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Lennox International Inc (NYSE:LII)
Q4 2019 Earnings Call
Feb 4, 2020, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Lennox International Fourth Quarter 2019 Earnings Call.

[Operator Instructions]

As a reminder, this call is being recorded. Now I'd like to turn the conference over to Steve Harrison, Vice President of Investor Relations. Please go ahead.

Steve Harrison -- Vice President, Investor Relations

Good morning. Thank you for joining us for this review of Lennox International's financial performance for the fourth quarter and full-year 2019.

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 to a couple of questions or follow-ups, and requeue for any additional questions. In the earnings release we issued this morning, we have included the necessary reconciliation of the non-GAAP financial measures that will be discussed to GAAP measures. All comparisons mentioned today are against the prior-year period. You can find a direct link to the webcast of today's conference call on our website at www.lennoxinternational.com. The webcast will be archived on the site for replay.

I would like to remind everyone that in the course of this call, to give you a better understanding of our operations, we will be making certain forward-looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Lennox International's publicly available filings with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

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

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

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

Let me start with a quick review of 2019 overall and then discuss some fourth quarter highlights. For 2019, the company reported record adjusted revenue, margin and profit, and had strong cash generation. As we talked about over the course of the year, weather was a significant headwind to growth in the second, third and finally fourth quarters. GAAP revenue overall for the company was $3.81 billion for the year, down 2% including a negative 5% impact from divestitures. GAAP operating income rose 29% to a record $657 million. GAAP EPS from continuing operations rose 18% to $10.38.

On an adjusted basis for 2019, excluding the impact from divestitures, revenue was up 3% to a record $3.77 billion. Total segment profit rose 12% to a record $610 million, and total segment margin expanded 140 basis points to a record 16.2%. Adjusted EPS from continuing operations increased 18% to a record $11.19. Of note in 2019, we completed the divestitures of our non-core Refrigeration businesses. We operationally recovered from the tornado and resumed capturing share in the market, and we introduced new products and continued to make investments for future growth and profitability that position the company well for 2020 and beyond.

Turning to our business segments for the year, Residential reported new record highs for revenue, margin and profit. Residential revenue rose 3% on comparable growth in both replacement and new construction business. Residential profit rose 16% and segment margin expanded 230 basis points to 20.3%. For the year, Residential had negative tornado impact of $109 million to revenue and $59 million to segment profit, offset by $99 million of insurance recovery for net benefit of $40 million to segment profit.

Our Commercial business set new records for profit and margin for the year. Commercial revenue and profit rose 5%. Segment margin was flat with prior year's record level of 17.5%. Commercial equipment revenue was up mid-single digits for the year with both replacement and new construction up mid-single digits. Looking at the business another way, revenue from regional local business is up low-single digits. National account equipment revenue was up high-single digits for the year. On the new business front, the company won 25 new national account customers across diverse vertical markets in 2019. On the service side, Lennox National Account Services revenue was up high-single digits for the year.

In the Refrigeration segment, on an adjusted basis that excludes impact from divestitures, revenue was up 1% at constant currency, and down 1% on a reported basis. Segment profit was down 12%, and margins were down 140 basis points to 11.7%. At constant currency, North America revenue was up low-single digits. Europe refrigeration was down mid-single digits and Europe commercial HVAC was up high-single digits.

Turning to the fourth quarter. Company revenue on a GAAP and adjusted basis was $885 million. GAAP revenue was up 5%. Adjusted revenue, excluding the impact from divestitures, was up 8% to a new fourth quarter high. GAAP operating income rose 64% to a fourth quarter record of $192 million. GAAP EPS from continuing operations was up 57% to fourth quarter record $2.92. On an adjusted basis, total segment profit rose 19% to a fourth quarter record of $133 million and total segment margin expanded 140 basis points to a fourth quarter high of 15.1%. Adjusted EPS from continuing operations rose 24% to fourth quarter record of $2.45.

Looking at our business segments for the fourth quarter, Residential reported new fourth quarter records for revenue, profit and margin. Residential revenue was up 8%, at a high-single-digit growth in replacement business and a mid-single-digit growth in new construction business. Segment profit was up 2% and segment margin expanded 190 basis points to 19.6%. As provided in December, the residential business had a negative tornado impact of $23 million to revenue and $13 million to segment profit in the fourth quarter, offset by $25 million of insurance recovery for a net benefit of $12 million to segment profit.

