Lennox International Inc (LII) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Lennox International Q3 2009 earnings conference call.

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

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

As a reminder this call is being recorded.

I would now like to turn the conference over to Steve Harrison, Vice President of Investor Relations.

Please go ahead.

Good morning.

Thank you for joining us for this review of Lennox International's financial performance for the third quarter of 2009.

I'm here today with Todd Bluedorn, CEO; and Bob Hau, CFO.

Todd will review key points on the quarter and Bob will take you through the earnings financial performance.

In the earnings release we issued this morning, we have included the necessary reconciliation of the financial metrics that will be discussed to GAAP measures.

You can find a direct link of the webcast of today's conference call on our corporate website at www.lennoxinternational.com.

We will archive the webcast on that site and make it available 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.

Lennox disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Before I turn the call over to Todd, I would like to announce the date of our Annual Investment Community Meeting, it will be held the morning of December 16th in New York.

Please mark your calendars.

Invitations and more details will follow.

The event will also be webcast.

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

Thanks Steve, good morning everyone and thanks for joining us.

Before I begin I would like to induce Bob Hau as our new CFO here at Lennox.

Bob joins us this month after 22 years at Allied Signal and Honeywell.

Most recently a CFO for Honeywell's $13 billion revenue aerospace group, Bob is off to a great start and we are very happy to have him here.

Bob?

Thanks, Todd.

Good morning, everyone.

I'm glad to be here and looking forward with working with Todd and the rest of the leadership team here at Lennox.

I'll also look forward to working with you in the investment community.

I'll have a chance to meet many of you in person during upcoming road shows and conference as well as the Analyst Day in December.

Great, thanks, Bob.

Let's turn to the third quarter and look at our operational and financial results.

End markets remain difficult in the third quarter as expected but strong execution enabled Lennox to generate a record $118 million in free cash flow up 18% from a year ago.

For the first nine months of the year, free cash flow is up more than 75%.

Gross margins increased for the second straight quarter, up 170 basis points year-over-year in the third quarter to 29.8%.

Gross margin improvement was driven by lower component costs from our global sourcing initiative, savings from manufacturing and rationalization, and lower commodity costs.

The cost reduction actions we have taken over the last year are providing clear benefits and additional restructuring activities are underway as end market conditions remain challenging.

Let's talk about the Residential market.

Looking at AHRI data from North America Residential, unit shipments in the third quarter were down 9% year-over-year compared to a 13% decline in the second quarter.

In replacement business, we estimate year-over-year decline in the mid-single digits for the industry in the third quarter.

Cool weather in July was offset by a relatively warm August and September.

Consumers remain cautious in this economic environment.

On the New Construction side, the year-over-year rates of decline continued to slow.

The National Association of Home Builders estimated single family housing starts to be down 20% year-over-year in the third quarter, compared to the 37% year-over-year decline in the second quarter.

On a seasonally adjusted basis single family housing starts are up six out of the last seven months.

While we are optimistic that Residential in New Construction has bottomed, we remain cautious due to the expiration at the end of November of the government tax credit up to $8000 for new home buyers.

In Commercial, AHRI industry data for North America Commercial unitary market shows unit shipments down 30% year-over-year in the third quarter.

We saw similar dynamics in the European HVAC market.

In Refrigeration we saw the rate of decline in Refrigeration slow, driven by recovery in Australasia and some stabilization in the North America market.

Looking at our financial results in this market environment, overall revenue was $750 million, down 20% at constant currency and down 22% of the actual currency.

Adjusted earnings per share from continuing operations was $0.72, compared to $1.10 in the record third quarter a year ago.

On a GAAP basis, earnings per share from continuing operations was $0.59 versus $0.96 in the third quarter last year.

Cash generation remains strong as we aggressively manage working capital levels.

As a result, cash from operations was $131 million in the third quarter, up 12% from a year ago.

Free cash flow was $118 million up 18% from a year ago.

Working capital changes year-over-year contributed $27 million to cash generation.

Through this down turn, and especially over the last 18 months, we have taken significant steps to lower our cost structure and rationalize our business operations around the world.

We are tracking with our previously announced 2009 plans to save approximately $25 million incrementally from restructuring, $20 million from lower commodity costs and another $20 million from global sourcing.

In addition we announced this year that we would save $55 million in SG&A versus our prior plans, driven by a 12% salary headcount reduction in 2009, on top of the 7% reduction last year.

And further cuts in discretionary spending.

This quarter we are announcing two new restructuring initiatives.

First in our Commercial business, we are cutting more than 50 positions at our manufacturing facility in Mions, France and transferring the production of our rooftop products for the European market to Longvic, France.

Second in our Residential business, we are relocating the headquarters and operations of our Hearth business in California to Tennessee.

The relocation will reduce costs and increase operating efficiencies by positioning product development and R&D personnel closer to our existing fireplace manufacturing operations in Union City, Tennessee.

Upon completion of these two projects in the first half of 2010, we expect annual savings of about $6 million.

Let's look at some key points for each of our businesses for the quarter.

In our Residential business the anniversary of our mid 2008 price increases has come and gone and we continue to hold on to price, which was flat in Q3, with a year ago levels.

Looking at our Residential New Construction business, sales of our Lennox brand products were flat in the third quarter versus a year ago.

This out performance of the market reflects the strong position we have with national builders.

Seven of the top ten builders do business with Lennox.

As a Residential New Construction market continues to come back, we are very well positioned.

Turning to Commercial, despite the weakness in the Commercial unitary market in North America and Europe, pricing remained firm and mix was up.

Lennox continued to win in the marketplace on the strength of our energy efficient roof top systems.

We signed four new national accounts in the quarter bringing the total since the start of 2007, to 68 new national accounts.

Regarding government stimulus spending K-12 schools continue to be a bright spot.

Also in the third quarter, we started to see an increase in quoting and booking activity with federal state and local governments, and we expect this to increase in 2010.

With the most energy efficient rooftop product line in the industry, and a focused sales force to capture these opportunities, we are well positioned to benefit from government stimulus spending.

In our Refrigeration business, we continue to pickup significant market share on the strength of our high efficiency products.

Our North American supermarket volume is up 20% in the first nine months of the year.

We continue to benefit in supermarkets from Carrier selling its tower Refrigeration business to Hill PHOENIX, one of our major customers earlier this year.

We are also gaining significant share in supermarkets in Australia, where sales were up in constant currency.

In China we saw double digit growth at constant currency in the third quarter.

Segment margin was up from the third quarter a year ago on strong cost reductions and favorable pricing.

Finally, in service experts we saw the year-over-year rate of decline slow slightly in the third quarter compared to the second quarter.

Although Commercial services are weak, the Residential service and replacement side of this business appears to be showing signs of bottoming.

With strong cost cutting, higher technician productivity compared to a year ago, segment margins were up in this business also.

Now let me turn it over to Bob to discuss our financial results in a bit more detail.

Bob?

Thank you, Todd.

Let me provide some additional commentary on the business segments for the quarter, starting with Residential heating and cooling.

In the third quarter, revenue from our Residential heating and cooling segment was $347 million, down 16%.

Volume was down 13%, price was flat and mix was down 2% on additional Residential New Construction business.

Currency had a 1% negative impact.

Segment profit in the third quarter was -- $39 million, compared to a profit of $55 million a year ago.

Segment margin was 11.2% compared to 13.4% in the third quarter of the prior year.

Now turning to our Commercial heating and cooling business, in the third quarter, revenue for the Commercial business was $154 million, down 39%.

Volume was down 40%, product mix was up 3% and price was flat.

Currency had a negative 2% impact.

Segment profit was $17 million, compared to $14 million in the prior year quarter.

Segment margin was 11.1%, compared to 16% a year ago.

