Investor Update

Dec 16, 2020

Slides

Ladies and gentlemen, thank you for standing by. Welcome to the Lennox International 2020 Investment Community Meeting. At the end of the presentation, there will be a question and answer session. You may now begin to submit your question by clicking on the Questions and Answers tab located below the video screen. If you experience any web issues during the broadcast, we suggest you first refresh your browser. If that does not resolve the issue, Call. As a reminder, this call is being recorded. I would now like to turn the conference over to Todd Bluedorn, Chairman and Chief Executive Officer. Please go ahead. Good morning, everyone. It's good to be here today and share with you our thoughts on LII, even if it is virtual. Joining me today on the call are Joe Reitmeier, our Chief Financial Officer and Steve Harrison, our VP of Investor Relations. Given the weather in New York today, I don't I would not have looked forward to fighting our way from Midtown to LaGuardia, so maybe it's good that we're here. Let's take a lead with what we always do, a forward looking statement. Let's continue with the presentation. Three things we'd like to do today. One is I'm going to lead off and do a quick business overview and get into some details of the initiatives within the segments. Joe is then going to follow me with review of 2020 guidance and then give you the 2021 overview. And then finally, we'll open it up for Q and A at the end. The operator gave a quick overview of how to post questions. I might encourage you to wait until I get a little further into the presentation to see if I don't preempt some of your questions. And I think 10 months in the pandemic, everyone understands how you post it. And then at the end, Steve will curate the questions. So let's go ahead and get started on the material. Those of you who are familiar with our story have seen this chart over the last decade or so. It's consistent and it's a strategy that works. We're capitalizing on growth markets. The resiliency of the North America residential market really seen this year, even in the face of a pandemic. And then a market bounce back in both our North America commercial and our refrigeration business in 2021. Well positioned for margin expansion, material cost reduction, another year plan for material cost reduction next year. Factory productivity of $20,000,000 to include a new factory, our 3rd factory in Sateo that we've already broken ground on and will be completed next year. And then continuing to leveraging technology to drive leverage in our SG and A spend. 3rd is winning in the marketplace with investments in product and distribution. We're excited to be reinstituting our store growth strategy in 2021. We're going to be opening 30 new stores. Also a great year for new products. We're going to be launching a 28 SEER residential product line as well as our new Model L commercial rooftop, which will be the highest energy efficient unit in the marketplace. And then driving shareholder value with disciplined use of free cash flow, we'll go back to growing dividends with earnings in 2021. And then after a hiatus, because of the pandemic on the share buyback, we'll start to share buyback up and Joe will get into some of the detail, but it's $400,000,000 that we're indicating that we're going to do in 2021. Let's talk a little bit about the business. Again, a consistent chart takes a look at the revenue on the left and segment profit on the right, residential in red, commercial in green, refrigeration segment in blue. We're now given the pullback in the commercial and refrigeration end markets and the growth continued growth in residential, we're now about 2 thirds residential and the balance of our business is commercial and refrigeration. Our business mix, again, we're primarily North America business with almost 95% of our revenue. We're about 3 quarters of our business replacement, which obviously we like. And then as I said earlier, about 2 thirds of our business is residential. This is our standard chart that shows revenue and EBITROSS on the left and free cash flow on the right. For 2019, we're also calling out a pre tornado Ross number to allow for a better comparison to 2020 and 2018. Joe, we'll be discussing the updated guidance for 2020 in a bit more detail later. We can see on this page it's a core EPS of $9.55 to 9.75 dollars and our revenue guidance of a decline of revenue of 4% to 6%. You can also see our 2021 guide on this page, it's core EPS of $10.55 to $11.15 but you can see a revenue number of $3,800,000,000 on this page. Later, Joe will walk through the revenue guide of 4% to percent. If you do all the math on the midpoint of these numbers, it will be revenue up 6%, return on sales up 90 basis points and an incremental drop through of 30%, in line with our traditional drop through performance. On the right hand side of the chart, you see free cash flow and outside performance in 2020, about 135 percent of net income, reflecting our focus on cash in a tough operating environment, combined with the natural reduction of working capital in down markets. In 2021, our free cash flow is forecasted to be 325,000,000 dollars approximately 80% of net income, lower percent than normal for a couple of reasons. 1 is 50% of CapEx is tied to our about half of that $50,000,000 is tied to our new Sateo facility. And then about half of it is finishing the Marshalltown construction post tornado They've got disrupted in 2020 because of the ratio. So about $50,000,000 of that CapEx spend is more than normal. And as you might remember, the $25,000,000 or so that we're spending on Marshalltown, we're using insurance proceeds to spend. And then the second major reason along with that $50,000,000 of additional CapEx is we'll be reinflating working capital as we have revenue growth as an enterprise in 2021. Over a 2 year period, so between 2020 2021, about a little under 110% free cash flow as a percent of net income. Over a 6 year period, almost exactly 100%, which is our target. Material cost reduction, a major initiative across LII, as we talk about internally forever and ever on men. And as we spoke about multiple years, a couple of major prongs of our initiative. One is continued leveraging of low cost supply base, approximately half of our components are sourced outside U. S. And Canada, and extending the global supply chain and qualifying the best global supplier is important to us. The tariffs were approximate cause, but we've continued to move out of China into Southeast Asia, India and Mexico. And we think this will continue to be the case. And even if the new administration revisits tariffs, we're going to continue to move from China to other low cost sources. 2nd prong of our material cost reduction continues to be designing costs out of our products, significant key enabler for us. We make continued investments in our capabilities to do that. And on the right hand side of the page, you see some of the examples of designing costs out of things like variable speed drive technology and optimizing our combustion chamber designs. Joe will talk about it more when he gives the 2021 guide, but we're targeting $25,000,000 of savings in 2021. Again, this is outside of commodities, which we'll talk Joe will talk about, but we expect commodities to $30,000,000 headwind and we expect our progress in material cost reduction to continue in future years. We continue to make significant investments in digital across our entire enterprise and we leverage it across OII. Three broad areas that we focus on, e commerce, controls and factory productivity. We continue to make investments in 2020 and we're well in 2021. These investments continue to drive market share gains, supporting our dealer contractor customer and margin expansion. And again, I will go into more detail a little bit later in the presentation. Factory productivity initiatives. 2021, we are targeting $20,000,000 incremental EBIT from factory productivity initiatives across LII. Three buckets of focus area. One is Mexico expansion. As I mentioned earlier, we have started building a 3rd factory on our Saltillo campus, approximately 325,000 square feet. We will be moving indoor coil production from our Grenada, Mississippi factory and also moving some sheet metal fabrication in house. In 2020, while over 50% of units were produced in Mexico, only approximately 40% of the residential production hours were in Mexico. When we're done with this, what we're calling Building 3, we will be up to 50% of production hours in Mexico. This project is worth approximately $0.20 of EPS spread over 2021 2022. Automation, we continue to make automation investments in both fabrication and assembly portion of our factories to drive down conversion costs. Information flow, again, we continue to make significant investments to allow our team to see the information that they need to manage the factories. All these are important factory productivity initiatives will pay dividends in 2021 and beyond. As I mentioned earlier, 2021 is going to be a nice year for us for product innovation. First is residential. We call our top of the line system the ultimate comfort system. In 2021, we are making an even ultimater, if that's a phrase. In the second half of twenty twenty, we launched our new SLP-ninety nine furnace, a 99 AFUE, that's a measure of efficiency furnace, the most efficient in the industry, as well as being a quiet unit, quietest unit in the marketplace. In early 2021, we will launch our new top of the line 28 SEER air