In Commercial, revenue, profit and margin were all new fourth quarter records. Commercial revenue was up 12% and profit rose 24%. Segment margin expanded 180 basis points to 19%. Commercial equipment revenue was up low double digits in the quarter. New construction revenue was up mid-teens and replacement revenue was up high-single digits. Looking at the business another way, revenue from regional and local business is up high single digits, National Account revenue was up low double digits in the quarter. On the service side, Lennox National [Phonetic] revenue was up mid-teens.

In Refrigeration for the fourth quarter, revenue was relatively flat at constant currency. Refrigeration profit rose 5% and segment margin expanded 70 basis points to 11.1%. At constant currency, North America revenue was up low-single digits. Europe refrigeration was down high-single digits and Europe commercial HVAC was up low-single digits.

Looking ahead for the company overall in 2020, we are reiterating guidance. We expect adjusted revenue growth of 4% to 8% this year, and GAAP and adjusted EPS from operations to be $11.30 to $11.90 for the full year. The company has a strong cash generation profile, including $371 million of free cash flow in 2019. Beyond our investments for the future performance of the business, we plan to continue to grow the dividend and repurchase stock including $400 million this year.

Now, I'll turn it over to Joe.

Joseph W. Reitmeier -- Executive Vice President & Chief Financial Officer

Thank you, Todd. And good morning, everyone. I'll provide some additional comments and financial details on the business segments for the quarter and full year, starting with Residential Heating & Cooling.

In the fourth quarter, revenue from Residential Heating & Cooling was a fourth quarter record $499 million, up 8%. Volume was up 3%, price was up 2%, and mix was up 3%. Foreign exchange was neutral to revenue. Residential profit was a fourth quarter record $98 million, up 20%. Segment margin was a fourth quarter record 19.6%, up 190 basis points. Segment profit was favorably impacted by the benefit from insurance in tornado recovery year-over-year, higher volume, price and mix, and lower material tariffs and warranty costs. Partial offsets included lower factory efficiency, higher distribution, freight and other product costs.

For the full year, Residential segment revenue was a record $2.29 billion, up 3%. Volume was up 1%, price was up 2%, and mix was flat. Foreign exchange was neutral to revenue. Residential profit was a record $465 million, up 16% and segment margin was a record 20.3%, up 230 basis points.

Turning to our Commercial Heating & Cooling business. Commercial revenue was a fourth quarter record $260 million, up 12%. Volume was up 12%, price and mix were flat, and foreign exchange was neutral to revenue. Commercial segment profit was a fourth quarter record $49 million, up 24%. Segment margin was a fourth quarter record 19%, up 180 basis points. Segment profit was favorably impacted by higher volume and price, lower material and other product costs, and lower SG&A. Partial offsets included unfavorable mix, lower factory efficiency and higher distribution, warranty and tariff costs.

For the full year, Commercial revenue was $947 million, up 5%. Volume was up 2%, price was up 1%, and mix was up 2%. Foreign exchange was neutral to revenue. Segment profit was a record $165 million, up 5%. Segment margin was 17.5%, flat with last year's record levels.

In Refrigeration on an adjusted basis, fourth quarter revenue was $127 million, down 2%. Volume was up 2%, price was up 1% and mix was up 1%, foreign exchange had a negative 2% impact on revenue. Refrigeration segment profit was $14 million in the fourth quarter, up 5%. Segment margin was 11.1%, up 70 basis points. Segment profit was favorably impacted by price and mix, lower material, distribution and tariff costs, and higher joint venture income. Partial offsets include lower volume and factory efficiency, higher warranty and other product costs, higher SG&A and unfavorable foreign exchange.

For the full year, Refrigeration revenue was $534 million, down 1%. Volume was flat, price was up 1% and mix was flat. Foreign exchange had a negative 2% impact. Segment profit was $62 million, down 12%. Segment profit margin was 11.7%, down 140 basis points.

Regarding special items in the fourth quarter, the company had a net after-tax gain totaling $18.7 million. This included a gain of $51 million for insurance recoveries received for property damage incurred from the natural disaster, a benefit of $4 million for excess tax benefits from share-based compensation, a charge of $28.9 million for pension settlements, and a total charge of $7.4 million for various other items net. For the full year, the company had net after-tax special charges totaling $31.1 million. This included a charge of $74.4 million for pension settlements, a charge of $7.7 million restructuring activities, $6.5 million net loss on the sale of businesses and related property, and a total charge of $13.2 million for various other items. Also included is a gain of $59.8 million for insurance recoveries received for property damage incurred from the natural disaster and a benefit of $10.9 million for excess tax benefits from share-based compensation.

Corporate expenses were $28 million in the fourth quarter and $82 million for the full year. Overall, SG&A on an adjusted basis was $144 million in the fourth quarter or 16.3% of revenue, down from 16.7% in the prior year quarter. For 2019, overall SG&A on an adjusted basis, was $581 million or 15.4% of revenue, down from 15.5% in the prior year. For 2019, the company had cash from operations of $396 million compared to $496 million in the prior year. Capital expenditures were $106 million for the full year, compared to $95 million in the prior year. And proceeds for damage to property and disposal of property were $81 million compared to $11 million in the prior year.

Free cash flow was $371 million for the year, compared to approximately $411 million in the prior year. In 2019, the company paid approximately $111 million in dividends and repurchased $400 million of company's stock. Total debt was $1.17 billion at the end of the fourth quarter and we ended the year with a debt-to-EBITDA ratio of 1.7. Cash and cash equivalents were $37 million at the end of the year.

Now before I turn it over to Q&A, I'll review our outlook for 2020. Our underlying market assumptions for the year are unchanged. For the industry overall, we expect North American residential HVAC shipments to be up mid-single digits. We expect North America Commercial unitary shipments to be flat, and we expect North America Refrigeration shipments to also be flat. The company guidance for 2020 remains the same as we presented at the December Investment Community Meeting, and we continue to expect adjusted revenue growth of 4% to % with neutral foreign exchange. And we still expect GAAP and adjusted EPS from continuing operations in a range of $11.30 to $11.90.

I would like to highlight that we expect the flow of EBIT over the quarters for 2020 to be a bit different this year than historical seasonal averages due to some effects stemming from the tornado that I will detail in a moment. Specifically, first quarter historically averaged about 14% of annual EBIT. This year, we expect about 11% of the annual EBIT to flow through the first quarter with the difference coming in the second half of the year, which will then be higher than historical seasonal averages. There are a couple of primary reasons for this.

The first relates to the factory productivity. As mentioned previously, we have incremental depreciation from the new equipment in our Iowa facility and we also have lower factory absorption in the first quarter. As you recall, we made the decision to more level load the Iowa factory in the third and fourth quarters of 2019 to pre-build ahead for the 2020 summer season. We mentioned the decision not to do a typical season ramp down in that factory to avoid the disruption in the labor force and production in that facility post the tornado.

The second reason relates to lower margin business we expect to have and winning back business after the tornado impact. This lower-margin business is planned for in our annual guidance and is expected to primarily impact the first half of 2020.

Now let's run through the other key points in our guidance assumptions and the puts and takes for 2020, all of which are unchanged. We expect a benefit of $30 million in net price for the year. Commodities are expected to be $20 million benefit and freight $10 million benefit. We expect $25 million benefit from sourcing and engineering-led cost reductions, and $10 million of benefit from Residential factory productivity. Residential mix is expected to be $5 million benefit.

For the headwinds in 2020, we expect $5 million of headwind from tariffs. We are planning $15 million for distribution investments. As part of that, we are resuming Lennox store openings and have 20 planned for 2020. Within SG&A, we will continue to make investments in research and development and IT for continued innovation and leadership in products, controls, e-commerce, factory automation and productivity.

A few other guidance points. Net interest expense -- net interest and other expenses is expected to be approximately $50 million. Corporate expenses are targeted at $90 million. We expect an effective tax rate in the range of 21% to 22% on an adjusted basis for the full year. Capital expenditures are still planned to be approximately $153 million, including $53 million funded by insurance proceeds received in 2019. And finally, we continue to expect the weighted average diluted share count for the full year to be between 38 million to 39 million shares, which incorporates our plans to repurchase $400 million of stock this year.

And with that, let's go to Q&A.

Questions and Answers:

Operator

[Operator Instructions]

Our first question is going to come from the line of Deepa Raghavan from Wells Fargo. Please go ahead.

Deepa Raghavan -- Wells Fargo Securities -- Analyst

Good morning, all. Thanks for taking the question. Todd, can you -- hey. Todd, can you talk about the momentum in the Residential business? Especially, how we should think about weather actually normalizing, weather normalizing being a plus or minus to your existing guide? I guess it wasn't pretty clear to us at the Investor Day, how we should think about if -- based on how you're thinking about weather impacting guide in fiscal '20.

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

I'll answer what I think the question is. I think weather last year was cooler in -- especially in the summer selling season, and then as we've gone into November and December, it was warmer in the furnace season. And so, in a more normalized year, I would expect weather to be a tailwind in 2020. When I think about our guide, we call for the market to be up mid-single digits in resi. If we get a warm summer, then the market will do better than that.

Deepa Raghavan -- Wells Fargo Securities -- Analyst

Got it. Yeah, that was my question, if weather were to normalize, how we should think about fiscal '20, but thanks for that. My follow-up would be on Q2. You called out obviously -- Q1 now you reset [Phonetic] it a little bit for us. But -- and you are expecting everything to be second-half loaded at this point in time, what our Delta has been captured. Anything with Q2 we should think about? Do things just start to get normal from Q2 on? Or is there some impact from this Q1 falling into Q2 as well?

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

When the exact words Joe used when he was talking about the lower margin business, we expect to have -- he referred to it, the lower margin business is planned in our annual guidance and is expected to primarily impact of first half of 2020. So as you know, we don't give quarterly guidance, but we in essence just did for first quarter, but there'll be a lingering impact in second quarter. So the way I think about it is, we spent quite a bit of time at the December Analyst Day, which obviously you were at, talking about the rebates and the different things we had to do to win back some of the lost share. And we started to lap that mid-year. Although it will be most pronounced in first quarter, there'll be a lingering effect in second quarter also.

Deepa Raghavan -- Wells Fargo Securities -- Analyst

All right. Thanks very much. I'll pass it on.

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

Thanks.

Operator

Thank you. Our next question will come from the line of Julian Mitchell from Barclays. Please go ahead.

Julian Mitchell -- Barclays -- Analyst

Hi, good morning. Hey, maybe just a question on the Commercial business. Very good performance in terms of sales as well as incremental margin. So just wondered if there was anything on the revenue line you'd call out that surprised you. And on the margin front, the margin performance in Commercial was a bit volatile quarter-to-quarter, the past sort of six, seven quarters. Do you think that we are now on a sustainable footing for steady margin expansion in Commercial?

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

First on the revenue point. As you well know, Julian, Commercial -- unitary Commercial can be lumpy. We obviously -- if you just look at one quarter, we obviously significantly outperformed the market in fourth quarter. That was driven as you heard in Joe comments a nice quarter in national accounts, nice quarter in new construction. That all doesn't repeat itself as we go into 2020 for the whole year, but we still think we're going to -- we call for the market to be flat, maybe the market does a little bit better. I think momentum in commercial is stronger than what it was even a month ago, when we had the December Analyst Day and our businesses gaining share.

On the margin impact, our plan is that we're going to have more steady margin improvement in 2020. The item that really sort of bounced -- two items that bounced around in 2019 was, one, our factory performance and we've talked in some detail around that, the major driver being labor availability and we've addressed that in multiple ways, we've talked about in December. And then just the mix of the business and that can bounce around. We do better -- have higher profit with national accounts and so on a strong national account month like we did in the fourth quarter, then we see even stronger margins. But I would think the sine curve amplitude starts to dampen and it's an upward trend rather than an up and down trend.

Julian Mitchell -- Barclays -- Analyst

Thank you. And then my follow up would be on Residential. Just wondered -- you talked in December about the lower margins or lower operating leverage coming through on some of that market share recapture. So even with that, you still had very good gross margins firmwide in Q4. So maybe just any update on how that incremental margin in resi is trending versus what you'd thought?

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

No changes from what we talked about at the Analyst Day. So there was nothing in fourth quarter that materially changed. Again we did guide in mid-December, so we have pretty good view what was happening. And so everything I said in December is standing today.

Julian Mitchell -- Barclays -- Analyst

Great, thank you.

Operator

Our next question then is going to come from the line of Jeff Hammond. Please go ahead.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Hey, good morning, guys.

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

Hey Jeff.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Hey. Just on kind of share recapture progress, we're hearing in the channel, people kind of discounting to hold on some of that borrowed share. Just what are you seeing and kind of what -- where do you think share captures kind of played out in the fourth quarter versus expectation?

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

It played out where we -- broadly where we expected it to, Jeff. We called it in December that we are going to get back 80% or so of the lost share, and we roughly did that in first quarter and we're feeling pretty good about where we're at. As you know, it's always a competitive marketplace, but broadly a disciplined structure. We announced price increases for 2020 that we're going to get $30 million of price and that's net of any of this matching that we have to do to hang on or win back some of our lost share. So I know some of the sell-side notes -- not yours, but others have sort of talked a little bit about. I don't think it's much different than it's been in past years.

Now we've called out that there is going to be some impact, and our -- our incrementals are 20%. So the normal 30% in 2020 and that's part of this, but that's all accounted for in our guide.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay. And then it sounds like some of the commercial issues in the plan are resolved and your margins are going to be more stable. Can you just speak to any kind of labor inflation inefficiencies in Refrigeration, Residential, and kind of how those play out through the year in terms of normalizing?

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

We feel -- I think the guide that we gave -- I'm just checking my fact sheet here. We guided in December that we'd have $10 million of factory productivity in 2020. We had negative factory productivity, I think that's called inefficiency in 2019. And so we're feeling better about things across the enterprise. And so some of the initiatives I talked about maybe specifically around Commercial of moving more the full-time labor versus the temps, doing more level loading. We've done that across the enterprise, as well as quite frankly have made some management changes and sort of streamed some talent into our factories to improve things. And so we're feeling much better going into 2020. Obviously, we need to do it, but we feel better at this point in the year than we've quite frankly we felt the last couple of years.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay. I don't know if I missed it, did you give independent versus company-owned distribution growth in 4Q?

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

We did not.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Thank you.

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

I'm not afraid to give it. So I'm just turning to make sure we got it. If I could find it -- if someone can find it in the fact sheet, we'll call it. I think roughly they were the same in fourth quarter. We didn't have the outflows that we've had in prior quarters. Quite frankly, we just spiked it out in the script, but we'll dig that up and make sure we say it.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay, thanks a lot.

Operator

Our next question then is going to come from the line of Nigel Coe from Wolfe Research. Please go ahead.

Nigel Coe -- Wolfe Research -- Analyst

Thanks, good morning. So hey Todd, so you mentioned the level loading back in December. Just -- is this the way it's going to be going forward, or is it because we've got a new setup at Marshalltown, maybe a tight labor markets? Obviously you don't necessarily want inventory to build up too much, but is this -- do you plan to level load more going forward?

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

Most likely, the answer is yes, but we have the flexibility to sort of just as need be. But I -- again, there is a benefit quite frankly to inventory and cash management, when we adjust up and down, especially when the sensitivity that we had around the labor force. We've always done quite frankly some amount of level loading. We never go to zero and then ramp back up. So in some ways, it's on the margins. And so we will retain some flexibility. But I think we'll most likely -- unless labor loosens up, we'll most likely do it for a while.

Nigel Coe -- Wolfe Research -- Analyst

Okay, great. That's great. And then Joe, appreciate a little bit color on the bridge and and the 1Q seasonality. Does the 1Q seasonality also embed a slightly weaker market growth in 1Q? And I'm just curious how January might have trended relative to 4Q.

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

No, I mean -- the guide or the earnings had nothing to do with revenue growth. It was the things that Joe talked about, it was gross margins both around factory productivity and around the lower margin business. January what was a little soft. The weather was warm. If you look at degree heating days, it was down 20% from a year ago. So January is a little soft, but look March is half the quarter. And March is much about dealer sentiments and confidence, and at AHRI, dealers are confident if we spend a lot of time with our dealers, their confidence. We just came out of a sales meeting, people are ready to go. So it's too early to be nervous about anything, because of the weather. So we'll see how it goes, but first quarter guide didn't have anything to do with revenue.

Nigel Coe -- Wolfe Research -- Analyst

Okay. Thanks, Todd. Appreciate it.

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

Just to go back to the question that Jeff asked. We had the people in charge of the Iowa caucus print this out, sort of real-time. So our independent business was up high-single digits in fourth quarter, and our Lennox business was also up about the same. So they both had roughly the same growth rate, which is the overall growth rate.

Operator

Our next question then will come from line of Nicole DeBlase from Deutsche Bank. Please go ahead.

