Lennox International Inc (LII) 2006 Q3 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by.

  • Welcome to the Lennox International third quarter 2006 earnings conference call.

  • At the request of your host, all lines are in a listen-only mode.

  • There will be a question and answer session at the end of the presentation.

  • As a reminder, this call is being recorded.

  • I would now like to turn the conference over to Bill Moltner, Vice-President of Investor Relations.

  • Please go ahead, sir.

  • Bill Moltner - VP IR

  • Thank you, Roxanne.

  • Good morning.

  • Thank you for joining us for this review of Lennox International's financial performance in the third quarter of 2006.

  • A link to the live webcast of this call can be found on our corporate website at www.lennoxinternational.com.

  • The webcast will be archived on our website and available for replay.

  • In a moment, our CEO, Bob Schjerven, will comment on our Company's progress and performance in Q3, and Sue Carter, our CFO, will review key data from our financial statements, as well as address business segment operating performance.

  • We'll follow their prepared remarks with Q&A.

  • The earnings release we issued earlier today is posted on our website, and it includes several tables providing financial detail and reconciliation to GAAP measures for the metrics we discuss on this call.

  • I would like to take this opportunity to remind you that Lennox International will be hosting an investment community meeting on the morning of November 7th at the Millennium Broadway Hotel in New York City.

  • At this meeting, our management team will be presenting insights into our Company's businesses and discussing the strategies and initiatives we have identified to build shareholder value.

  • If you have not registered and are interested in more information on this event, please call me, Bill Moltner, at 972-497-6670.

  • Before I turn the call over to Bob, I'd also 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 forward-looking statements are subject to risks and uncertainties.

  • A list of these risks and uncertainties is included in our publicly-available filings with the SEC and includes the impact of higher raw material prices, our ability to implement price increases for our products and Services, the impact of unfavorable weather, a decline in new construction activity on the demand for our products and Services and the potential impact on operations related to the implementation of new NACA efficiency standards.

  • These risks and uncertainties could cause our actual results to differ materially from those that we express to you today.

  • Bob?

  • Bob Schjerven - CEO

  • Thank you, Bill.

  • Good morning, everyone.

  • We are particularly pleased to report solid results for the third quarter against what we anticipated would be challenging year-over-year comparisons as we move to the back half of 2006.

  • Our record sales in Q3, which hit the $1 billion mark for the second consecutive quarter, represented a 9% increase over the prior year with foreign currency exchange contributing 1% of the growth.

  • Our GAAP net income was $36 million or $0.49 per diluted share compared with $55 million or $0.76 earnings per share in the prior year's third quarter.

  • Now, adjusting for unrealized gains on futures contracts, restructuring expenses and tax items, our income from continuing operations was $50 million or $0.69 per diluted share, a modest improvement over the very strong third quarter we had a year ago when our adjusted earnings were $49 million or $0.68 per diluted share.

  • Now, we did see improved pricing and beneficial product mix in the quarter, but as we predicted in our last earnings call, the benefit from our most recent round of price increases lagged the higher commodity costs that we have been experiencing.

  • This, along with higher freight and distribution expenses and inflation of other costs, resulted in reduced margins.

  • We were able to offset lower margins through higher sales and lower corporate and interest expenses.

  • Clearly, the downturn in Residential new construction is getting a lot of attention in the investment community, and as we also reported last quarter, we are seeing the softening of this market segment.

  • We believe, however, that it is important to keep the housing construction decline in proper perspective.

  • We estimate that Residential new construction represents approximately 20% of Lennox International's total corporate revenue, and more importantly, we believe in our ability to offset the downturn through the addition of new accounts and increased sales in the larger and more profitable replacement piece of the market.

  • With just the final quarter remaining, we expect full-year 2006 consolidated revenue growth of approximately 10%, and we are reaffirming our full-year guidance of diluted earnings per share in the range of $2.00 to $2.10 on a GAAP basis.

  • Our adjusted earnings, as I previously defined, however, are expected to exceed the $2.00 to $2.10 range for the year-end.

  • This will represent a greater than 15% improvement over the adjusted earnings per share of $1.83 that we reported in 2005.

  • This, we believe, is very solid performance in what has proved to be a very challenging market environment.

