then, the numbers you gave on price cost, I want to say, is it $10 million versus were you were before if I wrote that down correctly?.

Let me do the math as I think that yes, so commodities are $10 million better than what we thought, prices the same. And then FX is $50 million worst than what we saw..

Got you.

So on the price cost side or on the material equation is that at current spot prices is that – I guess where is the float or you guys assuming that numbers move around at all between now and 4Q or 3Q when you not hedged?.

I think its based on Joe said, where mathematically what we do is we have – we know what are hedges are, right, so that order of magnitude 70% of copper and aluminum hedged. We know what that is. And then we take a futures of what it would be in the out periods and that what we use to sort of calculate the math..

Got you.

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

I’ll look around the room. People are whispering to me, 46. So I’ll say 46 plus someone corrects me, 46.2..

Oh, I thought that was average.

Is that? We can follow-up…?.

Okay. Let’s follow-up, just make sure we give you the right number..

All right. Thanks..

Yes. Thanks..

All right. Next we’ll move to the line of Julian Mitchell with Credit Suisse. Please go ahead..

Hi. Thank you. Just the question on the margin profile, last you obviously had a very good EBIT margin expansion firmwide. All of it really coming leverage around SG&A with gross margins being sort of flattish. I just wondered when you look at this year, all the moving parts around price mix and so forth.

You think it will be the same trend again, or seeing our gross margin can start to move up?.

Well, I mean, I guess sort of underneath the hood, I would have categorized 2014 a little different than just SG&A leverage. I’d say the gross margin level, there were conflicting forces. We did another great job of material cost reduction and a nice job in price. And then we had extreme headwinds in Australia that sort of flew into gross margins.

And we also had negative mix North America grocery that’s flowed in the gross margin. So, I think 2015 will look a lot like 2014, where we’ll have nice material cost reduction, decent price.

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

Got it. Thanks. And then on Australia, I understand the currency moves and so on.

But just how you’re feeling about the organic outlook there, because I guess we heard from some other buildings, products companies like Tyco last week that Australia organic is looking worst for them again having seem to stabilized four or five months ago, just what you are seeing there?.

We’re seeing some pressure on Australia business and we’re obviously tied to the weather. We’re having a decent summer there right now. But when I think about Australia, it’s more of the pressure that we’re seeing on the year-over-year comp on the carbon tax in the underlying organic markets.

We think our sort of revenue; organic revenue will be fine in Australia market..

Thanks. And then lastly on the capital allocation, you have the $450 million cash out for buyback in Q4. You talked about leverage coming down steadily through the year.

So should we expect to be very quiet on capital allocation or maybe the year end?.

Yes. I mean, I think I would give the $450 share buyback that we announced I guess in December, our third quarter call, when we announced the $450 million share buyback. In my mind that would view that as our share buyback in 2015 and then we will get to the end of the year and we delever, we’ll sort of revisit the subject..

Great. Thank you..

Next we’ll go line of Shannon O'Callaghan with UBS. Please go ahead..

Good morning, guys..

Hey, Shannon..

Hey, just on little bit more on this fourth quarter Residential margin, even if you take out what seems like a fairly modest benefits of pre-build, that’s some pretty strong year-over-year margin expansion for us all to assume, continues at that run rate, is there – as you think through 2015, does the mix benefit is through the year is sort of 2014 SEER becomes the new bottom or there are other things that would cost that kind of conversion rate to moderate?.

I think we’re going to have – we’ve signed up for another nice year in Residential next year its half our business that’s implied in our guidance. Also when you look at our three-year targets for Residential, we’ve set some healthy targets there.

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

Okay.

And then in terms of the share gains was there any sort of difference in terms of SHEER level or geography or anything in terms of those share gains where you think you’re having the most success or what help drive such a strong finish to the year?.

No. I think geographically where you see is we’re putting in PartsPlus stores. I think it’s clearly tied to the strategy that we put in place to go to the market. I also think we’re seeing nice mix up on the equipment side. So we tend to win where we make our investments whether it’s a product innovation or distribution, that’s where we tend to ensure..

Okay. Great. Thanks guys..

Thanks..

Next we’ll move to line of Mark Douglass with Longbow Research. Please go ahead..

Hi, good morning, gentlemen..

Hi, Mark..

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

But what about the Canadian consumer with oil prices down, I mean, I would think that are you facing a volume headwind in Canada as well that you anticipate and put it in to your guidance?.

Yes. I mean, everything is in the guidance. So there’s parts of Canada obviously Calgary for example where you have the headwind from the drop in the oil and gas industry, but obviously there’s large loss of Canada both in the East and on the far West that aren’t impacted by that.

So the point around price, we’re focused on getting additional price in Canada to review what we’ve done so far back in January of 2014. So year ago, we had a North America wide price increase of 3% to 5% that included Canada.

