Todd Bluedorn - Chief Executive Officer Joseph Reitmeier - Chief Financial Officer Steve Harrison - Vice President, Investor Relations.

Jeff Hammond - KeyBanc Capital Steve Tusa - JP Morgan Robert Barry - Susquehanna Ryan Merkel - William Blair Rich Kwas - Wells Fargo Securities Julian Mitchell - Credit Suisse Jonny Wright - Nomura Tim Wojs - Robert W.

Baird Josh Pokrzywinski - Buckingham Research Shannon O’Callaghan - UBS Jeffrey Sprague - Vertical Research Keith Hughes - SunTrust Walter Liptak - Seaport Global Robert McCarthy - Stifel Samuel Eisner - Goldman Sachs.

Welcome to the Lennox International Fourth 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 Steve Harrison, Vice President of Investor Relations. Please go ahead..

Good morning. Thank you for joining us for this review of Lennox International’s financial performance for the fourth quarter and full year 2015. I’m here today with Chairman and CEO, Todd Bluedorn, and CFO Joe Reitmeier. Todd will review key points for the quarter and year, and Joe will take you through the company’s financial performance and outlook.

To give everyone time to ask questions during the Q&A, please limit yourself initially to a couple of questions or follow-ups and re-queue for any additional questions. In the earnings release we issued this morning, we have included the necessary reconciliation of the non-GAAP financial metrics that will be discussed to GAAP measures.

You can find a direct link to the webcast to 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 more information concerning these risks and uncertainties, see Lennox International’s publicly available filings with the SEC.

The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Now let me turn the call over to Chairman and CEO, Todd Bluedorn..

Thanks Steve. Good morning everyone and thank you for joining us. Let me start with a quick review of 2015 overall and then we’ll discuss the fourth quarter in more detail. 2015 was a year of strong growth and margin expansion for Lennox International.

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

Overall for the company, revenue was up 7% at constant currency and total segment profit margin expanded 80 basis points to a record 10.9% for the year. Adjusted EPS from continuing operations was up 17% from the prior year to a record $5.14.

GAAP EPS from continuing operations was $4.11 for the full year, including the previously announced non-cash impairment charge in our Kysor/Warren refrigerated display case business. 2015 growth was led by our residential business. Residential revenue was up 9% at constant currency and margins expanded 130 basis points to a record 14.9%.

Revenue from both replacement and new construction business was up high single digits for the year. We outgrew the North America market, captured price, saw improved mix, and reduced costs. We drove record margins in residential while continuing to expand distribution and investment for future growth.

In commercial, revenue was up 6% at constant currency for the year and margin expanded 60 basis points to a record 14.7%. In North America, national account equipment revenue was soft, as we discussed over the quarters, and finished down mid-single digits for the year.

On the service side, national accounts service revenue was up high single digits and our non-national account equipment business revenue was up mid-teens at constant currency. In the second half of 2015, we saw increasing traction in the VRF market in North America, and momentum continues to build in that business.

In Europe, commercial HVAC revenue was up mid-single digits at constant currency. Refrigeration revenue was up 3% at constant currency for 2015.

On a full-year basis, refrigeration margin was flat at 7.4%, but we saw significant expansion in the second half of the year on the ramp-up of major new supermarket business and having a negative year-over-year comparison from the repeal of the carbon tax in Australia behind us.

For 2016, we continue to expect about 100 basis points of margin expansion to approximately 8.5% for our refrigeration business. Turning to fourth quarter, total company revenue was up 7% at constant currency and total segment margin expanded 30 basis points to a fourth quarter record 9.7%.

Adjusted EPS from continuing operations was a fourth quarter record of $1.11, up 9% from the prior year quarter. GAAP EPS from continuing operations was $0.25 compared to $1.00 in the fourth quarter a year ago, including the Kysor/Warren impairment charges I mentioned earlier. Let’s talk about residential.

In residential business in the fourth quarter, volume and mix were negatively impacted by the record warm weather in the U.S. Residential revenue was up 8% at constant currency and with more seasonal weather, our growth would have even been greater.

Profit was flat and margin was down due to negative Canadian foreign exchange, lower factory absorption than a year ago driven by last year’s $77 million inventory pre-build to support the minimum efficiency regulatory change, and unfavorable mix driven by a lower mix of furnace products and replacement business both resulting from the warmer weather and a higher mix of residential national accounts in new construction.