  • Before I hand the call over to Sue, allow me to comment on the leadership changes that we have announced in the past few months.

  • We have put in place what I believe is an exceptional management team that is capable of taking LII to the next level.

  • Doug Young, who has served as the Vice President and General Manager of our North American Residential Product business, has been appointed President and Chief Operating Officer of Lennox International's Residential Heating and Cooling.

  • Harry Bizios, who was previously the Vice-President and General Manager of our Worldwide Commercial Systems, has been appointed President and Chief Operating Officer of LII's Commercial Heating and Cooling.

  • And David Moon has been appointed President and Chief Operating Officer of our Refrigeration business.

  • David was most recently the Vice-President and General Manager of our Refrigeration business in the Americas, and prior to that, he was the Managing Director for our operations in Australia.

  • Scott Boxer, who will continue in his leadership role as the President and Chief Operating Officer of Service Experts.

  • These moves, I think, demonstrate the bed strength of our Lennox International management team, provide good continuity in the operation of our businesses and further enhance our focus and agility in the growing Climate Control market that we serve.

  • Also Harry Ashenhurst, our Chief Administrative Officer, who capably took on the additional responsibility of Interim President and Chief Operating Officer of LII Refrigeration in June 2005, will continue in his role as Chief Administrative Officer.

  • Bob McDonough, who heads up -- headed up our Heating and Cooling businesses since 2003, will be leaving the Company.

  • We all want to thank him for his contribution -- in particular, his leadership in our very successful 13 SEER transition, and we certainly wish him well.

  • Finally, as many of you know, about a month ago, after 40 years in our industry and a very fulfilling 20-year career at Lennox International, I announced my intention to retire in mid-2007.

  • The timing of my announcement was driven by my desire to insure an orderly and seamless transition of leadership for this great Company.

  • The search for my replacement is underway, and our Board of Directors is considering both internal and external candidates in order to get the absolute best person for the job.

  • Until that time, I can assure you that continuing momentum that we have going at Lennox International will continue to receive my undivided attention.

  • Well, with that, Sue Carter, our Chief Financial Officer, will now give you a closer look at the numbers.

  • Sue?

  • Sue Carter - CFO

  • Thank you, Bob.

  • Good morning.

  • Let me begin by highlighting a change we made this quarter to our definition of segment profit.

  • Beginning in Q3, segment profit includes gains on futures contracts for copper and aluminum that settled in the quarter.

  • I think you will agree, it is a positive change that improves the transparency of our segment operating performance and provides consistency with the way we reported segment profit prior to 2006.

  • We have provided consistent characterization of segment profit in previously reported quarters as necessary in an 8-K filing we made this morning.

  • In our income statement, all futures contracts, related gains and/or losses are recorded in the gains/losses and other expenses line item above the operating income line.

  • In Q3, we reported a pre-tax gain of $2 million related to futures contracts for commodities.

  • This amount consists of $20 million in pre-tax gains on futures contracts for copper and aluminum that settled in the quarter.

  • This amount represents the gain since the inception of the contract, and material related to these contracts was received in the quarter.

  • The remaining $18 million pre-tax loss primarily represents net unrealized losses on open futures contracts that were mark-to-market, including an offset for the gains that were reported in prior periods for contracts that settled in Q3.

  • In our earnings release, we have provided a table which details the portion of gains, losses and other expenses that applies to contracts that closed in the quarter.

  • At September 30, approximately 65% of our projected Q4 copper requirements were hedged, as were about 75% of our projected aluminum needs.

  • As you know, futures contracts for steel are not available.

  • In the third quarter, we incurred pre-tax restructuring charges of $5 million related to previously announced projects.

  • We generated cash from operations of $120 million and invested $18 million in capital expenditures resulting in strong free cash flow of $102 million for the third quarter.

  • This compares very favorably with the $74 million in free cash flow in the same quarter a year ago.

  • We continue to expect our capital expenditures for the year to be approximately $70 million.

  • We aggressively continued our stock buy-back activity in Q3 using $70 million to repurchase just over 3 million shares of LII stock.

  • The remaining authorization on our stock repurchase program at the end of the third quarter is 4.8 million shares.

  • Our total debt at September 30 was $120 million, down from $236 million at the same time a year ago.

  • Our debt to total capital ratio was 13%, down dramatically from 27% a year ago.

  • Our balance sheet remains in excellent shape.

  • Our inventory at September 30 was up $94 million year-over-year As in the second quarter, this increase was driven in part by planned buffer inventory to accommodate our South Carolina consolidation project, higher levels of Commercial Heating and Cooling inventory at regional distribution centers to better position us for growth in the replacement market, as well as higher average unit costs due to the 13 SEER transition.

  • Despite this increase in inventory, our working capital management was very good, with our operational working capital ratio as a percent of trailing 12-month sales at 16.4%, below the 17.5% level a year ago.

  • Corporate and other expense was $6 million lower in the quarter, due in part to lower incentive program accruals, lower group insurance expenses and lower unallocated costs for sourcing initiative.

  • And finally, benefiting from a lower debt balance, our total interest expense of $1 million in the third quarter contrasts with $4 million in the prior year.

  • As I review our business segment performance, keep in mind that the benefit from futures contracts that closed in the quarter is now included in segment profit.

  • Revenue in our Residential Heating and Cooling business increased 7% with no significant impact from foreign exchange.

  • Segment profit of $54 million was down from a very strong $67 million last year.

  • While cooling-season weather was favorable in July and August, the heat did not extend into September, as it did last year.

  • Our total Residential Equipment unit volume decline in the quarter was approximately 5%, which we believe is significantly better than the industry as a whole.

  • A number of factors contributed to the segment profit decrease in Q3.

  • First, as Bob indicated earlier, the predicted lag in realizing our most recent round of price increases did not allow us to fully cover higher commodity and other input costs.

  • We expect this situation to improve in the fourth quarter.

  • We also experienced manufacturing and distribution inefficiencies as we consolidated factory and warehousing operations of our Armstrong and Ducane brands into South Carolina.

  • In addition, our geographic mix pressured margins as we successfully increased our penetration in the more price-competitive Sunbelt states where our market presence has been underdeveloped.

  • A final comment on our Residential Heating and Cooling segment Earlier this month, our Hearth Products business, which accounts for roughly 10% of our Residential Heating and Cooling segment revenue, completed the acquisition of the assets of Country Stoves, a manufacturer of steel stoves, inserts and specialty fire places that tailor to the needs of specialty hearth retailers.

  • The addition of Country Stoves product line significantly enhances our ability to participate in the retail hearth channel and reduces our reliance on new construction.

  • Country Stoves has annual sales of approximately $15 million, and its profitability is in line with our existing hearth operations.

  • Our Commercial Heating and Cooling sales increased 14% in Q3 or 13% adjusted for foreign exchange.

  • Segment profit was $26 million, down slightly from $27 million last year with higher commodity costs offsetting higher volume and price improvement.

  • While we achieved double-digit top-line growth in both North America and Europe, the price improvement in the quarter was limited to the domestic market.

  • The expansion of our factory in Arkansas to accommodate the continued growth of our domestic business is proceeding on schedule with completion scheduled for late in the third quarter of next year.

  • Service Expert sales were up 1% year-over-year and flat when adjusted for currency fluctuation.

  • Service Experts had a segment profit of $8 million in the third quarter, the same as the prior year.

  • We continue to see a beneficial mix shift with 80% of revenue in the quarter coming from more profitable service and replacement markets, with the remaining 20% from new construction.

  • Higher sales and price/mix benefits, however, were offset by approximately $700,000 in higher fuel costs and higher group medical expense of $1.3 million.

  • In our Refrigeration segment, revenue grossed 14%, or 13% when adjusted for foreign exchange.

  • Segment profit rose to $14 million from $12 million last year.

  • Our sales were higher, and we earned more profit in all of our major geographic markets, but the improvement was most noticeable in the Americas and in the Asia Pacific region.

  • Domestically, the supermarket and cold storage markets continue to be healthy, but we are also seeing growth in the convenience stores, food service and dollar stores that are adding refrigerated sections.

  • We are realizing higher prices in North America, but price improvement has been more difficult to achieve in our international markets.

  • That concludes our prepared remarks, and at this point, we would be pleased to address any questions that you may have.

  • Operator

  • [OPERATOR INSTRUCTIONS] Our first question comes from Curt Woodworth with JP Morgan.

  • Please go ahead.

  • Curt Woodworth - Analyst

  • Yes, hi.

  • Good morning.

  • Bob Schjerven - CEO

  • Good morning, Curt.

  • Sue Carter - CFO

  • Good morning, Curt.

  • Curt Woodworth - Analyst

  • What was the net headwind on the commodity costs' increase this quarter?

  • Sue Carter - CFO

  • The net headwind was --

  • Curt Woodworth - Analyst

  • Right, so -- sorry.

  • Sue Carter - CFO

  • -- $22 million.

  • Curt Woodworth - Analyst

  • Okay.

  • And on the $18 million of the pre-tax losses you have on the unsettled contracts which were backed out of the EPS, does that mean that when you do realize -- I guess you would not execute those contracts because they are underwater, so you wouldn't book a realized loss in the fourth quarter on those.

  • Or how do I think about that?

  • Sue Carter - CFO

  • Actually -- actually the way to think about that is when you're -- when have a futures contract and you are marking-to-market that contract every quarter, that's an unrealized gain or loss.

  • As we go through the process of realizing losses, then you have a realized portion of the unrealized, which is creating -- as our contracts roll off -- you're creating more realized gains in this case, and that looks like a loss on the unrealized piece.

  • Does that make sense?

  • Curt Woodworth - Analyst

  • Sort of.

  • So we wouldn't expect that as you execute those contracts in the fourth quarter that you would have a loss on them?

  • Sue Carter - CFO

  • No.

  • Curt Woodworth - Analyst

  • Okay.

  • And given where you are behind the commodity curve, what are you plans for pricing?

  • Carrier's, I guess, is going to come out with a 5% hike Jan 1.

  • Are you going to follow that?

  • Or are you going to move earlier?

  • Bob Schjerven - CEO

  • First of all, as we had covered last quarter, the price increases that we put into place in the course of this quarter have not been fully realized as you look through the quarter.

  • They need to take time to move through the channels and so forth, and so the first piece of good news is that we have a much larger percentage of those prices to have traction for pretty much all of the fourth quarter, which will change that picture, we would feel, quite a bit.

  • As far as additional price increases are concerned going forward, we've not announced anything yet as of the moment, but we're watching very carefully the movement in commodities as well as what our strategies around pricing will be.

  • As you know, and I think this probably is a good savings for most everybody in the industry, and that is that the industry has been, I think, pretty meticulous on trying to balance off these commodity costs with the pricing.

  • The pricing has been extremely important to the industry, and it just becomes a fact of life for everybody in the chain.

  • And so, I think that not only we, but everybody will continue to be pretty realistic about what kind of pricing deltas need to be placed out there in order to keep profitability where it needs to be.

  • But it is, in the short term, difficult to get ahead of the commodity price.

  • And naturally, as you might expect, people that are sophisticated consumers, particularly at the wholesale level in the chain, watch very carefully what is happening with the price of commodities and so forth, so -- and quite rightfully so.

  • I think most of the manufacturers are getting reasonable push-backs from time to time as price increases [inaudible].

  • Curt Woodworth - Analyst

  • Okay.

  • And one final question.

  • On Commercial HVAC, the demand trends are obviously very good there, but it seems like you are not capitalizing it on the bottom line.

  • You talked about price improvement in the US but not in Europe.

  • So, do you think there is a structural issue in Europe?

  • Are you going to be able to get price in Europe in Commercial HVAC?

  • And I guess also talk about the pricing dynamics in the US for Commercial HVAC.

  • Bob Schjerven - CEO

  • Well, let's see.

  • It's sort of a mixed bag because, first of all, if you're looking at our business in the US, we have a pretty substantial amount of work that is tied in with our national accounts.

  • And large percentage of that, of course, is in new construction [inaudible].

  • In our national accounts, they typically have contracts that are a year in duration or evergreen with pricing opportunities once a year, that type of thing, and they fall at different times of the year, for each one of these accounts.

  • And then layered on top of that in the US, you do have the other replacement business and so forth, which moves through other channels that have much quicker response.

  • Conversely, when you look at Europe, that is as much as anything -- I think it's related to a very tough, very competitive market.

  • That aspect of the European market has not changed at all.

  • Curt Woodworth - Analyst

  • Do you feel like you are not going to be able to get price in Europe?

  • Bob Schjerven - CEO

  • I think that would be a false statement.

  • Curt Woodworth - Analyst

  • Right.

  • Bob Schjerven - CEO

  • That just to this particular point in time we have not gotten the same level of price increases that we have been able to float in the US.

  • Curt Woodworth - Analyst

  • Okay.

  • All right, thank you.

  • Bob Schjerven - CEO

  • Sure.

  • Thank you, Curt.

  • Operator

  • [OPERATOR INSTRUCTIONS] Our next question is from Jeff Hammond with KeyBanc Capital.

  • Please go ahead.

  • Jeff Hammond - Analyst

  • Hi, good morning.

  • Bob Schjerven - CEO

  • Good morning, Jeff.

  • Sue Carter - CFO

  • Good morning, Jeff.

  • Jeff Hammond - Analyst

  • Just wanted to get a better sense of -- you kept your range of guidance, but we have one quarter to go.

  • Just wanted to understand why you wouldn't have tightened it.

  • What are the swing factors going into the fourth quarter?

  • If you had a bias, is it towards the higher end or lower end?

  • Sue Carter - CFO

  • I think that as we look at the back half of the year, this was the range that we were comfortable with, and so we just left our guidance as it was.

  • Jeff Hammond - Analyst

  • Okay.

  • Clearly a lot of moving pieces and headwinds in Residential Heating and Cooling, but I guess I was pretty surprised by the magnitude of the weakness in the profitability, particularly given that you had some favorable hedge mechanisms in place.

  • Can you just walk through, of the number of items that impact you -- if you can kind of put them in order of magnitude or quantify them to any extent and what you consider maybe one time or what persists.

  • Bob Schjerven - CEO

  • Well, let me try to ballpark that a little bit for you, Jeff.

  • First of all, two of the larger factors that we saw [inaudible] the lag with respect to the pricing impact versus the commodity [inaudible] hedges are concerned.

  • Part of the big news has been, for us in the industry, has been the steel increase that we saw back pretty much at the beginning of the third quarter.

  • That had a pretty pronounced effect.

  • Overall, if you look at what that impact has been in terms of the lag which versus the commodities, versus steel and some of the other input costs that we have, I think I'd ballpark that at about a $13 million hit that we took.

  • Jeff Hammond - Analyst

  • Just on commodities?

  • Bob Schjerven - CEO

  • Yes, commodities and purchase items and those types of input costs.

  • Jeff Hammond - Analyst

  • Even with the --

  • Bob Schjerven - CEO

  • This would also include, for example, I think, fuel and things of that nature.

  • Jeff Hammond - Analyst

  • And that's even with the hedges?

  • Bob Schjerven - CEO

  • Yes, uh-huh.

  • And if you look at the impact that ramping up the factory in South Carolina, which has had substantial rearrangement as we moved into a lean environment with all of the lines that we have been relocating from Ohio, they ran variations of -- both in terms of manufacturing and in terms of their distribution model of about $3 million.

  • Now, most of these things -- I think a substantial part of that raw material [inaudible] relative to pricing, we expect to see a substantial part of that go away in the fourth quarter.

  • Also, with respect to improvement in South Carolina, that's on a continuous basis, and a number of pretty substantial changes have been made.

  • And so we expect that, likewise, not to be a problem anywhere near that magnitude next quarter.

  • That would be my estimate.

  • I've visited the factories and have a pretty good feel for the kind of activity that's going on.

  • Golly, if you look at some other planned increases and fixed costs relative to the new warehouse strategy and distribution piece that we put together, that number could be as high as another $7 million or so.

  • So there's --

  • Jeff Hammond - Analyst

  • That's one-time cost?

  • The $7 million?

  • Or would you expect to continue more of that investment?

  • Bob Schjerven - CEO

  • We would expect to see that investment or some portion of that investment of roughly that magnitude to continue.

  • Jeff Hammond - Analyst

  • Why wouldn't most of that be capitalized?

  • Bob Schjerven - CEO

  • I guess that probably because it's got a fairly heavy people content associated with it.

  • Jeff Hammond - Analyst

  • Okay.

  • And then , if you can just talk about how you're thinking about hedging into '07.

  • I think your previous comments were given the changes in how you report, you had chosen not to hedge.

  • It sounds like some of your competitors are moving forward with some type of hedging strategy.

  • And then, I guess, within that - given that you had about $50 million through the first three quarters of protection, how big do you think your commodity headwind is year-on-year as you look into '07?

  • Sue Carter - CFO

  • Well, let me start with the -- what hedging looks like going forward.

  • I think there is a couple of components that are important.

  • Again, I'll remind everyone that, starting out, that steel is the largest commodity that we use, and that is done on a fixed forward contracts because it's not available for hedging.

  • In the Lennox International case, on aluminum going forward, we have also determined that our best course of action is to put aluminum on fixed-forward contracts, and we have started doing that, going out into 2007.

  • So we will utilize, again, same mechanism as steel on aluminum contracts going forward, and that is already in place.

  • In our international locations, because of foreign exchange and how it impacts some of the models, we are going to do economic hedging for copper and aluminum and have started doing economic hedging in those locations going forward.

  • So that leaves us with copper.

  • And copper, we have not begun the cash flow hedging process yet.

  • The impact is, as we move forward of that -- that's a tough one.

  • It depends on what happens to prices and there is just no real source of agreement out there with what happens to copper in the future other than the general consensus that it's artificially high from a supply and demand perspective right now.

  • But -- so that is one that we have not gone out into 2007 with it at this point.

  • Jeff Hammond - Analyst

  • Okay, I guess, final question, as you push into the Sunbelt states, how much of an impact was that in terms of your revenue growth in the quarter?

  • How early stage is that?

  • And then, are you finding that you have to be even more price competitive given that you're a new entrant into the market?

  • Or are you coming in comparable to what the competition is at?

  • Bill Moltner - VP IR

  • Jeff, with regard to the Sunbelt market, I mean, we aren't breaking out sales growth separately for that geography.

  • But the sales growth was significantly stronger in the southern states, when -- add them together -- versus the northern part of the country.

  • So we are seeing very solid execution on that strategy.

  • Whether we need to be more price competitive than the market, that's not necessarily so.

  • What we stated before was that the southern markets are more price competitive in general than the northern markets are.

  • And so like in any market, we need to be competitive to get our share of the business there.

  • Jeff Hammond - Analyst

  • Okay.

  • Thanks a lot.

  • Bob Schjerven - CEO

  • Thank you., Jeff.

  • Sue Carter - CFO

  • Thank you, Jeff.

  • Operator

  • And our last question is from Michael Coleman with Sterne Agee.

  • Please go ahead.

  • Michael Coleman - Analyst

  • Could you break out the price realization on the Residential business for the quarter, as well as the mix benefit?

  • Bill Moltner - VP IR

  • Mike, if we take a look at it, it's difficult to have a very clear breakout on price and mix because the product line is so different year-over-year.

  • What we've seen is that pricing, we've realized, low single-digit maybe as high as mid-single-digit on price improvements.

  • Our volume has been -- on a unit basis, as we mentioned, was down 5% and so the balance would be mixed.

  • Michael Coleman - Analyst

  • Okay.

  • And the, as you push into the Sunbelt, more price competitive, this is -- as opposed to the other, the lag in the inefficiencies -- this is something that you would continue as you continue to do this, at least for the next three quarters?

  • Bob Schjerven - CEO

  • Well, certainly given the fact that the market down there, Michael, is more competitive than the upper Midwest, rest of the market for that matter, you would expect for that portion of the business to be selling through at the pricing as we have it down there now so that to the degree that that mix of product going to the Sunbelt versus to the rest of it is somewhat lower in margin.

  • Yes, that effect would remain.

  • Michael Coleman - Analyst

  • Okay.

  • Bob Schjerven - CEO

  • Again, that's all about putting money in the bottom line and increasing earnings per share.

  • So it's not necessarily [a major factor of life] .

  • It's not necessarily a bad thing.

  • Michael Coleman - Analyst

  • And you talked about the third quarter was definitely a difficult comparison.

  • But fourth quarter last year, I think your two-step revenue was up 45%.