In April 2014, so April last year we had a 5% increase in Canada only in effective March 1 of 2015, so coming up here we’ve already announced an additional 6% Canadian price only – Canadian only price increase. So, we’re trying to be aggressive in the market to your point sort of balancing what’s happening with the consumer.

Carrier, Trane, Daikin, Goodman have all announced Canadian specific price increases effective early 2015. So again, we’re – as you suggested we’re focused on trying to offset the FX impact by getting price in Canada..

Great. And then looking at U.S. Residential, you’d say, you’re thinking Resi mix flat, but it seems that there has been a mix up even outside of the regulations.

Are you thinking there’s going some mix just not material in 2015 or is that just upside?.

Yes. I think the answer is it could probably be upside. When we gave that guidance in December I think I put words around that of – there’s a lot of moving pieces in 2015 with the regulatory change. And we have a pretty good view.

And so far it’s playing out like we had hope which is there’s enough 13 SEER that at the bottom and stays 13 SEER, we’re able to get price on 14 SEER, so the mix looks the same.

But there are some scenarios where all that doesn’t happen and so we thought it was prudent to sort of guide to no mix up and therefore able to do better than that’s upside to the numbers..

Okay. Great. Thank you..

Thanks..

All right. And next we’ll go to the line of Walt Liptak with Global Hunter. Please go ahead..

Hi, thanks, good morning..

Good morning..

I wonder follow-up on the market share discussion, I wonder if you been able to quantify the 2014 share gains in percentage and it’s been – you’ve been gaining share with PartsPlus and products for a couple of years now, is there a point in which we start to see which share gains decelerating?.

Well, I think we continue – you know this is an industry where if you gain half a point of market share, here you’re doing very well. And if you do it with systemic changes like building out distribution and innovating in product and focusing on taking Carrier dealers with innovation and investments. I think its share that you continue to grow.

And so, as we’ve talk about in our PartsPlus we’re not reaching, diminishing returns yet, we’re still putting these stores in and still wining where we put them in and we’re winning with our product innovation. We have another great suite of new products that we’re launching in first quarter.

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

Okay. Great. And just wondered by your thoughts on the $77 million inventory build, I think you’ve got 18 months to liquidate that.

Is there any change on timing on and when that converts to cash? Are you seeing anything early in the year – I’m sure it’s already too early, but any early thoughts on the cash conversion?.

Yes. Short answer is it’s early. I mean the guidance we gave in December of cash conversion or cash generation for 2015 we still think it’s the right number. We just got to place at through.

And again as we talked about the pre-build in effect was taking a spike in production that you would typically have in first quarter and move it into fourth quarter of prior year which is what we done. Also it’s not lettuce, it’s not going to go bad, the product that we build we can sell in the north if we need to.

So short answers, we build it, we have it and we have 18 months to sell it in the south and we need to sell in the north we will..

Okay. Great. Thank you..

Thanks..

All right. The next we will go to line of Keith Hughes with SunTrust. Please go ahead..

Thank you. Just you have listed in the press release and on the prepared statement some of the problems you had in Refrigeration in the quarter.

Can you put those in just a list of the biggest impacts, margin [indiscernible]?.

Yes. I mean, I think, carbon tax in Australia was the biggest issue. The mix in North America was a close second and then third was FX and sort of all low to mid single millions of EBIT impact..

The mix issue once you anniversary the – you mentioned the large customer earlier. Once you anniversary that, is that start to move back in the direction..

Yes, we'll better state it.

Once we get the full volume with them, then it starts to be grandfathered or laughed, but as I talked about we are sort of ramping up that volume through 2015, so we’ll be winding about mix headwind in North America as we go into 2016 Australia goes away first half of the year and we’ll also have some nice volume tailwind in North America as well as operational improvements around the enterprise, so second half of the year we’ll see margin improvement although we’ll still have mix headwind..

2016 is the year when we should really succeed the benefits, correct?.

Correct..

Thank you very much..

Okay, and next we’ll move onto Glenn Wortman with Sidoti & Company. Please go ahead..

Good morning everyone..

Hey Glenn..

How much is left on the share repurchase program, it looks like most if not all that was completed in the fourth quarter?.

Yes, the way the program worked was you know we delivered $450 million in cash in the fourth quarter, 70% of the shares were delivered in the fourth quarter and then we have 30% that were completed in the second half of 2015..

Okay, that’s all I had. Thank you very much..

There are no further questions..

Okay, great. I want to thank everyone for the time and for the questions. A few points I want to leave everyone with. We are well positioned and expect another record year in 2015 with EPS from continuing operations in the $5.20 to $5.60.

We remain focussed on capitalizing on growth in our major end markets capturing additional market share and driving increased profitability through our operational initiatives in 2015. Thank you for joining us today and we look forward to the year ahead. Thank you, operator..

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect..