Steve Harrison - Vice President, Investor Relations Todd Bluedorn - Chairman and CEO Joe Reitmeier - Chief Financial Officer.

Jeff Hammond - KeyBanc Capital Markets Steve Tusa - J.P.

Morgan Jeff Sprague - Vertical Research Rich Kwas - Wells Fargo Securities Robert Barry - Susquehanna Josh Pokrzywinski - Buckingham Research Johnny Wright - Nomura Keith Hughes - SunTrust Mark Douglass - Longbow Research Walter Liptak - Global Hunter Securities Jim Krapfel - Morningstar Glenn Wortman - Sidoti.

Ladies and gentlemen, thank you for standing by. Welcome to the Lennox International First Quarter 2015 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 call is being recorded.

I would now like to turn the conference over to Mr. 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 first quarter of 2015. 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 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, everyone, and thank you for joining us. Let me start with a few high-level comments on our businesses for the first quarter. In Residential, our strong business momentum continued. Residential revenue was up 7% at constant currency in the face of unfavorable weather conditions in the first quarter.

Residential profit rose 28% over the prior year quarter and segment margin expanded 150 basis points to 8.6%. Revenue from Replacement business was up high-single digits. While New Construction revenue was flat from the impact of severe weather in much of the country.

With the onset of spring and summer, we are confident our business in the New Construction market will see a rebound. On the operational front, we are on track in Mexico for $4 million of savings in 2015 and an additional $11 million in 2016 following the opening of our second plant in the second half of last year.

The facility performed well with furnished production for the winter season, we continue to grow and expand our operations there. Our Residential distribution expansion also continues. We opened two new Lennox PartsPlus stores in the first quarter to now total 163 stores across North America on our way to a total of 250 stores in 2017.

Turning to our Commercial business, revenue was down 3% at constant currency and segment margin and profit were down from a year ago. National account equipment revenue was down high-teens as we saw the timing of orders shift beyond the first quarter into the second, third and fourth quarters for this year.

This is due to severe winter weather in much of the country, as well as some timing decisions by specific national account customers. While Commercial national accounts business was down in the first quarter, our backlog is up double digits from year ago and we continue to expect solid goal for 2015 overall.

In the first quarter alone, we won 10 new national account customers and of to a great start with new customer business coming online within the next year. In the portion of our business that’s non-national account, we continue to see strong momentum with high single-digit revenue growth.

This reflects our continued progress in emergency replacement market and the underlying continued strength of the North America unitary market. Europe Commercial HVAC revenue was flat at constant currency.

A disappointing first quarter on the national account timing, but with strong backlog we are well-positioned over the coming quarters to deliver a solid year and momentum continues in our non-national account business. In Refrigeration, the quarter was as we expected. Refrigeration revenue was down 2% at constant currency.

By region, North America was up mid-single digits, led by double-digit growth in supermarket business, Asia was up mid-teens and South America was up low single digits, Europe was down low double digits and Australia was down mid-teens. We discussed previously that it would be a tough quarter for Refrigeration and it was, but as expected.

Refrigeration segment margin and profit were up significantly from the year ago level due to lower refrigerant profitability from repeal of the carbon tax in Australia, North America supermarket mix and foreign exchange.

In the second we’ll have a couple million dollars more of negative impact from repeal of the carbon tax in Australia and then the tough year-over-year comparisons will behind us going into the second half.

I would note that Refrigeration segment margin was flat from a year ago, when adjusted for the impact of Australian refrigerant in the constant currency. For the full year in Refrigeration we continue to expect top and bottomline growth with 50 basis points in margin expansion.

Overall for the company in the first quarter, revenue was up 2% at constant currency. Total segment profit margin was down 60 basis points to 4.5%. This includes the negative impact of $6 million from Australia refrigerant and $4 million from foreign exchange.

Adjusted EPS from continuing operations came in at $0.37, compared to $0.42 in the first quarter a year ago. With the seasonally lightest quarter of the year behind us and better weather, the second quarter is off to a solid start, Residential business momentum is continuing.

The Refrigeration business is stabiling as we expected and Commercial is a strong backlog of national account business scheduled over the coming quarters. We are maintaining our view on revenue and EPS growth for 2015, and expect another strong year of growth and record profitability with strong cash generation. Now I’ll turn it over to Joe..

Thank you, Todd. Good morning, everyone. I will provide some additional comments and financial details on the business segments for the quarter, starting with Residential Heating & Cooling. In the first quarter, revenue from Residential Heating & Cooling was $363 million, up 6%. Foreign exchange had a negative 1% impact on revenue.

Volume was up 6% and price and mix combined was up 1%. Residential profit in the first quarter was $31 million, up 28% from the prior year quarter. Segment profit margin was 8.6%, which was up 150 basis points.

Segment profit was positively impacted by higher volume, favorable price and mix and lower material costs, with partial offsets from negative foreign exchange and investments in SG&A and distribution expansion. Turning to our Commercial Heating & Cooling business. In the first quarter, Commercial revenue was $160 million, down 8%.

Foreign exchange had a negative 5% impact on revenue, volume was down 3% and price and mix combined was flat. North American Commercial HVAC equipment and service revenue was down mid single digits. Europe Commercial HVAC revenue was down high teens including the negative foreign exchange impact although flat at constant currency as Todd mentioned.

Commercial segment profit in the first quarter was $8 million, down 25% from the prior year quarter. Segment profit margin was 4.8%, down 110 basis points.

Segment profit was negatively impacted by lower volume, negative foreign exchange and investments in distribution expansion and the VRF business with partial offsets from favorable price and mix and lower material cost. In our Refrigeration segment, revenue in the first quarter was $163 million, down 9%.

Foreign exchange had a negative 7% impact on revenue. Volume was up 1% and price and mix combined was down 3%. From a regional perspective, Todd already addressed revenue growth in constant currency.

But on a reported basis, Asia was up low double digits, North America was up mid single digits, South America was down mid teens, and Europe and Australia were down more than 20%. Segment profit was $4 million, down 67% from the prior year quarter as expected. Segment profit margin was 2.4%, which was down 430 basis points.

Segment profit was negatively impacted by lower Australian refrigerant profitability, following the mid 2014 repeal of the carbon tax, unfavorable mix in North America supermarket business, and negative foreign exchange, with partial offsets from lower material costs and factory productivity.

Regarding special items in the quarter, the company had after-tax charges of $2.8 million which included $2.2 million in a special legal contingency and $600,000 for other items, net. Corporate expenses were $12 million in the first quarter, compared to $11 million in the same period a year ago.

Overall, SG&A was $133 million in the first quarter, which was down $2 million from the prior year quarter. Cash used in operations in the first quarter was $122 million compared to $125 million in the prior year quarter. Through the seasonality of our business, we tend to use cash in the first half and generate cash in the second half of the year.

As previously discussed, in the fourth quarter of 2014, we strategically build inventory to support customers in the minimum efficiency regulatory transition that took effect for certain products at the start of 2015. The special inventory build amounted to $77 million. And we expect most of this to be amortized as we progress through the year.

Capital spending was $18 million in the first quarter compared to $17 million in the quarter a year ago. Free cash flow was a use of $140 million in the first quarter compared to a use of $142 million in the prior-year quarter. Cash and cash equivalents were $37 million at the end of the March. Our debt-to-EBITDA ratio was 2.7, ending the quarter.

This is higher than our typical range of one to two times debt-to-EBITDA due to the accelerated share repurchase program but we expect that to be back within a range as we progress through 2015. And total debt was $1.09 billion ending the quarter. Before I turn it over to Q&A, I’ll review our outlook for 2015.

First, our underlying market assumptions for 2015 essentially remain the same. For the industry overall, we expect North America 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 these market assumptions for shipments and our targets for market share gains, guidance for our revenue growth remains 4% to 8% at constant currency for the full year. We continue to expect a negative 3 point impact from foreign exchange for revenue growth guidance of 1% to 5% at actual currency for the full year.

Guidance for adjusted EPS from continuing operations for the full year remains at range of $5.20 to $5.60. We are adjusting guidance for GAAP EPS from continuing operations to a range of $5.14 to $5.54 to incorporate the $0.06 of special charges we had in the first quarter.

The various puts and takes going into our guidance for 2015 remain the same as we discussed on our last call on early February when we trued up guidance for the significant moves we had seen year-over-year in foreign exchange and commodities. Now looking at the headwinds for 2015.

We continue to expect foreign exchange to have $20 million negative impact on earnings, net of specific price increases that we have enacted and are pushing through to help mitigate the unfavorable foreign exchange impact. Most of the headwind is coming from the Canadian dollar, with some coming from the Australian dollar.

The repeal of the carbon tax Australia was a negative $6 million impact to us in the first quarter and we expect couple of million more dollars in the second quarter. A headwind of $3 million is expected from our investments in VRF for the year.

We have ongoing investments in the expansion of our Residential and Commercial distribution network across North America as well. Now looking at some of the tailwinds for 2015. On the commodities front, we continue to see a $15 million benefit to earnings.

This includes the benefits we expect to see in 2015 from lower metal prices to include copper, steel and aluminum but also lower fuel costs as well. We still target $35 million of savings from our sourcing and engineering lead cost reduction programs. And we continue to expect $10 million from incremental price for the full year.

This is separate from the price we are capturing specifically to help offset negative foreign exchange. As Todd mentioned, we expect about $4 million from incremental savings this year from our second plant in Mexico. And we continue to assume Residential mix as flat in 2015. But we will know more about this as we move into the summer selling season.

A few of the guidance points that are unchanged, corporate expense is expected to be approximately $75 million which is up slightly from 2014. We still expect net interest expense for the 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. Capital expenditures are expected to remain at $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] First, with the line of Jeff Hammond with KeyBanc Capital Markets. Please go ahead..

Hey good morning guys..

Hey Jeff..

Hi Jeff..

So can you go through the magnitude of the timing in whether it’s showing Commercial and then just as you look at the double-digit backlog growth.

How should we think of the growth rate for Commercial for the next three quarters?.

As I’ve mentioned in the call, Jeff, we saw multiple national account customer shift the timing of shipments for various reasons.

In some cases, it was due to the severe winter weather we had where new construction would slow down were one of the last things that happened on a store, a new store when you put the air conditioner or -- excuse me -- the rooftop on top of the building.

Some of the shipment shifted into Q2, but I would say more moved into the second half of the year and are scheduled for Q3 and Q4. It was a bit of a disappointment for Q1, but our North American national account backlog, as I talked about in the call was up double-digits from a year ago and we continue to expect a solid year overall in the business..

So is that kind of a mid single-digit growth where you continued to outperform kind of the market expectation?.

Overall for North America, Commercial, we’ve called the market up to be low single digits and we still believe we will outperform the overall market..

Okay. Great. And then just quick follow-up on the price, costs, seems like in between fuel and steel you maybe got a little more headwind but you are not changing that.

How should we think about upside to that number?.

You got me confusing. You said headwind.

Say that one more time?.

I guess it seems like that tailwind is better with the lower fuel and lower steel costs..

We tried to true it up as best we could. On the call, I think it was in February when I announced fourth quarter earnings when we said a $15 million benefit from commodities. I think we sort of maybe either had flat or $5 million back in December and we raised it to $15 million, that’s sort of order of magnitude that’s still our best guess, Jeff..

Okay. Thanks, guys..

And next, we go to Steve Tusa with J.P. Morgan. Please go ahead..

Hey. Good morning..

Hey Steve. Good morning..

On the Refrigeration side, can you just maybe give us a little bit of an expectation of a trajectory? I mean, it just seems like it’s kind of tough to model quarter-to-quarter. You got a lot moving around there.

So maybe if you could give us some sense that how those margins play out over the course of the year?.

Well, first, it’s not first quarter. We thought it would be a tough quarter and it was, but it was as expected. I think the sort of the moving pieces, I think that are most impactful to our margin story was in first quarter, we had $4 million year-over-year headwind because of the carbon tax repeal in Australia in the lower refrigerant pricing.

And so we think that had -- obviously had major impact. We also had FX headwinds of a $2 million in first quarter, just associated with the Refrigeration segment.

And so then, as we think about the second half of the year, we have another $2 million in second quarter from Australia refrigerant but second half of the year, we no longer have that headwind. And also some of the FX comparisons get a little bit better when we get to fourth quarter.

That on top of the building backlog in order rates in North America was some of the business that we’ve won. As I talked about back in December, we don’t think it’s going to be a hockey stick here on Refrigeration. We think we are going to have a bounce back in margins, primarily second half of the year..

Okay.

So kind of the exit rate, or it’s ultimately kind of where you expect this thing to kind of -- what's kind of the best range you can give or how good it could get this year or so, kind of think about the more normalized run rate in ’16?.

I understand the question. I don’t think I’m not going to give a direct answer to it. I think the answer that we’ve given -- I mean, I think you can sort of model what Steve, given what I’ve said, right. So if you, kind of at full year are up 50 basis points, order of magnitude plus or minus..

Okay..

And you have the first quarter number and I’m challenging you, we have $2 million of headwinds, $2 million or $3 million of headwind from Australia refrigerants in the second quarter and you can start to get sort of a trajectory..

Right. So you said a solid start for the second quarter.

I mean, can you maybe just provide some -- are you just talking about resi, you talking about Commercial and then this solid start mean better than the revenue trends you had in the first quarter?.

Yeah. Part of the reason you’ve got to calibrate your words as you know, we do -- half of our business in the month of June, so it’s hard to be bullish and as you said -- too bullish when you said in April but when we think about Q2, so far a strong momentum in Residential.

As we move into the spring and summer selling season, everything tracking as we had hoped and we also think given as I talked about it in the script, we actually think there is going to be some bouncing of Residential new construction about where it was in first quarter.

Refrigeration business, as we just talked about stabilizing, we won’t have quite headwind in second quarter. Order rates look good, backlog looks solid. Commercial as I talked about in the phone call has a solid backlog in national accounts, up double digits from where we were in the year ago.

When you sit at this part in mid April, we have about 70%-75% of the national accounts that we need to ship in the quarter. In backlog, we still have to book and ship, that’s a higher percentage than we normally have, sitting in the first month of the quarter.

The non-national account business, which accounts for about half of what we do, as we talked about was up high single digits in first quarter and order rates there continue to be solid and continue along those trend lines. So net-net, feels good but always cognizant that June’s half of our revenue and a lot of things can happen between now and then..

Okay. Great. Thanks a lot for the color..

Thanks..

And next, we go to Jeff Sprague with Vertical Research. Please go ahead..

Thank you. Good morning, gents..

Hey Jeff..

Hi Jeff..

Just coming back to national accounts, I’m still struggling with -- and then you’ve said, you made it clear there is some videosyncratic customer issues.

Is there a something, is there a something by vertical that stands out or some other factor that was making the slip into H2 as opposed to just being kind of a timing difference between the first and second quarter?.

Wal-Mart’s one of our larger customers and our largest customer, I believe in our North America Commercial equipment business and that’s had an impact but also not just them. I mean, we’ve had selective customers sort of push things out.

Again, everyone -- it’s a dozen or so accounts because this is sort of how national accounts work and they all have different stories. As we talk to them, we are still confident for the full year and that’s why we said what we said. But for all different reasons, they push things out.

Weather was part of it, but also just their own decision-making of when they had the money and when they wanted to spend it..

I think you characterized pricing exports as positive in the quarter for resi.

Any initial feel on how the ’13 versus ’14 plays out here as enter into the key season, or is there anything in behavior that is kind of notable one-way or the other?.

Yeah. I mean, I think the headline, Jeff, is so far so good. It’s going as expected but again, so the caveat of it’s early. You know this will, but I will repeat it for others on the call. We pre-build an appropriate level of ’13 [sears] [ph] to support our customers this year and most if not, all of our major competitors did the same thing.

We are seeing -- as we expected, we are seeing a smooth transition from the regulatory change. We will know more as we go through the summer season where some of our competitors run out, ‘13 [sear] [ph] and sort of how that affects things but so far so good..

And then your comment that replacement was strong. What do you think we are at on replacement at this point? Do you actually see a replacement cycle gaining momentum per se? I think the replacement was strong in the quarter that was impacted by weather on the new construction side.

Is there any other color you can provide there?.

Well, just sort of answer the last part first. I mean, the cold weather helped on furnace sales, right. And so that sort of drives the replacement market and the winter broke late really in many parts of the country second half of the year. And so that helped furnace season if you will on the add-on and replacement but particularly construction.

I continue to be very bullish as you know on the add-on and replacement market for Residential. I still think we have significant amount of pent-up demand. We didn’t see that during furnace season. We see that in the summer selling season, but we still think that’s out there.

And we also -- as we’ve spoken about, we think the new construction boom of a decade ago is now starting to come into the replacement window. So I know the quarter is a bit of a disappointment because of Commercial.

But the underlying fundamental of our story around Residential and add-on and replacement and pent-up demand just another quarter of continued momentum and we think that continues as we go into the balance of the year..

Great. Thanks for the color..

Thanks..

Our next question is from Rich Kwas with Wells Fargo Securities. Please go ahead..

Hi, good morning..

Hi, Rich..

So on the national account piece, so Todd it sounds like you are pretty confident, what could be real second half, I mean what do you most concerned about in terms of the national accounts coming back?.

Yes. I mean, we are confident because our customers are confident, but customers can change their mind. That’s a biggest risk. So we are in constant dialogue with these national accounts customers as you can imagine. We have visibility of their plans over the balance of the year.

But that being said, customers can change their mind and sort of change things around. So as we sit today, we feel confident for the balance of the year and that’s reflecting it. But there is a shot to the economy, the consumer quits spending and our national accounts want to quit building, I mean they are scenarios.

But what we see now the economic environment we are in now, we all feel very good internally that this was just sort of a move-out and we feel good for the balance of the year..

Okay. And then on the non-national accounts piece, which was pretty good.

So what do you need to see to get more bullish about your overall view of the Commercial market for the U.S.?.

I think we just have to go to the summer season. I mean, these are things where you sort of call it and then you see what happens. And obviously, our low-single digits call the marketing campuses both sides of the market. Not only for us but for the entire industry national accounts is a meaningful part of the unitary or rooftop market.

The non-unitary business as we said was up high-single digits. That reflects both market, but I think it reflects us gaining share. The replacement initiative continues to work and continues to accelerate and we continue to build out our distribution more broadly and that’s helping with our sort of non-national account business..

Okay.

And then just the clarification, did you see 6 million from Australian headwind, the 4 million from FX on a year-over-year basis that you did?.

I sort of mixed apples and oranges. I said overall for LII 6 million from Australia refrigerant and then 4 million from FX, so 10 million total headwind from those two things.

And then if you’re just looking at -- if you’re trying to model the Refrigeration segment, all 6 million of Australia refrigerant and obviously it’s in Refrigeration segment and half of the 4 million of FX you could put into Refrigeration segment..

All right. Great. And one last one in terms of oil prices coming down, obviously it’s helping you on the cost side.

Any signal in terms of the type of demand you are seeing that’s helping you on the demand side at all if you look at Residential replacement?.

It’s hard to us answer, it’s hard to tell. I mean, as again we had good news on add-on and replacement and resi for the quarter, but there is a lots of forces driving that.

When I read the same thing as you do, when I hear retailers talk about and when we talked to our retail customers, it sounds like a lot of consumers are putting the gas savings in their pocket rather than spending it. I assume if it’s true for them, it’s true for us.

But even with that said, add-on replacement was strong and we expect it to continue to be strong..

Okay, great. Thank you..

Our next question is from Robert Barry with Susquehanna. Please go ahead..

Hey, guys. Good morning..

Hey, Robert..

Wanted to actually follow up on currencies at 4 million total, 2 million in Refrigeration, I know there have been some concern about transactional exposure in Canada, does that mean that ended up being really quite small?.

No. I think it just means that we are going to see it for the balance of the year. Joe talked about 20 million of headwind for the quarter -- or excuse me for full year from FX and that’s net of pricing we are able to get in Canada.

And we announced some price increases, but we will see the volume and the furnace is a strong season, it’s also strong second and third quarter.

Joe, do you have that?.

I would just say that seasonally first quarter is one of our lightest that’s why saw heavy impact that it relative to our total full year guidance..

Okay.

Why is that? I mean it’s furnace season, it’s mostly a furnace market, why is that more in 2Q, 3Q?.

When you look at the numbers, it is the furnace market, but air conditioner sale for a lot more on a dollar basis than what furnaces do. And so even in Canada, they buy air conditioners, even on summer season it matters.

And then what happens is when you have a catastrophic failure on an air conditioner, you have a tendency especially when you live in Canada or cold weather environment they replace the whole system and we do a system sale and we get the furnace. So summer season, even there is a large portion of the business..

Got you.

How would you characterize the underlying end market outlook in Refrigeration? You mentioned that your business came in as expected, but I know a competitor too preannounced during the quarter citing weakness in Refrigeration or foodservice?.

It’s choppy. Globally as we mentioned is we did well in Asia. We did well in a tough market in Brazil. Europe was soft, but it was soft for everybody. And in North America, we were up and driven by growth in our North America grocery segment, I think that’s share gain.

So I think we called the market in Refrigeration flattish back in December and that still sort of feels right, right now..

Got you.

And then finally on the margin in resi, you talked about a headwind being distribution expansion, is that investment actually rising year-over-year in dollar terms because you seem to have reached a pretty steady level pace of adding distribution?.

It really hasn’t increased year-over-year, but again it’s sort of the way the model works as we continue to invest on a year-over-year basis, we have more fixed cost investment in distribution and then it takes 18 months or so to get covered.

And so someday when we stop there will be a year where we say distribution net, net is sort of a good story for us rather than sort of the continued investment..

Got you. Okay. Thank you..

Thanks..

Next question is from the line of Josh Pokrzywinski with Buckingham Research. Please go ahead..

Hi, good morning, guys..

Hey..

Just a couple of follow-on to overall -- some was already asked. I guess first on Commercial, if you could dimension now kind of 2Q versus second half, you mentioned having a lot of more backlog visibility than usual.

Just wondering if you could kind of put that I guess down 15ish% in national accounts from 1Q if my math is right kind of portion out when those come back?.

I think if you -- if I was going to build a model I might -- I do it a little less than linear, so a little less than one-third in second quarter sort of how I think about it. Again, we will have better view obviously as we get to the second quarter and sort of talked to our customers and see how it flows.

But right now on a full year basis as I suggest that we are feeling still solid of what we call which is for the industry it could be up low-single digits and for us to have another solid year in Commercial..

And I guess, on the Resi business, just given some in the channel movement and obviously, it’s early in the year, so we’re working off of low absolute numbers on the base? How would you characterize your quarter versus maybe the market on sell-through? Obviously, HARDI and AHRI data through February were quite strong, but again, probably a function of small numbers and they denominated more than anything else?.

Yeah. I mean, we felt like we had a good quarter. We feel like we gain share over the last two and a half, three years and we think we continued to gain share. But the honest answer is, probably need to be a few more cards turned over and see how other people announce and see what they do.

But we felt we had a nice quarter being up high-single digits that on replacement and a tough Residential New Construction market being flat and we think the momentum continues..

And on the FX headwind that you talked about, one thing that hasn’t really come up is, I would imagine with all the production that you do in Mexico and maybe with the industry as well that you’re getting some transactional benefit from labor cost denominated in pesos? Is that included in the guidance as part of the netting process? Is that something that could be a source of upside when we get into air conditioning season and more your production that comes from Mexico?.

Yeah. There is slight benefit there that’s factored into our guidance. We have a small proportion of our cost that are conversion related. So, once again the benefit of the lower pesos is factored into the guidance that we provided..

And how big is that?.

Yeah. I’ve seen it especially, but it’s -- again it sort of it’s all in the $20 million..

Yeah..

I mean, I think, if you look at the charts of what we’ve communicated of the percentage of volume of air conditioners that we build down there and that labor and fixed overheads -- labors about 10% of our cost of good sold, I think, you can sort of back into order of magnitude.

But when you’re buying all the components, even those that we buy from Asia and U.S. denominated, current -- or U.S. -- in U.S. dollars and then you sell in the Canada, you still have the issues..

Got you. All right. Thanks, guys..

And we’ll go to Johnny Wright with Nomura. Please go ahead..

Hey, guys. Thanks for taking the question..

Hey, John..

So just on the Refrigeration margin here, so clearly, you said tough start of the year and some of the headwind fade away in the second half.

But, I think, Todd, you said underline margin flat in 1Q? So what are the kind of the big drivers in the second half of the year as we have a headwind fades away, the gates up plus 50 bps, so you had a quite a meaningful expansion for the second half?.

I think it continues to be volume in North America, material cost reduction across our businesses and the commodity tailwinds. So I think all those are three sort of major drivers that will get volume and volume leverage, aggressive material cost reduction and continued commodity tailwinds..

Okay. And kind of broadly on the Refrigeration strategy you look forward. Is that, obviously, when the Wal-Mart business this year, which is giving you boost in the market.

So you’re willing to be aggressive on price going forwards, trying get that volume leverage? Is that part of the strategy or is that sort of the one-off target?.

Well, that implies that we were aggressive on price of Wal-Mart fact not an evidence. But I think what I -- because I think we want to full lots of reasons. Look, we want to make money and we think we have value-added product with some of the new product launches we come out. We’ve improved the reliability and delivery, and lead times of that business.

And so we’re not looking to be the price leader, we want to ensure the right way and continue to grow the business with margins..

Okay. Great. And then just one more if I can. On the national accounts, I think, the backlog of 10%.

Do you gave the order number there? What was the other growth for the national account customers in 1Q?.

We didn’t give it and it’s higher than 10%. I think we said double digits and I would read that as mid-teens and we didn’t give the dollar figure.

But I think you can sort of back into it, because I said, we’re 70% covered for second quarter for our national account business and it’s by half our business and so, I think, you can sort of figure it out..

Okay. Thanks, guys..

Thanks..

And we’ll go to Keith Hughes with SunTrust. Please go ahead..

Of course, is in Residential.

I think, as far as in this quarter, just from a production capacity utilization standpoint, where were we in the first -- what that look like to the rest of the year getting the backlog and [indiscernible] that you have the efficiency change?.

I’m not sure I understand the question sort of borrow down on exactly what you’re looking for, Keith, I am not sure I understood..

Okay.

You pre-build inventory obviously for the efficiency changes, if that can affect the production rates in the first half, first three quarters of the year?.

No. I mean, what we do is we really -- well, we pre-build in fourth quarter, so we took productions from first quarter in the fourth quarter. And for the quarter, it may cost us $2 million or $3 million of absorption in first quarter. I didn’t whine about it because we didn’t pile or adjust in fourth quarter when we had the benefit.

But net-net, we sort of swapped $2 million or $3 million of EBIT, if we pull from first quarter and the fourth quarter when we had that headwind this quarter. But second, third and fourth quarter will be more normal, sort of curve of productions changes from first quarter, fourth quarter..

Okay. Second question, back to Commercial again.

Based on your comments from the previous question, I assume that national accounts will return back positive during the second quarter, is that correct?.

It’s correct..

But it will be at a lower rate than we’ll see in the second half of the year..

I wouldn’t necessarily say that, what sort of whether at all play out. Because again, I was being asked -- I think the question I was being ask was, how was the miss in first quarter going to be laid on second, third and fourth quarter. But we never discussed what was in the base plan for second, third and fourth quarter.

I think the answer is we think national accounts are going to be up each of the next three quarters. But I’m not really guiding to which is the stronger of the three..

Okay. Thank you..

Thanks..

The next question is from Mark Douglass with Longbow Research. Please go ahead..

Hi. Good morning, gentlemen..

Hey Mark..

Todd, just to go back to an earlier question on Refrigeration, I think one of the questions we understand Australia has the headwinds but it’s still pretty lumpy on the organic growth side. Last quarter was really strong. This quarter’s weak. It’s just kind of back and forth.

Anything or particularly you can cite as to why Refrigeration is so lumpy? Is it just large orders occurring in different quarters?.

Yeah. I think it has to do with large orders. I think it has to do with the comps, obviously from the year before. And I think it has to do with the currency. I mean, when you look at actual currency as sort of significant headwind. When you look at a constant currency, I don’t think the story is quite as dramatic..

Right.

Is the currency headwind affecting you in sales into overseas for Refrigeration, basically export, you are at a disadvantage?.

No. It’s affecting us on translational..

Okay. And then finally with the 1Q of 2% organically, you are still guiding the 8% as a possibility.

Can you give us the puts and takes to what could -- you have to really ramp sales there in the rest of the year to get to 8% but you still believe that’s doable and why?.

Half of our business is Residential and we may have not seen some great summers in Residential. So we sort of always keep that out there. Residential, new construction picks up, add-on replacement remained solid and we get a hot summer. We can sell lot of air conditioners in one summer and that’s sort of how you think about the peak..

Great. Thanks for taking my questions..

Thanks..

And we’ll go to Walter Liptak with Global Hunter Securities. Please go ahead..

Hi. Thanks. Good morning, everyone..

Hey, Walt..

Wanted to ask -- stick with Refrigeration and just the timing, I think -- maybe the Wal-Mart business wasn’t expected to shift much in the first quarter.

So, I wonder about the timing for the second and third quarter, is it more back half loaded?.

We have more volumes second half of the year in our Refrigeration business than we do first half of the year and part because of Wal-Mart and also in part because of other customers..

Okay. And on that Wal-Mart business are -- your comments earlier kind of suggested that as you ship more volume that’s where you get the leverage and the margin pickup.

Is that the mix you were referring to?.

I think where Wal-Mart helps us is sort of the volume in the factory. And we’ll continue to mix up across our Refrigeration business in North America in part because of other customers including Wal-Mart..

Okay. All right makes sense. And I wanted to ask about in the resi business.

If you could help us refresh and on pricing and the pricing actions that were taken this year and what’d be -- how much is taken?.

We’ve called that we are going to get net price this year of $10 million. And we still think that's where we are at. Again we have to get into the summer selling season really to find out more. In January, we had a North America wide price increase of 3% to 5%. And then we had a 5% increase in Canada only in April.

And we’ve seen Carrier, Trane, Daikin, Goodman and sort of our other major competitors announce similar pricing both in North America and in Canada. So again it’s early, and we have to get into the major parts of the selling season, but so far so good on price..

Okay. Sounds good. Thanks for that color. I wonder about for your ‘13 pricing, I know, it’s early in the season.

But did you do anything with price in this year ‘13 product?.

No, I mean -- I think as we caught out in the Refrigeration -- in our Residential business, price mix was positive for the quarter. I am looking to make sure I am sort of doing it for memory. It was positive for the quarter. And so that’s what we had expected.

And I think as I talked about in an earlier call is transition from ‘13 to ‘14, still it’s early but so far so good and things are going as expected. But we'll know more as we get into the throws of the summer selling season..

Okay, got it. Okay. Thank you very much..

Thank you..

And we’ll go to Jim Krapfel with Morningstar. Please go ahead..

Hey good morning. Thanks for taking my question. So you mentioned the Residential replacement laying up a lot pent-up demand there.

Just hoping to get some quantification on how much pent-up demand is there?.

We’ve never shown our own number. I always quote others and several of the sell side analysts have sort of modeled it. And if you look over to four or five year period replacement that was deferred because homeowners didn't want to spend the money on a new piece of equipment and they bandaid it all pieces of equipment.

Order of magnitude, people have model sort of a full year, if you will of air conditioning. Volume was taken out of the market over a four or five-year period. And I think we are a couple years since the pent-up demand. And I think there’s another two or three maybe even more years of it left..

Okay. Thank you. That’s all I have..

Our final question will be from Glenn Wortman with Sidoti. Please go ahead..

Yeah. Good morning guys..

Hey Glenn..

Just on Refrigeration, I think you said earlier that you are still expecting sales growth for the full year.

Just to clarify is that at actual currency and then aside from Wal-Mart, where do you expect the growth is coming from?.

At actual currency, we expect revenue to be up and it's across our North America business, our Asia business and a tough market we expect revenues to be up in Brazil. Europe, we are less optimistic about we sort of think flat to slightly down there..

Okay. Thanks a lot..

Okay. Good. Thanks..

And I’ll turn it back to the presenters for any closing comments..

Thanks. Thank you, Operator. A few points to leave you with. We remain focused on capitalizing on growth in our major end markets, capturing additional market share and driving increased profitability through our operational initiatives. We are well positioned for 2015 and expect another year of record profits with strong cash generation.

I want to thank everyone for joining us, and we look forward to the strongest seasonal periods ahead. Thanks..

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