conditioner with variable capacity inverter compression, our new SL28 XCV, write that down if you like, will be our most energy efficient and precise air conditioner in the market. In our commercial business, we will launch a new premium rooftop lineup in late Q1 of 2021. The Lennox Model L rooftop line will redefine the premium segment with industry leading efficiency, variable speed technology and a completely redesigned control system. All Model L rooftops feature the all new Lennox core control system and service app that goes with it. The innovative unit controller drives advanced variable speed technology to maximize energy savings and space comfort. Premium diagnostic features reduce installation service and maintenance expenses to provide the lowest total cost of ownership in the industry. The Model L will also have advanced IAQ package that will allow building owners to purify air, ventilate and control humidity better than any product in the marketplace. Also leading into IAQ, just like our competitors who've spoken quite a bit about it, we have an industry leading IAQ offering. Our PureAir S is a residential filtration system with a filter that removes from the air over 99% of the virus that causes COVID-nineteen based on independent third party testing. We also have a full line of our residential IAQ products to include UV lights, humidity control and outdoor air ventilation. We did a little under $100,000,000 in residential IAQ revenue with only about approximately 25% of our new systems, new replacement systems having an attachment rate of the RIAQ product lines. So we see this as a continued growth opportunity. In October, Lennox Commercial introduced the Building Better Air initiative, which helps facilities evaluate the state of their HVAC systems by using an IAQ survey and create solutions tailored to the needs of the building. We have a full product lineup of high efficiency filters, UV lights, bipolar ionization, energy recovery and dedicated outdoor units and humidity control. We work with our unitary commercial customers to meet their IAQ needs. Another area that I haven't traditionally talked about and quite frankly our competitors talk about it more than we do is our position in ESG and we think we're an industry leader. Over the last decade, we've made significant progress in our environmental sustainability initiatives. You can see on the chart, a 69% reduction in greenhouse gases and a 32% reduction in energy usage, both adjusted for revenue, so volume adjusted, while at the same time producing the most energy efficient product line in the industry. As you can also see in the chart, we have made great strides in our diversity representation and our safety recordable and lost workday frequency rates. We take great pride in our focus in these areas. We spend a lot of time discussing it and communicating in the results internally. But quite frankly, haven't done quite as good a job as our competitors are communicating our achievements to investors. We're changing that. We released yesterday online our new ESG report on lennoxinternational.com. I'd ask you to check it out. And again, we're going to be more aggressive on communicating all the good work that we have done and continue to do in this area. Let me now go to the segments. Let me lead off with residential. On the left hand side of the chart, you see our revenue in RAS. Over the last 4 year, our revenue has grown at a 4% CAGR. That includes a major tornado, a pandemic and a derecho. Our 2021 Ross is up 50 basis points when compared to the 2019 pre tornado of 17.6. Our mix of business in 2020 is approximately 80% replacement, 20% new construction. Lennox makes up 80% of our equipment sales selling directly to dealer contractors, while Allied makes up the balance selling exclusively through independent distribution. This is a pretty important chart, so I'm going to spend a little bit of time on it. On the left hand side shows industry information on year over year change in units. We are forecasting the overall market to be up mid single digits in 2020. It's hard quite frankly to call exactly what the number is going to be because of the difference between AHRI industry numbers, which measures the sales from OEMs to include sales to independent distributors and hardy numbers, which measure sales from distributors to dealers. For example, for the months of September October AHRI data showed the industry up 45%. So September, October AHRI up 45%, which is sales from OEMs. And so our larger competitors that sales to independent distributors. While Hardie data shows the industry up approximately 8% in September October, and that's sales from distribution to dealer and that's more in line with our model. This difference is obviously driven by the loading of independent distributor with products to both reload what was sold in 2020, but also distributors stocking their warehouses for 2021 given supply uncertainties. We don't sell toilet paper, but the same phenomenon that's taking place in homes across the country is taking place with independent distribution as they're concerned about the impacts of pandemic to the supply chain, and independent distribution is pulling in volume from 2021 into 2020. Since we are primarily directly to dealer, we don't have that pull forward effect from loading up independent distribution. There's been lots of discussion on this point. So let me reiterate. Given our direct to dealer model, we haven't pulled forward demand from 2021 into 2020. I can't say that necessarily for those who have independent distribution models. That's true for Lennox. For 2021, we are calling for the market to be up mid single digits. We expect to see continued growth in both new construction, where we're still seeing the last few years of the echo of the housing boom play out in the replacement market. 2021 with our new product launches, we expect positive mix and we have announced up to a 6% price increase in all our businesses effective in the Q1 of the year. As always with a consumer based business like residential macroeconomic, political uncertainty, Remington misc, we're also assuming a COVID wide path that we're on now. If that changes, all bets are off. Taking a slightly longer view of the market, the new housing bubble, the early mid-2000s will drive our replacement business as we said over the next few years. Through this installed base, we believe our end markets will grow at a multiple of GDP. So about Lennox store strategies, after taking a 2 year hiatus and building new stores due to a tornado, but the ratio and COVID-nineteen pandemic and shutting down support performing stores, we are back on the attack in 2021. We'll be opening 30 new stores. Those of you new to our store story, our Lennox store strategy is an important driver of our market share growth. An average store is about 10,000 square feet, about 80% warehouse, 20% front end wholesale, but 80% of the sales are equipment and accessories with 20% of the sales being parts and supplies. These wholesale distribution points allow us to sign up new distributors and serve our excuse me, new dealers and serve our existing dealers more effectively, cost about approximately $150,000 of capital and one time expenses to open a new store. Now operating expenses about $300,000 a year. We are operational breakeven in a little over 12 months. Revenue per store open at least 3 years is about $3,000,000 with half of it incremental and half of it business with existing customers. Our goal is to fill out the North America market with store locations with a 30 minute drive of dealers in the markets that can support a dealer. Right now, our intermediate goal is to have 350 dealers in place by 2025, starting with 30 new stores next year. This strategy works. This is a great growth vehicle for us. Our 1 stop excuse me, our 1 step model allows us to be selective where we open stores and have a scalable backroom to support our network. We're excited to be back on the attack here. Another initiative that's been on hold to the tornado and pandemic has been our parts and supplies initiative. It's an initiative to leverage this brick and mortar that we've built. As you can see on the chart in 2017, 16% of our revenue was parts and supplies. The initiative was showing real traction. We were up to 20% in 2019, due to the tornado and the pandemic we saw it in 2020. We have set a target to get that number up to 24% by 2024, growing our parts and supplies revenue at a 15% CAGR. When we do that, it will be worth about $300,000,000 of revenue for us. Revenue is similar to profitability to our equipment business. To accomplish this, there are a handful of initiatives we'll be driving, initiatives we showed in 2017 to 2019 work. New business efforts in the stores have primarily been virtual in 2020 as can imagine, but as we begin to enter more normal post COVID environment, the store teams will regain their focus on walking traffic as well specifically targeting account growth. 2, our marketing teams, along with our category managers consistently drive focus on merchandising opportunities to drive additional sales in our showrooms. And 3rd, a key pillar for our same store sales has been defied focus on operational excellence. So continued focus on adding to the systems and support we have to drive growth within our stores. The overall strategy of Lennox stores and driving a higher penetration of parts and supplies is exciting and the results are clear. Again, we're really glad to be on the attack here. Our residential digitization strategy continues to be a major area for us. And again, I'm going to spend a little bit of time on this chart. Our strategy is focused on building better service or better serving our customers, making it more productive and profitable, our customers being our dealer contractors and increasing their entanglement with us. Starting on top, you have screenshots of our repair parts finder and our product detail page. Here we're showing our latest investments to drive a more intuitive experience on Lennox pros to buy parts and equipment. The repair parts finder is moving to an exploded view of our equipment It makes it much easier to identify the right payer part when needed. We continue to improve our product detail pages to ensure the customer has all the information that they need. This includes imagery, specifications and manuals. It also includes suggestions on installation parts and accessories, thermostats and other equipment that it's often sold with. We'll soon leverage AI to make recommendations based on geography as well. Every distributor talks about their ability to do e commerce, just like every retailer says their Amazon, our investments in things like repair parts finder and product detail page allows us to drive a user experience unlike others. On the bottom are examples of digital tools designed to assist customers in selling, installing and service Lenoxing equipment. The bottom left is our tech experience on Lennox Pro's launching earlier next year. Here a technician can scan a barcode and gather all the necessary information to troubleshoot that product. The single barcode you can access the service literature, determine warranty status, review the pair parts exploded view. As a product is communicating, you can access system performance information and error codes with corresponding troubleshooting steps. On the bottom right is our service dashboard that was launched in 2020. It's a command center that allows the dealer service manager to stay very connected to the homeowner where they can A, monitor, B, proactively diagnose and 3, troubleshoot Lennox equipment without having to enter the home. The purpose of these tools is a dealer success is for dealer success and dealer entanglement. Lennox will continue to invest in digital strategies that deliver value for our dealers. We'll focus on areas where we can deliver differentiated value such as e commerce, which help dealers buy and track purchases or digital tools that I've talked about. Again, we're excited by the progress we're making in this area and we'll continue to make investments. Let me switch gears to talk about another segment, let me talk about commercial. Starting on the right side of the page, the commercial segment is comprised of 2 businesses, HVAC Business in North America, 75% of the revenue and National Account Services or NAS as we call it internally, which is 25% of revenue. We are in a placement cycle with about 70% of our revenue coming from planned or emergency replacement. This is good and brings stability to market demand. Moving back to the left side of the page, the green bars are revenue and the blue line again is EBITRAS. In 2020, our top line was significantly impacted by the COVID-nineteen slowdown with revenue down a little over 15%, most predominantly driven by a slowdown in planned replacement with our national account customers. However, nice cost containment actions by the team limited the RAS deterioration to just 70 basis points. Similar chart to what I showed on resi, left side shows industry shipment information. 2020 North America unitary commercial market will be down mid teens. The market reached its nadir back in Q2 with the industry being down 30% and has been bouncing back off that low for the balance of the year. Looking at Lennox data, we are exiting the year with backlog up double digits. Our experience during the Great Recession is pent up demand is created through the postponement of planned replacement like we saw in 2020 and is released over the next few years. We're calling for the market in 'twenty one to be up mid single digits, maybe with a little luck, maybe even better. We in the industry expect price leverage to continue and as we continue to drive mix up with customers with our new Model L. On the downside, macroeconomic and political uncertainty and the risk of slower than expected recovery from COVID-nineteen continue to bring potential volatility to the market. And our national account customers continue to fight for capital dollars for rooftop replacements versus spending on e commerce initiatives. Over time, Lennox has been recognized as the market leader in national accounts with hundreds of accounts in our portfolio. National account HVAC equipment sales is roughly half of our equipment sales. We will keep adding to the list of customers with over 26 new accounts this year on top of the 26 that we added last year. Lennox has the most efficient rooftop product line in the industry and it's even going to get more efficient with our Model L launch. Our configured order factory with the shortest lead times in the industry as part of our success in national accounts. Increasingly, our national account national account services arm. On the right side, we're experiencing a lot of success by extending our national account program into non retail verticals. In 2016, traditional retail represented 25% on our overall equipment sales in North America commercial. Now it represents slightly under 15%. Other important verticals that we target include DIY, restaurants, supermarkets and discount. And we're continuing to grow the critical distribution vertical. We have a strong relationship with Amazon, business more than doubled in 2020. And we have established national account programs with key distribution property owners like ProLogistix. We're excited that we continue to win in national accounts Our diversification efforts are paving the way for continued success. National account services, we have over 100 service branches across North America and so the footprint to provide self performing service to more than 94% of North America customer sites. We perform planned maintenance, planned replacements and provide asset management services for national accounts with the benefit of HVAC performance certainty and budget certainty. We have recently started to offer EMS monitoring and technical support for our national account customers the legacy EMS systems installed. Because of what we offer, we have tremendous relationships with many well known customers or brands, some of which you see on this page, and have strong customer retention and are successfully acquiring new customers as we continue to scale the operation. After a lull in growth due to the pandemic in 2020, we'll be back on the growth path in 2021 with a revenue target in 2023 of $250,000,000 The other major equipment segment is what we call our local regional share or local regional market, which is things other than national accounts. You can we think this market accounts for about 2 thirds of the North American unitary market and it only makes up 50% of our revenue. You can see we have an opportunity to continue to grow share there. Local contractor service business verticals like schools, office buildings and mixed use development to name a few. Local contractors also performed the majority of emergency replacement, which we focused on over the last 6 or 7 years, as well as building owners reach out to the contractor they trust to take care of their urgent needs. Moving to the left of this chart, our investments in products, driving specifications with engineers, local availability, dedicated support have all been part of our growth strategy and continues to be where we will focus in 2021 to grow our share in this market. Our third segment is refrigeration. Over the last few years, we've made adjustments to our Refrigeration portfolio. When you look on the right hand side of the slide, you can see that the makeup of the segment, just over half of its sales in North America commercial refrigeration space, while the remaining portion of it's in Europe, to include exports to the Middle East and Africa. About 2 thirds of our sales in Europe are commercial HVAC where the balance is refrigeration. From an end market standpoint, you can see we have a pretty balanced portfolio of solid and stable applications with good long term potential. Moving to the left side of the slide, revenue and raws of the Refrigeration segment. As in commercial, the profitability of Refrigeration segment has been negatively impacted by COVID-nineteen, lower volume, factory inefficiencies, and we were hardest hit due to factory inefficiencies in Europe and our Georgia refrigeration factories. So it had the most negative impact there. The negative mix impact driven by a more profitable North America business down more than our European business. 