  • So as you look at the fourth quarter, you do have some prices that you can - you increased your prices recently.

  • It should help.

  • But as you look at the fourth quarter, do you think it's a more difficult comparison than what you just came up against in the third quarter ?

  • Or do you think it's a little easier?

  • Bob Schjerven - CEO

  • Well, certainly, from a volume perspective, it's going to be different because, certainly, not only the two-step customers that we serve -- distributors.

  • But also distributors in general for all of the manufacturers who are in two-step saw a pretty good spike in volume the fourth quarter because there were at the distributor level - independent distributor level, I should say -- varying strategies around inventory and so forth as a low price product.

  • And so on the two-step side we did participate in some of that.

  • So -- and that effect certainly won't be repeated for us or for the industry.

  • So, for our two-step side of the business, from the year-over-year Q4 to Q4 comparison, volume is a tough comparison.

  • Michael Coleman - Analyst

  • Okay.

  • And do you have -- Sue, do you have any early indications as to what your '07 CapEx plans would be?

  • Sue Carter - CFO

  • No, we are evaluating that as we speak and looking at all the projects and what their financial returns are, and so we'll have that when we do our teleconference in January.

  • Michael Coleman - Analyst

  • Do you just have kind of a generalization?

  • Would it be similar to the last two years?

  • Or could it be closer to more of a maintenance level?

  • Sue Carter - CFO

  • I just don't know at this point yet.

  • Michael Coleman - Analyst

  • Just one more question.

  • On your buy-back you have 4.8 million left.

  • Is it your feeling that once you exhaust the remaining shares that you would go ahead and -- or that the Board would be willing to or favorable in terms of increasing or authorizing an additional share repurchase?

  • Sue Carter - CFO

  • Well, I would have to say that the answer to that truly is we'll talk to the board about it as we get closer to the end of the current authorization.

  • And we'll provide some recommendations, and they'll provide guidance.

  • So, that's out in the future.

  • Michael Coleman - Analyst

  • What would your recommendation to the board be?

  • Sue Carter - CFO

  • No comment on that at this time.

  • Michael Coleman - Analyst

  • Okay.

  • Thanks.

  • Operator

  • And we do have a follow up question from Jeff Hammond with KeyBanc Capital.

  • Please go ahead.

  • Jeff Hammond - Analyst

  • Hi.

  • Bob Schjerven - CEO

  • Hi.

  • Jeff Hammond - Analyst

  • Corporate expense was down significantly year-on-year.

  • I think you had a sequential increase 3Q to 4Q last year, and I just wanted to get a sense within your guidance how you are thinking about corporate expense for this year and then also what's really driving the more meaningful declines in that number.

  • Sue Carter - CFO

  • Well, there's many pieces, of course, that continue to move in corporate expense, but we talked about what the major factors were for the third quarter with the insurance expense and the lower incentive accruals.

  • Our outlook for the year is that we would expect corporate expense to be right about $100 million for the year, so slightly below the 2005 level, and work from there.

  • Jeff Hammond - Analyst

  • So you have a pretty substantial ramp in the fourth quarter, it looks like.

  • Or it looks like, I guess, it would be flat versus last year but about a $10 million ramp, $10-$11 million ramp from 3Q to 4Q.

  • Is that fair?

  • Sue Carter - CFO

  • There is a ramp up in the fourth quarter.

  • Yes.

  • Jeff Hammond - Analyst

  • Okay, helpful.

  • Thanks.

  • Bob Schjerven - CEO

  • Thanks, Jeff.

  • Operator

  • And there are no further questions at this time.

  • Please continue, Mr. Schjerven.

  • Bob Schjerven - CEO

  • Thank you.

  • Well, as we expected, 2006 has been a very challenging year but Lennox International has risen to the challenge and performed well in the first three quarters.

  • We are reaffirming our full year 2006 earnings per share guidance of $2.00 to $2.10 on a GAAP basis.

  • Adjusted earnings per share is expected to come in above that range, which will represent greater than 15% improvement over the adjusted earnings per share in 2005.

  • I want to thank you for taking the time to be with us today.

  • Operator

  • Ladies and Gentlemen, that does conclude our conference for today.

  • Thank you for your participation and for using AT&T Executive Teleconference.

  • You may now disconnect.