Our European Commercial HVAC revenue was down in the high 30% range and the business was essentially break-even for the quarter.

Aggressive restructuring activities continue in Europe, as Todd has mentioned.

In North America Commercial HVAC revenue was down in the high 30% range due to the overall New Construction slow down and ongoing weakness in retail.

Moving to our service experts business, in the third quarter, revenue was $137 million, down 11%.

Volume was down 10%, price and mix were flat.

Currency had a negative 1% impact.

Segment profit was $8 million, compared to $5 million in the prior year quarter, and segment margin was 5.7% compared to 2.9% a year ago.

This is due to higher technician productivity, lower fuel costs, lower SG&A expenses and the timing of cost savings between quarters in the second half.

In our Refrigeration segment revenue in the third quarter was $134 million, down 18%.

Volume was down 16%, product mix was flat, and price was up 1% from third quarter a year ago.

Currency had a negative 3% impact.

At constant currency, sales were down in the mid-teens in North America, up in Australia and China, and down significantly in other international markets.

Segment profit was $17 million, flat with $17 million a year ago.

Segment margin was 12.6%, versus 10.3% in the prior year quarter.

The 230 basis point improvement was driven by favorable pricing, lower SG&A expenses and savings for manufacturing rationalization initiatives.

Looking at restructuring charges and other items from our continuing operations in the third quarter, Lennox had net after tax charges of $8.2 million from restructuring activities, and $0.8 million from unrealized gains on open futures contracts and other items.

These net charges impacted our GAAP EPS from continuing operations by $0.13.

In discontinued operations the Company announced plans to exit from five additional unprofitable SEI service centers in the quarter, which led to a $2.9 million pre-tax charge in the quarter in discontinued operations.

$2.1 million of this was from impairment.

The after tax affect was $2.7 million or $0.05 per share.

Corporate expenses were $13 million in the third quarter, down 18% from $16 million a year ago due to lower compensation costs and cuts in discretionary spending.

Our full year 2009 corporate expense guidance remains approximately $60 million.

Overall, SG&A was down 6% in the third quarter, versus the prior year, driven by salary headcount reduction and cuts in discretionary spending.

Our cash from operations in the third quarter was $131 million, 12% better than third quarter last year.

For the first nine months of this year, cash from operations was $213 million, up more than 50% in the same period last year.

Capital spending in the third quarter was approximately $13 million versus $16 million a year ago.

We now expect 2009 capital spending to be about $65 million versus prior guidance of $75 million.

Working capital balances improved on a year-over-year basis by $134 million.

Our 12 month average working capital as a percent of trailing 12 month sales was 18.9% compared to 18.2% in the prior year quarter.

The quarter end working capital balance as a percent of trailing 12 month sales was 17.7%, compared to 17.9% in the prior year quarter.

Now looking at liquidity, cash and short-term investments were $102 million at the end of September.

Our debt to EBITDAR ratio was 0.9 and our total debt on the balance sheet was $201 million at the end of the quarter, after paying down $119 million.

Looking ahead, our long-term debt to EBITDA guidance remains between one and two times and we expect it to be within that range ending 2009.

We will continue with a balanced and disciplined approach to the use of our cash, including investing in the business, paying competitive dividends, potential share repurchases and potential acquisitions.

Before I turn it over to Q & A, I'll briefly talk about our outlook for the remainder of 2009.

Looking at the end market assumptions and Residential first, the most recent NAHB estimate has North America single family housing starts down 28% for all of 2009.

For the fourth quarter, NAHB estimates Residential New Construction to be up 9% year-over-year.

With seasonally adjusted single family housing starts up six of the last seven months, we are more optimistic that the bottom of the Residential New Construction market has been reached.

Our best estimate for the replacement market is down mid-single digits for the full year.

There continues to be uncertainty around the replacement market and around key drivers like consumer confidence, consumer finance and of course, weather is always a variable.

Overall for the Residential market we expect a decline in the low teens for all of 2009.