2020 was a tough year for our Refrigeration segment. We expect 2021 to be a better year. After the markets being down mid teens in 2020, we expect a bounce back in 2021, a mid single digits. And like I said, a commercial with a little bit of luck maybe even better. Looking at our refrigeration backlog, we are exiting 2020 with our backlog up double digits. We have the right portfolio of businesses and the keys to driving growth and profitability are clear. Continued investments in product innovation, which I'll discuss here in a moment, but also increased focus on operational improvement in our factories and digitization across the segment to drive profitability and better support our customers. One initiative in refrigeration I want to talk about, refrigeration product leadership. This page gives some flavor to that. Our Department of Energy or DOE compliant product line, we revamped 80% of our total product line in North America due to these new minimum efficiency standards that went into effect earlier this year. The transition has gone very smoothly. We feel we're in a good position to grow share with this revamped product line. Our new Magna industrial refrigeration product, a more industrial grade product than our traditional North America offering, that's a nice organic expansion for us into an adjacent market we weren't currently serving. We've begun quoting on the new product line and sales will begin in mid year of 2021. We're also working with our Turkish partner or better stated working with our Turkish partner, we have established a low cost Turkish factory for our European rooftops. We're looking at opportunities to expand our product offering there and grow our business in low cost countries in Europe. And finally, our European Process Cooling business, we're a market leader and continue to make investments to improve our product line and equally important leverage our investments in North America to automate engineering tools to improve effectiveness and speed of the engineer to order process. With that, I'll turn it over to Joe to walk us through financial guidance and updates and I'll be back on for Q and A later. Thanks. Joe? Thanks, Todd, and good morning, everyone. I'll start by updating our 2020 guidance points, which were included in the press release that we issued this morning. Collectively, revenue is projected to be down 4% to 6%, GAAP EPS within a range of $8.85 to 9 point $5 and adjusted EPS within a range of $9.55 to $9.75 Corporate expenses will be approximately $90,000,000 We expect our full year tax rate to be between 19% to 20% and our guidance for free cash flow is increasing to $475,000,000 resulting from strong residential demand and driving inventory levels down. Capital spending will be approximately $85,000,000 for the year, and we've completed $100,000,000 of share repurchases for 2020 and we'll be resuming share repurchases in 2021. Now let's turn to 2021 and an overview of what we have planned. Todd gave you an overview of our 2021 plan, but these are some of the dynamics driving the plan, starting with end market growth. We expect to see end markets in all three segments continue to rebound in 2021. Residential markets remain resilient, as Todd mentioned, and bounced back quickly in 2020, and we expect to see the continued growth in 2021. In commercial HVAC and refrigeration markets, we continue to see steady improvement, and that's evidenced by order rates and backlogs that continue to climb. Market share gains will complement end market growth. We have share gain initiatives in all three segments in 2021. Share gains are driven by our continued investment in distribution, industry leading innovative products and advancing digital capabilities that further enhances the value that we deliver to our customers. Announced price increases will provide a $50,000,000 benefit in 2021, which is approximately 1.5% top line yield. Productivity is always a priority and increasing on several fronts. We anticipate sourcing and engineering led cost reduction efforts to generate $25,000,000 in net savings in 2021. In addition, productivity gains from manufacturing initiatives will deliver approximately $20,000,000 in benefit across the businesses. Now let's turn to the headwinds that we anticipate. SG and A will increase in 2021. Discretionary SG and A spending will remain tightly controlled until we see how markets are behaving. However, we will be reinstituting advertising and incentive programs that drive top line growth, and there will be inflationary effects relating to employee compensation next year. Commodity costs, including tariffs and freight rates, are escalating in 2021 and creating a $40,000,000 headwind. Commodities in the form of raw metals will be a $30,000,000 increase. Tariffs will add another $5,000,000 and increasing freight rates will be an additional $5,000,000 initiatives and investments remain focused on driving profitable growth. The initiative to expand our share in parts and supplies is projected to continue to grow at a mid teens pace with very attractive margins. We will be resuming our investment in Lennox stores and our residential distribution network and adding new stores to drive growth. Over the years, we have demonstrated success with our continued investment in distribution, industry leading product innovation and superior customer support capabilities as we continue to digitize the businesses. And this momentum will continue in 2021 and complements the end market growth. And finally, macroeconomic uncertainty, no surprise here, remains a bit of a wildcard, but hopefully the pandemic is behind us in early 2021 and the political environment stabilizes so we can get back to really some semblance of normalcy. Top line growth is expected to be between 4% to 8%. The top line growth is both from market growth and the share gains we've discussed. Price yield will contribute approximately 150 basis points to the top line. GAAP and adjusted earnings per share are planned to be within a range $10.55 to $11.15 Corporate expenses are expected to be approximately $90,000,000 Our effective tax rate will be approximately 21%, and capital expenditures are planned to be approximately $135,000,000 and we continue there with investments in high return on investment projects, focused on fueling growth, driving innovation with industry leading technologies and capabilities that enhance the value proposition to our customers and increasing profitability with continued investment and cost reduction initiatives. It also includes $25,000,000 for the final Marshalltown reconstruction that is funded with insurance proceeds that we've already received and approximately CAD25 1,000,000 for the reconstruction of a third facility in Saltillo, Mexico. Free cash flow will be approximately $325,000,000 and includes replenishment of residential inventory and share repurchases are targeted at $400,000,000 for 2021. Now when you boil down all the guide points for next year, the plan will be to deliver our targeted 30% incremental margins. I'll now touch on our capital deployment philosophy. Our philosophy on cash deployment remains consistent. We plan to deliver free cash flow that approximates net income. We will have a targeted debt to EBITDA ratio of 2.0. Interest, pension and other expenses will be approximately $35,000,000 We will continue to drive investments in our businesses focused on profitable growth. Organically, we continue to identify growth opportunities that enable us to seize market share, continue to support distribution expansion and innovative new products and solutions that enable us to outpace the competition, along with continued investments to lower our product costs. And then inorganically, we will consider acquisitions where they make sense, and we maintain flexibility in our capital structure to invest efficiently. Lennox remains shareholder friendly, and we look for efficient ways to return cash to shareholders. We will continue to grow our dividend steady with earnings. We've returned $1,500,000,000 to shareholders in the form of share repurchases over the last 5 years, and we'll continue to return cash to shareholders, supplementing a competitive dividend with share repurchases. Now I'll turn to a history of our performance and our 2023 targets. This chart reflects, once again, historical trends in revenue and return on sales and our projections for 2023. After a few years of navigating through disruptions, first, the tornado that hit in 2018 and the recovery that took place through 2019 and now the pandemic. We will be returning to our more normalized trends 6% top line growth, delivering 30% incremental margins that drive margin expansions margin expansion. Now turning to margin targets. Here are our long range targets for each segment. For HVAC businesses, both residential and commercial, 2023 targets are between 19% to 21%. In our Refrigeration segment, our most geographically dispersed business, margins are targeted between 12% to 14% by the end of 2023. And now I'll end where Todd began with our investment thesis. And in summary, our momentum continues with the effective execution of our core strategies that deliver value centered on innovation on multiple fronts, enabling Lennox to continue to outpace our competitors, enhance profitability and deliver superior returns to our shareholders. Thank you again, and that concludes the formal part of our presentation this morning. And now we'll go to Q and A. Hi, Todd. We already have some questions in. So the first one is from Julian Mitchell. Any initial thoughts on seasonality for 2021 on sales or margins? Obviously, 2021 is going to be different than prior years have been given the impact of the pandemic. And right now, sort of the way you should build your models is we expect about half of the EPS to come in the first half of the year and about half of the EPS to come in the second half of the year and EBIT can can sort of be answered the same way. So we're ending 4th quarter in a good position. The momentum in the market continues in 3rd quarter in residential had a huge bounce back. And so, obviously, 2nd quarter was depressed this year, 3rd quarter in residential had a huge bounce back. And so we'll see more profitability