Nicole DeBlase -- Deutsche Bank -- Analyst

Yeah, thanks. Good morning, guys.

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

Hey Nicole.

Nicole DeBlase -- Deutsche Bank -- Analyst

I was wondering if you could talk a little bit about what you saw with their respect to backlog within Commercial and Refrigeration.

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

In Commercial, our backlog is relatively flat year-over-year. We sold a lot in fourth quarter and so it drained it a bit. So it's flat, slightly down. But again when we're looking at the order quoting activity, we still feel pretty good about 2020 and first quarter. On Refrigeration, it's up slightly year-over-year. And again it's seasonally a light time [Phonetic] to really be looking at backlog. It becomes a bit more important as we get into first quarter.

Nicole DeBlase -- Deutsche Bank -- Analyst

Okay, got it. Thanks, Todd. And then my follow-up is just around refrigeration margins. You guys saw that year-on-year expansion come through. It looks pretty good in the fourth quarter. Any like major drivers to call out or like sustainability of that level of improvement through 2020?

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

Again, it's similar conversation I had around Commercial. Our big issues -- well, slightly different. Our big issues in Refrigeration in 2019 around margins were one factory productivity or lack thereof. And just like Commercial, I think that's now behind us both at our US factory and our European factories. And then the other issue in our Refrigeration business was a mix that we had a stronger year in our Europe business than our North America business. And our North America business has higher margins. And the other issue year-over-year in 2020 was from -- excuse me, 2019 -- it was from 2018 to 2019, we had less of refrigerant allocation change that impacted us.

Nicole DeBlase -- Deutsche Bank -- Analyst

Got it, thanks. I'll pass it on.

Operator

Our next question then comes from line of Robert Barry from Buckingham Research. Please go ahead.

Robert Barry -- Buckingham Research -- Analyst

Yeah, hey guys, good morning.

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

Hey Robert.

Robert Barry -- Buckingham Research -- Analyst

Do you actually have an estimate for how much the share recapture contributed to the revenue in 4Q for resi?

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

The way I calculate -- and I don't have the math, the sheet in front of me, Robert, is take the impact from fourth quarter last year, the revenue that we guided to in order of magnitude, it's 80%. And so when I talk about the 80% share of gain, back -- I look back a year and multiply times 0.8 and that's order of magnitude, the number that we've been talking about.

Robert Barry -- Buckingham Research -- Analyst

Got it. And so with the difference between if we back that out and what you actually did versus a mid-single-digit number all the weather, or do you think kind of the underlying fundamentals in the market were also just weaker?

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

I think it was exclusively weather, is the short answer, if I understood the question right. But I think it's hard to sort of back us out that way. But I think if you look -- think about it this way, if you look at industry data, the market was flattish in fourth quarter. And so that's how I would think about what the market did.

Robert Barry -- Buckingham Research -- Analyst

Got it. And then I just did want to follow up on this comments about the -- I guess the mix impacts of the share recapture, make sure I'm understanding that. It was my impression that the share that you lost because of the tornado is generally very rich mix, like 50s, 60s, plus incrementals, that there'd be a lot of room for discounting and still have above-average incrementals on that business as it comes back. Is that inaccurate, or...?

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

I think there is -- some of the -- I think it's a mix of the mix. So, I think clearly there were some very high profitable and we saw the drop-through on that, but there's also sort of this mid-tier dealer if you will, that we've had in the back and we've had decremental margins because of it.

Robert Barry -- Buckingham Research -- Analyst

Got it. All right, thanks, guys. I'll pass it on.

Operator

Our next question then will come from the line of Steve Tusa from JP Morgan. Please go ahead.

Pat Baumann -- JP Morgan Securities -- Analyst

Hi, good morning, Todd. Good morning, Joe. This is actually Pat Baumann on for Steve Tusa. Thanks for taking my questions. Just with regard to the lower margin business you're winning back that's first-half weighted, can you update us on your assumptions for just the overall market share recapture at resi in 2020 and the expected cost to win that share back? And then any reason why that's expected to be a first half versus second half thing?

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

I'll answer the first -- second part of the question first. It's because we had already started gaining share back during the second half of the year. So it's really a lapping of effect. Right. So we started gaining share back in third quarter when the factories were fully running mid-half of the year. And then fourth quarter, I just called out that we in essence gained back the 80%. And so it completely lapped in fourth quarter, partially in third quarter. So the real impact is in first and second quarter. And the guide is no different than what we talked about at the December Analyst Day that it's 20% incremental drop-through and we went through at the December Analyst Day, the impact of that lower margin business and none of those guide points have changed.