A lot there, I know, but simply stated, the record warm weather negatively impacted our residential business both in volume and in mix. More recently, we have seen weather cool down in the first quarter and our residential business is off to a nice start.

We are seeing momentum for strong growth and margin expansion in the first quarter, as well as for 2016 overall. Turning to commercial, in the fourth quarter revenue was up 7% at constant currency and margin expanded 70 basis points to 15.3%.

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

In Europe, commercial HVAC revenue was up low single digits at constant currency. In refrigeration, revenue was up 3% at constant currency in the fourth quarter led by growth in North America supermarket business. Refrigeration margin expanded 180 basis points to 8.8%.

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

Looking ahead at 201 overall for the company, we expect another year of strong growth and profitability across all three of our businesses.

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

corporate expense is expected to be approximately $85 million, we still expect net interest expense for the full year of about $29 million, our effective tax rate guidance remains 34 to 35% on a full-year basis, and we continue to expect the weighted average diluted share count for the full year to be between 44 and 45 million shares, which includes our plans to repurchase $200 million of stock this year.

Capital expenditures are expected to be approximately $95 million for the full year, and we’re targeting free cash flow of $250 million in 2016. With that, let’s go to Q&A..

[Operator instructions] First we’ll go to Jeff Hammond with KeyBanc Capital. Please go ahead..

Hey, good morning guys. So just wanted to go back to residential margins and maybe just overall kind of where the--because it seemed like top line was okay, so I just want to understand better where the shortfall came in versus the low end of the guidance, and maybe just speak to the residential margin..

Well, let me just unpack it a couple ways, Jeff. What we said in the call or in the script was the record warm weather impacted both volume and mix, but we were up at 8% to constant currency. As we started the month of December, we actually thought we were going to do better than that, and then the continued warm weather hurt us.

My guess is you looked at heating degree days - they were down 20% in December versus last year, 20% versus the quarter, down 30% versus normal in December, so in December down 30% from a normal December, which we were sort of betting that we might have. Also it affected the mix.

We make more money on furnaces than we do on air conditioners, and the furnace mix was down. Typically--well, the industry were a magnitude 50% furnaces in fourth quarter, and the warm weather really impacted that mix for us and for the industry. Also, the foreign exchange hurt us, especially the Canadian dollar weakening versus the U.S.

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

Okay. Just on buyback, I think at the December meeting you talked about kind of open market purchases, but clearly the stock’s been under a lot of pressure here year-to-date.

How are you thinking the same or differently about that?.

You know, we’re still thinking through the right way to do this, and as I’ve said before, I don’t want to surprise people on the what but I don’t mind surprising you on the how.

We’re still thinking through the right way to be most beneficial to our shareholders on the share buyback, but we’re committed to doing a minimum of $200 million of share buyback, and to your point, where the stock is now, it’s a better deal than when it was $1.35. .

Great, thanks..

Our next question is from Steve Tusa with JP Morgan. Please go ahead..

Hey guys, good morning.

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

Yes, I’ll even broaden it. If we look at on a year-over-year basis fourth quarter, we think FX had a negative impact of $3 million to $4 million.

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

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

Right, and that mix dynamic you’re kind of speaking to, you said price mix combined with negative 2.5, when you say mix on that, I guess is that just furnaces are a higher price? It doesn’t say--you’re raising, or at least you’re reaffirming your resi mix forecast for this year, for ’16, so it doesn’t sound like it’s necessarily a 13, 14, 15 SEER thing.

It’s more product mix?.

Yes, I just want to underline that hard. It has nothing to do with the regulatory change. What drove the mix impact in fourth quarter simplistically is the weather, so we have big fourth quarters in furnaces, it’s half of the industry. We’re a strong furnace company - it’s even usually more than half for us.

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

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

Again, I think it’s all sort of in a box tied--largely speaking tied to weather, if not exclusively weather, and as we’re going into first quarter and the weather has cooled down, as I mentioned, to repeat myself, not be quite like Senator Rubio, but we’re heading in the right direction and margin expansion is going the way it has over the last three or four years..

Wow - you went there. Didn’t think you were going to go there, but you went there..

I couldn’t help it. .

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

No. I mean, it’s not affecting--even in Houston, there’s still lots of new construction, still replacement taking place. I understand the big overhang and the fear of the plunging oil prices, but we may the only industry, I guess, that it’s a benefit for.

We drive a lot of trucks around, and that’s down, and in some ways it’s a tax decrease to consumers and that helps us, so we have to look hard to find anything negative to us as an industry on lower fuel prices..

One last question for you. Tyco, JCI coming together, I don’t really know how resi fits there. They haven’t really opined on what they’re going to do on that front.

Is there kind of a--perhaps you kind of toggle the buyback a little bit in the near term, just in case that gets spit out there? I know you’ve talked about in the past that you think you could improve that business.

What’s your take there?.

I think I’d break it into three or four things. One is, as you said, we’d like to participate in industry consolidation, and we think if we owned the York Unitary asset, we could create value at the right price for shareholders. Two is it’s really JCI’s call on what they do. My guess is they’re pretty busy right now, and will be for a while.

Three is we think we can do both if we had to, but tied to what Jeff asked earlier, given where the stock price is, we’re going to be fearless on share buyback..

Right, and sorry - one last quick one.

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

Yes. I mean, you heard Joe guide to price up a bit. That reflects an additional price increase that we’re putting in effect March 1 in Canada, given the weakening of the Canadian dollar. So again, we’re aggressively pushing price..

Okay, that makes sense. Thanks a lot. .

Thanks..

Next we go to Robert Barry with Susquehanna. Please go ahead..

Hey guys, good morning. Just wanted to follow up on a couple things. First, the Canadian dollar - I mean, it’s been kind of a pressure for a while, but honestly for you guys, it seemed kind of an underwhelming one.

Any reason it really ticked up this quarter - hedges, pricing cadence, anything?.

Well, I think it’s been pressured all year. The FX impact that we had, and I have all the ’16 numbers in my head but I think the ’15 number was close to 25, $25 million of FX as I’m looking to my left here. A lot of that was the Canadian dollar, and then just within the month of December, the Canadian dollar weakened pretty severely versus the U.S.

dollar, I think 4 or 5%, and that just had some impact because it takes us a while to pass the price on in response, and now we have another price increase March 1. .

Got you. Did you guys say how much the RNC was up in 4Q? I think you said mid-single for the year..

I’m looking around the room - 17%..

Seventeen - yeah. I mean, I think that would be--well first of all, what’s happening there? Is that just starts and completes? Are you gaining share? You didn’t call that out as one of the drivers of the mix headwind, but I think it would be.

Any thoughts there?.

Short answer is it is absolutely part of the mix headwind, and I think we said it in the script - at least I meant to, maybe I didn’t read it right, but we think the warm weather affected us both with furnaces being down and air conditioners being up, which hurts us, and add-on and replacement down as a percent and residential new construction up, and both those had negative impacts to us for the quarter.

I’m not so sure we’re gaining share. I just think the warm weather allowed starts and completions to continue to flow in the quarter more than it did last year..

Got you, so it’s in the weather bucket. Just one last one on steel. I know you updated the commodities guidance. I was curious what was driving that. I know you guys had been concerned about some perhaps some tariff regime changes on the steel front. Just any update there, and to what extent is that driving the change? Thanks..

Your speculation is correct. We withheld some of the benefit of steel because we weren’t sure it was going to be there, but given the softening economy and the unlikelihood of any kind of high tariff impact to us, at least within the year, we’re getting more comfortable. Also, we buy our steel prices a quarter in arrears.

It’s another way of saying we already know what the first four months of 2016 look like for our steel pricing, so we’re getting increasingly comfortable in the benefit, and that’s reflected in the new guide. .

Got you. Okay, thanks guys..

Our next question is from Ryan Merkel with William Blair. Please go ahead..

Thanks. So first, it’s nice to hear that the first quarter is off to a good start.

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

Yes..

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

Is there perhaps maybe an upward bias to your guidance for over 100 basis points of margin expansion in ’16?.

Look - the honest answer is our internal plans are to do better than that, but also last year, I guided up 50 points in 2015 and we were flat, so things can happen.