in second quarter or second half than we did this year and less during the second half of the year. Thank you. The next question is from Nigel. He's asking, can we talk about investment spend in a little more detail? Train is upping investment and we're hearing something similar from Carrier. Is investment spend on an upward curve from here? Yes. I mean, I we don't give dollar spend on those sort of things. What we do is talk about the initiatives that we have in place, and we've continue to make significant investment in new products. I can give you the number I can port to the Model L and point to the 28 SEER and the most efficient product line we have in the marketplace. I can talk about digital investments in the dollar, or I can just point to the things that we're having around e commerce and digitization. So we're armed, we're ready to go. We're making 30 new stores. And so we're absolutely on the attack. And so, yes, that's a short answer. And the next question also from Nigel and Julian as well on topic. Why is refrigeration a core business? No real channel synergies and the outlook on margins continues to decline. Alternatively, do you want to scale in Refrigeration? And then Julian's question related is bridging the margins between current refrigeration and our targets down the road. This is sort of a funny way to do Q and A because Steve one, when I answer the question, I look at Steve and he has a pleasant look on his face like he believes everything I said, which you should. And then the others, when he asked a question, there isn't a cynicism and sarcasm in the question on that question. Look, I think our position on Refrigeration has been consistent and clear, which is at some level everything's core, at some level nothing's core. If you walked into a refrigeration factory, you'd see the same kind of compressors we use in HVAC business. You'd see the same kind of sheet metal processes, same kind of heat exchanger processes. You would see the same kind of controls because we leverage across all our businesses. And so the actual product, the design of the product, the manufacturing of the product is very, very similar. Where it differs obviously is then customers in the channel and how they use the product. So I think that's we're not selling washers and dryers here. It's a lot of overwrought with what we do. I think that's point number 1. Point number 2 is we've shown a discipline that we identify where we think we can win, where we can compete and that's where we'll and we've sold things where we didn't think that was the case, China, Brazil, Australia, Kaiser worn display cases. And the businesses we have left, Europe, North America, we think the fundamentals are strong that allow us to make money there. We think we have the right teams. We think we're critical mass. I said in the comments, 2020 was obviously a tough year. The pandemic hurt our refrigeration business more than anywhere else. Our factories in Europe were shut down for a couple of weeks. Our factories in Georgia were shut down. We also had an impact of mix down. And so we're confident that we have the right team and the right initiatives in place, and we're going to focus turning around the factory performance once we get to the other side of COVID, driving volume across the business with investments in product and digitization. And so we like our Refrigeration business. Now in terms of growing it, I think we're already in scale in the markets we play. And as I talked to the team about, I think you have to earn the right to do acquisitions. So we're not looking to throw a whole lot of new capital in this segment by doing acquisitions right now. But as we continue to grow the margins of the business then maybe if the right opportunity came along, we'd look at it. Next question, Steve? I'd remind everyone as well, if you have any questions for Todd, we submit them in the investor Q and A section. There's also a technical Q and A box that goes to another location. So please enter your Q and A in investor Q and A section. The next question, Todd, is from TN San Lucas. Do you expect high inventory in the independent distributors to pressure pricing in the overall market next year? And will it be more of a first half event? No. Our experience in this industry is distributors and dealers don't panic when they have a little bit of inventory. It's not lettuce. I mean, toilet paper is a good example. I mean, it lasts. And so their warehouses are full, they don't panic. So I don't expect any pressure on pricing. I think we're passing on price. I think the other OEMs have announced price increases even for things that are being bought here at the end of the year. And so we have commodity inflation, we have tariffs and we have freight inflation and so we'll be passing on price as well others. So I don't expect it. And in terms of the phenomena, yes, I would expect it to be 1st quarter excuse me, first half of the year, as we get through the summer selling season, I think inventories will be righted and people will reload as needed. Next question is from Jeff Sprague regarding the AHRI and Hardie color that we provided. Do dealers hold much inventory or is it LII sale to dealer effectively a sale to the end customer with very little lag? Just what you said, a sale from LAI to dealer to customer is almost simultaneous. The big little in the weeds, some dealers or large dealers may carry a couple of weeks of inventory. But over the last 6 or 7 years, they carry less and less because of our ability to supply them with our parts, our Lennox stores or direct distribution or direct delivery the same day or next day. So we model and demand very closely. The next question is from Gotham MacKowen. Todd, can you elaborate on your view of how long the resi HVAC echo boom may last? And how much that adds to resi unit growth, I. E. How much unit demand growth soften once the boom subsides? Yes, I mean, I have to be consistent with what I've said over the years, which is I think we're getting to the point where there's another year or 2 left. And as I've publicly said before, we build a model because there's these sequential set of bell shaped curves around installed demand, there's never a year where it crashes. But there's going to be a year in the next year or 2. We don't think it's 2021. I don't think it's 2022. But beyond that, there'll be a year where the market starts to flatten out. Our model actually says that it goes down a couple percent, 2% or 3%. But I think that's false precision. And if the hot summer, we won't see it. Or if there's other forces at work that drives the volume that year, we won't see it. But I think longer term, once we get through this echo, I think that we'll have a sort of a decrease in the market or flat now for a couple of years. And then what our model shows is after a couple of years of flat that it starts to grow low single digits sort of a GDP market. But we're real confident even in those years where the market is flat in a couple of years. If we gain 0.5 point of market share, that's worth 3 points of revenue. We get a little bit of price, we get a little bit of mix, we're mid single digits, maybe 6, 7 points of revenue growth in residential sort of on a normal year, if you will, once we get past this echo boom. So we think this is a great end market and will continue to be a very good end market for us. And Gautam was also asking with 30 new parts plus stores, how much incremental market share will that drive in 202120 22? I think I don't know how much well, I think I know. The answer is 2021. It won't be a major driver. What some of the stores we open up beginning of the year will have some impact, but stores we have second half of the year don't have a major impact. The way the algorithm I think about is if you do the math of 30 stores, you have the flywheel going, you get about a quarter of a point a year in market share in residential. So do all the math of $3,000,000 a store, half of it incremental. And so I think that's the impact that will have in 2022. The investments we're making initially will have some impact in 2020 one, but more 2022 and beyond. I think that the share gains in 2021 are going to be driven by the new product, leveraging all the digitization tools that I spoke about, as well as continuing to grow on the share that we gained this year from dealers because we are able to handle the pandemic better than others in terms of supply assurance. And this question is from Ryan. And again, I probably can't capture the tone of the question correctly, but commercial margins have declined for a few years. What happened and what drives margins higher beyond this? Yes. I mean, I'm going to spin it the other way. If you had told me that commercial markets are going to be down 15% and that you're going to have COVID impacts to your factories, I. E, absenteeism in Stuttgart, Arkansas, and that margins would only be down 70 basis points, I'd say sold. Over the last few years, they've been down because we've just made been making significant investments in the business in digitization and new product. And again, we're real comfortable as we end the year around 17% operating margins that on our 3 year target of getting it to 2019 to 2021. And again, it's leveraging factory productivity with the increased volume that we're going to have next year, material cost reduction and then the share gains that we're going to make with the Model L on our new product line. So I understand the jab on Refrigeration on Commercial. I'm a bit more defensive. I think they've