Pat Baumann -- JP Morgan Securities -- Analyst

And I guess with first quarter margin softer in resi -- I assume resi, so there's no change in how you're thinking about resi margins for the entire year? And what is your guide on that for the year versus the 20% in 2019? I don't think you gave a guide on the actual margin. Did you, for resi?

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

No, we don't --

Pat Baumann -- JP Morgan Securities -- Analyst

For 2020?

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

No, we don't give segment guides for margins. And so the 20% was the incremental drop-through for the corporation. But we haven't given a resi margin guidance.

Pat Baumann -- JP Morgan Securities -- Analyst

Okay. But no change in...? It's just the profile of the year versus what we had in our models versus anything that you were expecting that's different?

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

Yeah. The way I'd characterize what we talked about new here was, we talked about both those effects, both the factory productivity and lower margin business in some great detail in December. What we didn't do was calendarize it, and we were using this as an opportunity to revisit the exact same things we talked about. Full-year impact hasn't changed, our assumptions haven't changed. Nothing has changed. We just want to be more transparent around the cadence of it during the calendar year, quite frankly, so there wasn't a disconnect between how investors were anticipating things and how we were anticipating things in 2020.

Pat Baumann -- JP Morgan Securities -- Analyst

Yeah, OK. Yeah. I appreciate the color. Thanks for the time.

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

Thanks.

Operator

Our next question then will come from the line of John Walsh from Credit Suisse. Please go ahead.

John Walsh -- Credit Suisse -- Analyst

Hi, good morning.

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

Good morning, John.

John Walsh -- Credit Suisse -- Analyst

Hey. So really good performance on the commercial side of the business. It sounds like from walking around AHR, we're going to see a lot more competition in that space around kind of refresh product, etc. One, I don't know if you agree with that characterization. And then maybe what are you doing from a new product or pricing perspective as we think about Commercial?

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

We think we have a very, very good product line. Our altered Energence is the best in the market for high efficiency in our landmark and radar is as competitive as it gets in entry-level. There is always a long -- or better stated, there is a time lag from people announcing that they have a new product to the market, accepting and going. I think one of the competitors you're talking about also sort of bragged about the new residential product line they were having a year or two years ago. And I think in fourth quarter, they were down mid-single digits, York in Residential. So there is a gap between we have a great new widget to, the market accepts the widget, your sales force can sell the widget, your sales force can inspect the widget. So we'll put our product against anyone in the marketplace. We'll certainly put our unitary sales force. So, yeah, I'm not worried that they had a big boost at AHRI and are talking about the new products.

John Walsh -- Credit Suisse -- Analyst

Got you. And then maybe you can just remind us, obviously with VRF, you have the partnership there. As we think about also heat pump versus kind of gas furnace, can you just remind us your mix there as we think about electrification?

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

Yeah, I don't know if we publicly talked about our mix at heat pump. But we have a very strong heat pump line up. We view it as an integral part of what we do and we make significant investments there. And when we come out with new products, heat pump is part of it. So again we're as good as anybody with our heat pump product line and continue to make investments there.

John Walsh -- Credit Suisse -- Analyst

Great, thank you.

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

Super. Thanks.

Operator

And at this time, I have no further questions in queue.

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

Thanks, everyone. To wrap up, we are well positioned for a year of strong growth and profitability in 2020, and look forward to driving performance to another record year. And I thank everyone for joining us today.

Operator

[Operator Closing Remarks]

Duration: 39 minutes

Call participants:

Steve Harrison -- Vice President, Investor Relations

Todd M Bluedorn -- Chairman of the Board & Chief Executive Officer

Joseph W. Reitmeier -- Executive Vice President & Chief Financial Officer

Deepa Raghavan -- Wells Fargo Securities -- Analyst

Julian Mitchell -- Barclays -- Analyst

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Nigel Coe -- Wolfe Research -- Analyst

Nicole DeBlase -- Deutsche Bank -- Analyst

Robert Barry -- Buckingham Research -- Analyst

Pat Baumann -- JP Morgan Securities -- Analyst

John Walsh -- Credit Suisse -- Analyst

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