We’re committed to getting 100 basis points or more in the refrigeration business, it’s the things that we’ve talked about - the ramp-up in our Wal-Mart business, at our Kysor/Warren factories, continued margin expansion and cost take-out, and a higher portion of our material cost reduction ’15 and in ’16 is focused on the refrigeration business, and that’s helping the margin improvements.

.

And then just lastly on Canada, just an update on the economy there and how are trends for you guys - getting worse, staying the same? Just an update there would be helpful..

I think the Canadian economy, other than in Calgary and sort of the oil areas, is fine and chugging along, both on new construction and on add-on and replacement. The weather obviously in fourth quarter hurt us, but it’s cooled down over the last 35, 40 days in Canada and it’s heading in the right direction.

I mean, we do over 10% of our residential business in Canada. We’re strong there, and so when the Canadian dollar weakens, that hurts us from a profitability viewpoint but we’re doing fine on share, and I think the market’s fine..

Great, thank you..

Next we’ll go to Rich Kwas with Wells Fargo Securities. Please go ahead..

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

But last year at this time, replacement demand was pretty good in Q1, new construction was down, so do we think of that as a mix headwind when we’re thinking about modeling this over the next couple quarters?.

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

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

There’s also the benefits of the ramp-up of our Saltillo factory and the material cost reduction benefit, so we still feel good about resi margins. Now, the one caution I’d put out there is always the case, which is March is a huge month for first quarter.

That’s 40 to 50% of our revenue is during one month, so we feel pretty good right now but I’ll feel better April 1..

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

Is that correct, on the residential side?.

I think that’s order of magnitude probably right..

Are you seeing anything around the edges, around the duration or maybe a little bit less availability? Any problems along those lines, or is it pretty much status quo?.

I think it’s status quo, Rich. I’ll be honest with you - I haven’t had a detailed conversation with our team in a while on that subject. They usually raise the red flag pretty early if there’s any issues, so the silence indicates to me that there’s no issue. We just had a big sales meeting earlier--or excuse me, late last week.

I was with the sales guys and no one brought it up to me, so I think we’re not seeing any issues there..

Okay. Last one on commercial - so with non-national account as strong as it has been and national account moderating and down, does that--I would think that helps your mix in commercial, but if you can just help understand that as we think about margins for commercial..

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

The answer is even though you’d think the buying power of the large retailers would cripple us, it’s our absolute most technologically advanced product and they’re willing to pay for the technology, because we can do things that others can’t. So it’s actually the other way - when national accounts are down, that’s a margin hit to us..

Okay, great. Thanks so much. Appreciate it..

We’ll go to Julian Mitchell with Credit Suisse. Please go ahead..

Hi, thank you. Just a follow-up around the commercial trends in North America, if you’ve seen any sort of order push-outs or delays of conversion of pipeline into your orders, and any sort of updates on the push-outs of planned replacement in retail that you talked about as a potential risk back in mid-December..

We actually did a little bit better in commercial than what we thought we were going to do when we gave that guide, so some of those national accounts, we were able to deliver in fourth quarter. Commercial national account revenue was down mid-single digits in 2015.

We now expect it to be closer to flat in 2016, so we don’t see a bump-up but maybe the deterioration slows down a little bit. The non-national account revenue was up mid-teens at constant currency in ’15, and we continue to see broad momentum in that business. It was up 20%-plus in Q4.

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

Thanks. Then on refrigeration, you talked earlier about the margin outlook, but how about just on the end markets by region? You characterized the sort of expected market growth back in December across five geographies.

Any change in view on those today?.

No, I think it’s still about the same. Our most important market is North America, and we think it’s down low single digits.

We’ll continue--you know, the Brazil market will continue to be challenging, Europe we think up a bit, Australia sort of flattish, and China we think even in a slower growth rate, we’re still going to be up mid-single digits as an end market in China..

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

Is the same true of refrigeration, or it’s more uneven?.

It’s more uneven. I mean, it’s just a more challenging market to get price than in HVAC, but we continue to--if we can take advantage of our material cost reductions and able to pass on some price, then that’s a win for us and that’s sort of where we’re focused on..

Great, thank you..

Thanks..

Our next question is from Jonny Wright with Nomura. Please go ahead..

Good morning, guys.

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

Our best guess, over the last couple of years it’s been a net investment. We think it’s going to be breakeven or so in 2016 as we continue to grow the business.