done a very good job on margin in a very tough market. Questions from Nigel and Julian. Are you able to quantify SG and A headwinds as a placeholder? Or how big will SG and A headwinds be in 2021? Yes. I mean, we're not going to put a number on it. I think the way I think about it is we initially said we're going to have $115,000,000 of cost takeout this year. And now we're saying it's half of that, it's $58,000,000 or so. And the big difference was a major one time cut this year was salary reduction and no incentive bonus. And we're paying all those now this year. And so you're not going to have the bounce back next year that you typically have. So I would think about it more as SG and A growing a little less than revenue. Typically, we say as a fraction or sort of half of revenue, I think a year like this, I would sort of build a model having it grow with revenue would be how I would model it. Question from Ryan Merkel as well. Can you frame the commercial outlook in 2021 by business type. So what is your view on structural challenges in office, retail and hotels? The area that we I'm going to slice it differently than the verticals that you asked. I'm going to slice it more on how we think about it internally. The area that's going to bounce back the most is going to be the one that was down the most to 2020, which is planned replacement. And so sort of at the nadir in second quarter, our planned replacement business order rates were down 60%. That's discretionary spend. That's very large. That's national accounts. You just say we're not going to spend on replacement this year. Our experience is that comes back, it comes back quickly and once they have a green light to spend, they might have they reach back to what they deferred during the prior period, during a pent up period and then they make investments that were scheduled for the current time period. And so that's what comes roaring back and we think that will come back maybe not all the way back or all the roar in 2021, some of it will be in 2022. But our national account business was down materially more than our non national account business this year. And that's what we think bounces back. I mean, you then sort of look at the verticals in national accounts to support that. It's the large retailers that are doing well who are major customers for us, people like Lowe's, people like Home Depot, people like Best Buy, people like Walmart. Those are the verticals that come back. Also, I talked about in my comments that distribution is a major market for us and obviously a rooftop market and Amazon is a major customer. And so those are the verticals that we expect the most in. I think the area that will continue to be soft would be mid rise office buildings until we get to the other side of COVID. I think that would be a softer end market. But yes, that's a planned replacement, I think it's more of it. And Julian is asking, how is LII thinking about the margin expansion by segment in 2021 relative to the overall LII goal? Yes, we don't give segment targets. I understand the question. We don't give segment targets. I think the one thing I would say is they're all going to have similar 30% incrementals, but we don't give segment targets. Steve Volkmann, I think just needs a clarification around the expectations for price costs next year, I mentioned price increases. Yes, I think the headlines are commodity inflation of 30,000,000 dollars headwinds from freight to $5,000,000 headwinds from tariffs $5,000,000 so total $40,000,000 between commodities, freight and tariffs. And then we're targeting $50,000,000 benefit of price, which is about a $1,300,000,000 1.4 yield on revenue. We've announced up to a 6% price increase. A few years ago, you may recall, we got $75,000,000 of price. I think that's the power of this business that in good markets and bad markets, we're able to get price and next year, we're going to have volume up in our end markets. We're going to have commodity headwinds. Also when we talk to our customers, although we haven't quantified the number for investors, COVID obviously has been a tax to the entire all manufacturers. And so there's this COVID inefficiency that's built into our cost structure that we're also going to need to pass on the customer. So our competitors have announced similar price increases, some maybe even more. And so we're confident that we're going to get price in 2021. And Nicole is asking, can you give more color around investment spending in 2021, perhaps quantify? And what level of steel copper price is embedded in your commodity outlook? Well, I'll answer the second question first. What's we hedge copper and aluminum, and we're about 50% hedged out 12 months out. And then steel, we buy on based on the market spot price during the prior quarter. And we also have some discounts negotiated with the mills and service centers off that price. And so what's baked in there is that what our hedges are. And then for the unhedged portion, we take a look at what the future spots are or the futures are and that's that we bake into our number. In terms of investments, I think I broadly covered it on our prior question. We're not going to give an exact number. I would assume that our SG and A investment this year will be because we're going to have some bounce back, will be something shorter revenue growth, but in that zip code. And John Walsh has a question. You talked about raw materials. What about inflation in components with a focus on what you still source in China or Asia more probably? The $25,000,000 of material cost reduction, that's always in that number. So that's after all the price increases we get, we have to take out that much more cost to get there. So if there's $10,000,000 of price increases, we have to take $35,000,000 of cost out to get to a net $25,000,000 So that's all baked in. So the answer is, yes, there's more inflation right now than in prior years, but that's obviously a good thing. That means the economy is heating back up. We have a handful of agreements with some major suppliers where we have commodity escalators or deescalators if there's a lot of copper steel in their product. And so some of that's contractual and some of it is suppliers want to raise prices. And obviously, our ability to have everything be second sourced and be able to move it to other low cost sources is a big part of our opportunity to head all that off. So the answer is it's in the 25% and we're aggressively looking to minimize it. Next question is from Walt Liptak. He's asking about the new stores. I believe we covered the sales aspect to his question, but he's asking is there specific geographic location that we're focused on with the new stores? No, I mean not one I'm going to talk about. What our team does is, as I've publicly spoken about before, is we understand all the dealer contractors in North America, those that we do business with, but also those that we don't do business with. We have an algorithm set up that scores them ABC of how high quality they are for us to help the ease of us to convert them. We understand what the issues are and why we're not converting them. And then we understand what our market share is in each market and what the opportunity is for growing. And so then with that high level algorithm, we're able to rank how we want the stores to be entered for the next 18 months. We then put that against sitting down for sales leadership team, they look at the list and then sort of an auction, if you will, where if you get a new store, you got to raise your quota. That's sort of an asset test to salespeople of whether they really want the store and then we work through that and then we come up with a list of how we roll them and that's what we've done for 2021. Tim Weese is asking Goodman has had operating challenges in 2020. There's some concern that they'll be more aggressive to regain share in 2021 and that the industry has borrowed share from Goodman in 2020 that reverts in 2021. Can you frame how this may impact LII next year? Yes. We should have a PhD on borrowed share, right, after all the conversations we've publicly had about what happened with us in the tornado. So we understand the dynamic, I think, pretty well of what happens when you have a catastrophic event like this and you lose share and how you hang on to it or how in the end you lose it. And so we were pretty clear eyed when we took advantage of Goodman's issues of who we signed on. What I mean by that is if you sign up a dealer who may have volume, but it's a very tight Goodman dealer and you have a sense of once you meet their needs, they're going to go back to Goodman. That's not what we did. We signed up or we supplied dealers who we were confident would stay with us or high confidence they would stay with us. The other thing is what we did was we armed our own traditional dealers to go out at the homeowner level and take business from Goodman Dealer. So Goodman did that product, we could win it through existing Lennox dealers or we could support the Goodman dealers and we always opted where we could to support existing Lennox dealers to win the business. So they grow their share in the marketplace. And again, the dealers that we did sign up, we did it with our eyes wide open of what we needed to hang on to them. So pretty confident we're going to hang on to a lot of it. Again, Goodman has the dilemma of being a market share leader. Are they really going to try and start a price war to gain back a little bit of share that they lost when they're the market leader? I mean, that's self defeating. We're not even the market leader, and we certainly didn't do that after the tornado. We matched other people's deals and gave some back end rebates in line with what they had with the current supplier that had taken them from us. But we didn't get a price war. And I'm pretty certain Goodman won't either. Next question is from Jeff Sprague. We touched on this perhaps a bit earlier, but can you size the magnitude of the temporary cost returning on compensation, advertising, etcetera? Approximately $5,000,000 If you do all the math of the things we get publicly, it's I think $7,000,000 or so incentive comp bounces back. The rest of it were headcount reduction and what we call discretionary spending and quite frankly, we'll throttle that as need be as what the markets as the markets behave. The next question is from Jeff Hammond. Based on your comments on distributor stocking, would you say we have gone from understocked to now overstocked in the industry? And then also how is furnace season shaping up giving more mild weather? Yes, I think the answer is we're either overstocked or we're heading that way with independent distribution. And again, I don't know for certain because they're not our customers. We have a little bit of a lens through Allied, which is 20% of our business. And what you see is, as we've talked about almost all the OEMs, in fact, I'll just say all the OEMs, to some level or another had issues during the summer selling season, either because of their own factory issues or because of the supply base and had trouble meeting demand. And so then you have that in the distributors head. And so they want to have as much inventory as they can have going into the selling season to protect themselves. And so yes, I think when you look at a number of September October of AHRI being up 45%, that's just not reloading for last year, that's pulling some forward. So I don't know how much more they is an independent distribution, but I think there's some. Was there a second part of that question, Steve? I forget. How furnace season is going so far? Yes. Furnace season is fine. I mean, it's again, I think the weather matters, but obviously matters much less than have it be hot in the summertime. So yes, hot in the summertime. So the fact that it's not as cool as normal, I think on the margins has some impact, but you saw we raised our guide for Q4. So we're doing fine as we end the year. And also from Nicole, what is driving the confidence in 12% to 14% margins in Refrigeration by 2023? Again, it's our taking a look at the business and understanding the impact of improved factory productivity. We changed the leadership in all our factories in the last 18 months to 24 months, the negative impact from COVID. Prior as we exited make sure I have the right notes here. As we exited 2020 as we exited 'twenty nine, our margins were near 12% in Refrigeration, 11.5% or so. So we had this significant downturn in 2021 and that's in large part because of COVID, 15% lower volume impact to the factories and then a negative mix impact because North America was hard to hit. You should play all that back, we're back to the close to 12%, which is spitting distance to where we need to be for our targets of 12% to 14%. So we got to get some volume across the business. We have to improve our factory productivity. We have to gain some share. And I think we're set up to do that. The next question is from John Walsh regarding the 25% attach rate in IAQ. What is the experience more recently? How high can it go? And does IAQ drive 10 points of incremental price versus a standard unit? Well, I don't know what cause and effect is. Well, yes, the cost of an IAQ system is $500 to $1,000 depending on what they buy and a normal system is $5,000 So it's 10 maybe 10% to the top line number. But I think more importantly, if you're selling IAQ, you're getting high mix too. So no one buys or very few people buy, I don't know if anyone buys an entry level SEER unit with an IAQ package. So if you're skewing up the IAQ, you're mixing up the higher product line. We focused on IAQ for years, and we think we're as good as anybody. And some of our competitors, I think, have breathlessly talked about IAQ with response to COVID. And I've always, I think, been a bit more balanced publicly on this. I think it's an opportunity. I don't think we ever the thing to always remember is with all the good things we do on mix and new products that the industry is over 0.5% entry level. So I don't think you ever get higher than that on IAQ, because half the people just want to buy the lowest cost unit that they can. But we continue to focus on mix up. I think longer term, because I'm optimistic on COVID, that we'll get to the other side of this reasonably quickly. And then it's going to be the more traditional IAQ conversations about my children have asthma, I have animals in the house, there's dust particles that I'm sensitive to and that's where IAQ helps out longer term. Tom, this question is from Jeff Hammond. The compound annual growth rate in parts and supplies is steep versus a much more modest ramp over the past few years. What needs to change here strategically to up your mix and hit these aggressive growth targets? I think it's in part what happened in 2020 is, I think the actual parts market is down. I think people replaced units maybe at a higher rate than what they typically done. And so I think we're down with the market. I think there's a bounce back in market growth of parts and supplies. I also think we quite frankly haven't been focused on parts and supplies in the stores. We haven't been able to go out and call on customers. We haven't been able to bring them into the stores. They wanted to take delivery or pick up equipment at our windows. And so I think it's areas that we spoke about. I think it's a focus on new business development. It's a focus on the operating system and then it continues to be a focus on making sure we have the SKUs to support it. So if you look from 2017 to 2019, we took it from 16% to 20%, and now we're going to go from 20% to 24%. So I think it's roughly the same growth rate of what we need to do. And another question from Tim Weese. Are there higher costs related to higher efficiency standards for 2023 that are embedded in 2021 or expected to be in 2022 or can existing productivity, etcetera, offset that? I think it's that existing productivity can offset it. I mean, we always use the industry does too, so just not us. I mean, you use these breakpoints and efficiency standards to revamp your product line. So we're talking about the Model L, new highest energy efficient rooftop product line. That's part of the broader strategy as we revamp everything for 2023. Minimum efficiency standards go up, you need to raise your high end or you'll get compression and mix down. And so the Model L is a way of doing that similar on residential. And so that's all just baked into the normal cadence of the business. There's not a big ticket investment that we're going to talk about in 2022 to get ready for 2023. The next question from Chris Danker. How do you think work from home impacts the appetite for commercial property improvement and investment going forward? I think that's probably a better question for our larger competitors who are involved in Applied. We're in a building, I'm in a building that's 9 stories high or 8 stories high, so we need an applied system. I think those are the buildings that are going to be more impacted. I think the verticals that we plan, it's not going to affect distribution, not going to affect retail, Obviously, it has affected restaurants, but those will come back. In terms of working from home, I think that's more of an applied large office question. I don't know what's going to happen with Midtown Manhattan, but we don't sell any equipment there. So it's not my concern. And also from Chris, with new residential Sears standards on the horizon in 'twenty three, your long term targets assume a similar 2020 standard increases? Ask that question again, Steve. Sorry. With new residential Sears standards on the horizon in 2023, do your long term targets assume a similar 2022 boom like the last round of the efficiency increases? Or how well Yes, the 2023 targets encompass the 2023 regulatory change, if that's the question. I don't know what's meant by the boom that we saw last time. We didn't have, I don't think much of a boom last time. We had a boom in 2,006, 2,007 when there's minimum efficiency standard, but there wasn't much of a boom last time. And question from Jeff Sprague. Is over absorption in the factories as rebuild inventories the significant margin driver? It's all baked into guide. But maybe a more responsive question would be the $20,000,000 of factory productivity. So we called out, we had $10,000,000 dollars and I think it was just residential $10,000,000 all right, let me look at my notes, make sure I say the right thing here before I give away a number, that we called out that we had $10,000,000 of headwind from factory inefficiencies this year. Part of that's under absorption and the pandemic and the $20,000,000 of factory productivity next year is all the good things we're doing, but it's also greater volume that's going to flow through the factories. So the short answer is, yes, it's good news and it's part of the $20,000,000 dollars Next question from Steve Volkmann. How much volume is needed to hit the low end of the 2023 refrigeration margin target? Or is it more around cost controls or improvement? Well, I think it's both. We