As we’ve talked about, we think we have a five-year roadmap to get this thing in the order of magnitude of $100 million of revenue, high single digit [ROS], and as mentioned in the script over the last quarter or so, we started to really gain traction with some specific end markets.

I think where we find where we do the best is where we can package our rooftop business, so schools, healthcare, low-rise office buildings where they’re sort of multi-use.

If we can specify both rooftops and VRF, that gives us an advantage rather than just going in purely with the VRF play, but we’re gaining traction and we think it will be breakeven in ’16. .

Okay, great. Thank you. Then I know you guys always have some adjustments you put out below the line, but there’s a bit of step-up this year when you include the Kysor/Warren impairment cost.

Do you expect that to normalize in ’16, or is there anything else you think is worth calling out this year that had an impact there?.

I think it will normalize. These things tend to be chunky one way or another, and it was a chunky year in ’15. .

All right guys, thanks..

We have a question from Tim Wojs with Baird. Please go ahead..

Yes, hey guys, good morning. Just a couple quick housekeeping items.

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

March 1, deliveries after March 1..

Okay, and then what’s the--you’re still unsure how you’re going to do the buyback for the year, but what’s actually embedded in the guide?.

I think what’s embedded in the guide is we do $200 million, and then we gave you the share count, so I think you can sort of back into how we’re thinking about it. But you know, again just to sort of--I think we know what we’re going to do, we’re just not talking about it right now. We’re still talking about it with the board..

Fair enough. All right, take care. Thanks..

Thanks..

We’ll go to Josh Pokrzywinski with Buckingham Research. Please go ahead..

Hi, good morning guys. Just a follow-up on some of the earlier questions about the step into 1Q.

Todd, I don’t know if you mentioned it specifically, but I guess seasonally you always see a step-down in residential profitability, just given the lower absorption in fourth quarter, but it sounds like if weather is starting to go your way, if mix is starting to go your way, maybe there’s some opportunity to catch up a little bit on price in Canada, and obviously only one month of it.

But should we see a much lower than normal drop in the operating margin there in resi in the first quarter, or is there a chance that that could be up? Just any way to dimension some of that more qualitative commentary?.

I think just sort of the math of it would be our margins were down in fourth quarter, and I’m saying the margins are going to be up in first quarter, so just I think those two facts would tell you that it’s going to be closer than normal..

That’s helpful.

Then just back to commercial - I know you guys broke down kind of the performance of national accounts versus non-national accounts, but any shifts in the environment more broadly? Never mind push-outs specifically, but anything you’re seeing from customers in terms of trading down or any kind of caution that you’re seeing on that front, price competition, anything of that nature?.

No. I think, look - the world is spinning pretty fast right now, and we have our ear to the ground - mixing metaphors, right - but we have our ear to the ground to see if the world’s changing. So far, it’s steady as she goes.

The national account customers are lumpy and they push out and they pull in, things move; and the non-national account business, which has been on a tear for 18 months or so, was very strong in fourth quarter and we haven’t seen any changes to--like I said, it’s probably not going to be up 20% like it was in fourth quarter, but we’re still feeling good about the non-national account business.

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

Is there any expectation that some of that lumpiness on the national accounts side maybe becomes a little bit more stubborn, I guess just what’s going on with the retailers in the stores themselves? Maybe some of that is tied to weather for them as well, but clearly a bit more choppiness on their fundamentals these days, and maybe just lumpiness..

Fair enough, and we’ll see how it plays out. You can defer these things for a year or two, but the operating--if you have the cash, the operating cost savings is so important to retail chains, you’re going to spend the money.

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

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

So we’ll see how it plays out, but we’re cautiously optimistic for national accounts in 2016..

All right, thanks guys..

We’ll go to Shannon O’Callaghan with UBS. Please go ahead..

Morning guys. On the residential, it was up 8% even with the negative weather impact. You said it would have been better without that.

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

I think we could have had another point or two..

Okay.

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

We’ve done very well in schools this year. Our school business is up 20%-plus, and I think that’s a focus on them spending more money but also us having a dedicated sales channel, dedicated sales people, dedicated inside sales people.

Light industrial has been reasonably strong, and some of the smaller retailers who aren’t our national accounts, we continue to sell to. So I think it’s strong across multiple verticals, but probably the strongest has been schools, the most meaningful has been schools..

And that up 20, obviously is going to be a very tough comp, but generally you think you’ll still be able to grow against these comps, I guess.

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

We’re gaining share, and it’s not a vertical per se, it’s more of a buying pattern. But our whole initiative in emergency replacement continues to yield dividends, and the investment that we made in a greater product line and our investments in distribution continue to pay dividends.

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

Okay, great. Thanks guys..

We’ll go to Jeffrey Sprague with Vertical Research. Please go ahead..

Hey, thank you guys. Good morning. Just a couple clean-ups here, I guess. First, just coming back to price, so the bump on price from a $10 million benefit to $15 million, Joe described the change as Canadian dollar related.

Was any of the 10 related to FX or other factors? I guess what I’m trying to get at is there actual like-for-like price increases going on inside the business adjusting for the FX and maybe other noise?.

A portion of the $10 million was associated with FX, not all of it, so we’re getting sort of net-net price and then we’re partially offsetting the FX this year. I mean, what we find is when the FX moves as quickly as it has, we’re not able to get it in one year, so we’re getting a piece of it this year and we’ll get some more of it next year..

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

You didn’t actually mention, or if you did I missed it, but how significant was the actual headwind from the investment activity that you were talking about, and how does that play out as we look into the new year?.

I don’t think the investment--I mean, the investments, we had investments last year, we had investments this year, so sort of on a year-over-year basis that wasn’t that big a driver. I think we missed on our guide on corporate expenses, and I think that just reflects timing of some of the bills coming due and sort of rising healthcare costs.

We got surprised, quite frankly, on a few things at the corporate line, but I think about it more evenly over a year-to-year period, our rate of investments are about the same. .

Just one last one - what was the inventory write-down in the quarter? Was that in refrigeration or something else?.

Yes, it was in refrigeration. It was an adjustment to the market value of inventory in one of our Florence subsidiaries. It was a situation where it was a one-time event and it was completely resolved in the fourth quarter..

Great, thank you..

Our next question is from Keith Hughes with SunTrust. Please go ahead..

You’ve talked about buybacks a few times here, and I think we know where you’re heading.

I guess the board’s appetite at this point for leverage, how far would you take it up if you viewed the shares as attractive?.

You know, I’ve talked that our--that range is one to two times debt to EBITDA, and over the longer term it’s certainly closer to two. I’ve said in this industry, you can even go higher than two and sleep at night.

I mean, we’ve had record cash flow in fourth quarter, we had record cash flow in 2015, and we think we’ll beat that in 2016, so I think we have lots of cash.

I also, though, think it’s important to keep some flexibility if an acquisition would come along, and I also think especially in the uncertain world we live in, we’re investment grade and we like being investment grade, so we’d want to work with our rating agencies to make sure that that’d be the case.

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

All right, thank you..

We’ll go Walter Liptak with Seaport Global. Please go ahead..

Hi, thanks. Good morning. I wanted to ask about your comments with the new construction, as well as replacement HVAC. I assume that that being stronger, that it was down kind of in the southern region of the U.S., and I wonder if the strength you saw there has any implications for the spring construction season up here in the north..

I don’t know if I’d extrapolate in any major way. What I was trying to make the point was that the building season gets extended when the weather remains warm, and that’s what we saw. From a mix point of view, we make less on residential new construction that add-on or replacement..

Okay, so no thought about an early start to construction--.

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

Okay.

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

No, I think we’re in a good position. We’re entering the year with some 13 SEER, and we think that’s important to have inventory as we carry through the final transition that takes place midyear. The transition from 13 to 14 SEER in the south has gone well. We’ll know more when everybody is out of 13 SEER, quite frankly, but so far so good..

Okay.

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

There’s still a price delta..

Okay. All right, thank you..

The next question is from Robert McCarthy with Stifel. Please go ahead..

Good morning everyone. I guess just back to your comments around the outlook, a good start to 1Q, granted, but 40 to 50% is in March.

What specific things are you looking at to give you confidence to--you know, it’s 1Q of pretty seasonal business in the context of the full year, but is there anything that’s pointing to your confidence around 1Q and the persistence of the trends in terms of quoting activity orders? How would you characterize it, because it sounds like you’re reasonably bullish at what is debatably a tough pivot point in the year?.