don't give segment guidance, but I think I would tend to think about it as the overall revenue guide of 6% supports the mid range or the midpoint of the targets that we gave. And so if it's below 6% for Refrigeration, we're closer to the lower number. And if it's more than 6, we're closer to the higher end of the range. This question from Steve Tusa at JPMorgan. What are the segment growth rate assumptions through 2023? Yes, I understand the question. We don't give them, right. So we don't give segment growth rates. We just give the overall enterprise growth rate for the 3 years. The next question is from Nigel. Question on the free cash flow bridge for next year. Are you able to more finally run through the moving pieces between inventory, working capital, CapEx, etcetera? Yes. Well, inventory is part of working capital, right? High level, I think it's what Joe said, it's like pulling my nose to make sure I have the exact right numbers in front of me that our guide is $325,000,000 of free cash flow and there's $50,000,000 of CapEx that's greater than this year. So we did $85,000,000 in 2020, we're going to do $135,000,000 in 2021. That $50,000,000 about half of that is geofactory, about half of that's rebuilding Marshalltown, where we already have insurance money for. So one way to think about it, which I know is unfair, but I'll say it this way is, if you take the $325,000,000 and add $50,000,000 to it, you get $375,000,000 that's sort of what our number would be if we weren't having these major factory rebuilds or new factory build and rebuild where we already have insurance proceeds. And then the delta between that, which I think if you do the math about 90%, 91% of net income, the delta between that and 100% of net income, I would just assume is working capital. And again, it's the three elements of working capital state, the obvious inventory, payables, receivables, and they're all intertwined. But that's sort of how I would think about it given what we've said. And a question from Brian Loftus. Could you talk about the longer term market demand shift toward the heat pumps? Do you believe that will happen? And or is it mainly a new construction or some replacing furnace for heat pump in some regions? No, I mean, heat pumps in the Southeast has grown over the last 20 years and we have a competitive product line there and an important part of our product offering. Having cooler weather heat pumps, I think support for energy efficiency. So we're focused on that also. So I think it's both it's obviously a new construction product, but it's also a replacement product because if you have to replace the furnace and the condensing unit, you can just replace them both with a heat pump and then bring in an indoor AHU or fan coil that they handle for you. So it can be it's a replacement product also and we play there and have a strong product offering, it continues to grow. We have another question from Steve Tusa. We answered some of this earlier, but how big is warehouse as a percent of the market? And is data center a factor or is that served by a different type of product? Yes. I mean, we I don't think we've ever sort of broke out warehouse distribution as its own segment, but it's increasingly an important part of what we do. As I said, we doubled our business with Amazon, grown part of what we do. And then what was the second part of this question, Steve? Related to data center and also warehouse. Yes, I mean, warehouses distribution, I just answered. In terms of data center, we do a little bit there, primarily in refrigeration, because we sell refrigeration components into crack units and other people who are focused on cold rooms. I'm going to make sure I got it, Steve. Was he talking cold rooms was it cold storage or IT facility? Data centers, so IT, I believe. Yes, I'm anticipating questions. Yes, so data centers, we sell through refrigeration to crack who provides equipment, But we don't it's a different type of product on. But I would also tell you it's obviously an interesting market because the first blush should say, man, you want to be in data centers because it's growing, there's so much more footprint going in, which is true. But I don't know, 10, 15 years ago, they cooled the whole rooms. Then they moved to they were just cooling the computers, the racks. And now they're moving to precision cooling where they're just cooling the chips. And so even though the total capacity of data centers continues to grow dramatically, the cooling requirements isn't growing near that amount. In fact, may even be shrinking for the reasons I just said. So we've looked at it over the years, but it's a different type of product and there's already players there and it doesn't appear to be for the reasons I said that go to market. And we have a question from Joe Ritchie at Goldman Sachs. If growth turns out to be slower in 2021, what happens to free cash flow in 2021? Is your expectation to get back to 100% conversion by 2022? Yes. Tough audience on free cash flow. If you back out the CapEx, we're at 91% next year and we're 135% this year. So yes, we'll definitely get back to 100 the target will be to get back to 100% in 2022 unless there's a reason not to. And then the question will be what will happen if the markets turn? Well, if the markets turn again from where they are now, working capital won't be reinflated and therefore, we won't be taking that out of free cash flow. And so again, we're a distributor product business. And so when markets are softer down, we continue to generate cash and we would do that in 2021 if the markets turn down. And another question, could you talk about the VRF market progress in general? Is that getting some traction in the market with experience? Could VRF help drive the commercial recovery in 2020 1? No. The last part of the question, look, the VRF, there wasn't a chart in the presentation and that wasn't by accident. We continue to offer the product. It continues to be a part of what we offer. It allows us to meet with engineers. It's $20,000,000 or so revenue for us. We think it's a growing end market, 10% or so. But it's not going to drive a recovery in 2021. What's going to drive the recovery in 2021 for us is going to be our large national accounts who deferred planned replacement in 2020 make the decision to buy in 2021 and they are. And that's why our backlog is up and that's why the order rates are up. And so that's what's going to drive revenue in 2021. Next question is from Gotham. What is the long term goal for percentage of product produced in Mexico in 2023 or 2020? However you'd like to discuss that. I mean, for obvious reasons, we don't publicly talk about that, right? But we're going from 40% to 50% of ours. And so half of all our labor is going to be in for residential is going to be in Mexico. We think it's a great option. But I would tell you that a tornado later, a pandemic later, having multiple factories for a business is probably a good thing. I don't want to speculate too much on Goodman's issues, but when you have one factory and it's whatever it is, 5,000,000 square feet and you have everybody in 1 factory and COVID hits, you're in trouble. Where we had COVID hit 1 factory and we produce it in the other or have absenteeism in 1 factory and produce it in another. So having multiple factories will continue to be our strategy in residential. And from Ryan Merkel, for robotics, what inning are you in on this rollout? Discuss the benefits that you've seen so far. I think we're 3rd or 4th inning. When you walk into one of our factories, broadly speaking, you'll see about a third of the factory's fabrication sheet metal, cutting, slitting, forming, bending of copper tubing, stamping of aluminum onto the copper tubes or aluminum tubes to make heat exchangers. And then balance of the factory's final assembly test. And what we have done with automation is primarily today, it's primarily been the fabrication. So auto brazers, auto sheet metal, auto fabricating of copper and aluminum. Where we still have big opportunities is automating assembly. And it's high skew, different parts, and we don't have the same kind of volume as washing machines or autos. So we're just getting to the right price point of robots to be able to do that for us. And so that's still in front of us. So we still have lots of opportunities. We've taken some good steps. We're doing some pilots on the areas I talked about. So that's still in front of us. And when I think about 2020, the $20,000,000 of productivity, that's obviously a combination of leverage, as I said earlier, that Jeff asked about more volume flowing through factory. But some of that's the investments that we've made in robotics and fabrication, that's going to help us in 2021. And back on refrigeration from Steve Volkmann. He's working on some math and assumes 7.5% compound annual growth rate on refrigeration sales at a 30% incremental would be needed to hit the low end of the 2023 target. So your view or comments on that? Yes. Thanks. Okay. And I think we're at the end of our questions and time. So Todd, if you'd like to close. Good. I'm going to thank everybody for the interest. Thank everybody for taking time out. Be safe. I will tell you I will be ready to travel and be back out once we get the vaccines. But I got to tell you, I am glad that I turn off my computer, I'm in my office and I'm not fighting traffic to get to LaGuardia. So everybody be safe and we'll talk to you if we don't talk here in the next few weeks, we'll talk to you at the beginning of the year. Thanks.