I think I’d point to in our commercial businesses, what we’re seeing in backlog and order rates, so we have some visibility there, albeit shorter. On the residential side, it’s a little--you know, we have one month down, so I know what actuals are for at least one-third of the calendar month.

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

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

The lower fuel costs, while sort of doom and gloom in many industries, is giving more people more disposable income, and we had some weather-related issues in fourth quarter for resi on the mix side and the pre-build year-over-year impact.

If you sort of take those away, revenue is still up 8% and a weather headwind, we still feel good about--you know, our residential business is still chugging along and we’re confident for first quarter and for full year..

Just as a follow-up to that, and obviously we know that obviously 2Q, et cetera, are kind of critical pivot points.

But is there anything in terms of the compare that we should just be kind of reminded of, either in the April or June time frame in terms of sell-through, anything along those lines? Just what you’re looking to kind of get a better sense of the trajectory of this year in terms of seasonality and weather..

I’ll be honest with you - I’m spooled up in my head on fourth quarter and first quarter. I haven’t thought so much about all the trends in second quarter. So I forget when weather broke last year.

I think, as I recall, it was a cooler start to the summer than it was the year before, so we didn’t get much weather in April-May, but then it started to get warm end of June and was very strong in July. So I think that’s the weather impact, so if it gets warmer earlier, then I think we’ll have an earlier start to the summer selling season.

But all that being said, I think the economic indicators of add-on and replacement have been existing home values, unemployment, consumer confidence. If people are willing to spend money, we’re able to give them a value that if you’re going to stay in your house two or three years, you get to breakeven pretty quickly due to energy efficiency.

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

Thanks for your time..

Thanks..

We’ll go to Samuel Eisner with Goldman Sachs. Please go ahead..

Thanks, good morning everyone. Just on the pricing comment there, I think down at the AHR Expo, it sounded as though that SEER 14 pricing was coming in, and I know that you had that embedded in your original guidance.

Can you maybe just talk about, going back to Jeff’s question about individual product line pricing, can you tell us what’s going on with SEER 14 and above pricing, and how you think that’s going to play out throughout the course of the year?.

I think we’ve announced price increases at the beginning of the year for all of North America. We announced another one March 1 in Canada, and it’s always our goal to not only mix up but price up, and we’re committed to try and get that.

Our guide is $15 million in price, a portion of that is Canadian FX, a portion of that is getting price in the marketplace, but we’re committed to doing both. .

Okay, and the SEER 14 price down that you guys were expecting, I think you alluded to that in multiple calls prior.

Is that compressing in line with your expectation?.

So far, it’s done better than what we had thought, and that’s why we had positive price in--or more positive price in ’15 than we originally guided to. I understand the question. We really won’t know the answer until we get into the summer selling season and everybody’s 13 SEER has evaporated, then we’ll get a better read.

Exactly how it’s going to be, I’m cautiously optimistic it’s gone much better than we thought to date, but we’ll know for certain when we get in summer selling season. Our guide assumes there’s some compression, but let’s see what happens..

Got it. Then just going back on the mix comment, it sounds as though first quarter you’re going to get a nice benefit from the push-out in furnace shipments.

You’re going to have a pretty easy comp in the fourth quarter when it relates to comping against more new construction as well as the easier furnace comps, so I guess what am I missing in more of the positive commentary on mix? Why is it still staying around $5 million? Thanks..

Good question. I think it’s early in the year and we’ve just got to see how it plays out. The regulatory change could change things. We just to see how it plays out, and quite frankly we haven’t sort of baked in everything that happened in fourth quarter in resi, so the guide is let’s see what happens.

I agree with you - if everything breaks our way, there will be upside in mix..

Got it. Really appreciate that. Thanks..

Thanks..

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

Thanks Operator. A few points to leave you with - in fourth quarter, momentum continued in our commercial and refrigeration businesses. Residential margin hit a lull from the impact of record warm weather in the fourth quarter. We’re off to a nice start and are seeing momentum for a strong year-over-year growth in margin expansion in the first quarter.

Overall, we expect strong growth and margin expansion across all three of our businesses in 2016, and another year of record profitability. I want to thank everyone for joining us today..

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