In Commercial HVAC we continue to see very soft end markets.

We now expect the North America unitary market to be down in the high 20% range for the year versus our prior expectation of down in the mid 20% range.

We now expect the markets we serve in Europe to be down in the high -- excuse me, in the mid 30% range versus prior expectations to be down in the low 30% range.

In Refrigeration, North America continues to be soft while international markets have weakened further, excluding Australia and China.

We expect China to be up in 2009.

As Todd previously discussed, we are on track with our restructuring commodity, global sourcing and SG&A cost savings guidance for 2009.

Based on results today and market conditions expected through 2009, we are narrowing our revenue and adjusted EPS guidance.

We expect revenue to be down approximately 19% for the full year, including a two point impact from foreign exchange.

We expect adjusted EPS from continuing operations to be $1.65 to $1.70 for all 2009.

Our adjusted EPS from continuing operations for the first nine months of the year is $1.19.

GAAP EPS from continuing operations for 2009 is now expected to be $1.31 to $1.36 on the narrow of guidance range and additional restructuring charges.

Our fully diluted weighted average share count assumption is 56 to 57 million shares for the full year and our tax rate on income from continuing operations is expected to be 36% to 37% for the year.

And we now expect capital spending to be $65 million for 2009.

With that, let's go to Q&A.

(Operator Instructions) The first question is from the line of Jeff Hammond with KeyBanc Capital Market.

Please go ahead.

Hi, good morning, guys.

Bob, welcome aboard.

Thanks Jeff, good morning.

Todd, you announced some additional restructuring here.

If you could just walk through what you are calling for, for incremental restructuring savings in 2010 from the actions you have already announced?

I think the pieces that we have been clear about so far, Jeff, for 2010 is the global sourcing initiative we have talked about.

We think that is a 5% savings.

So somewhere between $30 million to $40 million incremental and material cost reduction in 2010.

On the restructuring charges, I'm not sure we have added all that up in sort of giving clear guidance on when pieces are going to be in 2010.

I think the piece that we announced today we talk about -- at least right now talking about being at $6 million annualized and it will be implemented during the first half of 2010.

We're together in December we'll lay out a detailed roadmap on how all that breaks out.

Okay.

Then Refrigeration certainly impressive results.

On the bottom line, and certainly a little bit better on the top, it sounds like from the color you gave that the benefits you got on the bottom line are sustainable.

But I just want to ask, are there any abrasions or one time benefits that would suggest that -- that is not a sustainable run rate?

No.

I mean, it's the things that we talked about.

So there is no one timers, if that's the question.

It is we're winning in the marketplace, and out performing the market.

The team's done a very good job on SG&A.

We got price in the quarter.

And then we used words like manufacturing rationization initiatives.

To a large degree that is the closure of Danville and we talked about that being a $7 million annual run rate savings and a vast majority of those savings started to kick-in in 2009.

So it is restructuring our footprints and taking costs out.

Okay, great.

Finally I appreciate the comments on national accounts and what you guys continue to accomplish there on the Commercial side.

I think you commented on share gains in Res and New Construction.

But can you just reconcile your results, Res kind of down mid-teens versus AHRI down 9%, and I think the AHRI Light Commercial's kind of running down 30%.

You guys seem to kind of run closer to down 40%.

Can you just kind of talk about share and maybe some of the moving pieces of your results versus some of the market data?

Right.

If you look at our Residential segment, and as you know, Jeff, that includes our Hearth business, our fireplace business, as well as what we call our ADP Coil business and both those business are 70% -- 80% New Construction.

And so those were down more than our core HVAC business.

If you just look at our core Residential HVAC business we were down 10%-ish or so in volume for the quarter.

So very much in line with the AHRI numbers of 9%.

On the Commercial business our volume was down 40% for the quarter and that's -- one, the market's down 30%.

The other reason that we're down more than the market is just some timing of some major national accounts.

And sort of -- since last year, we shipped them during the second half of the year, this year, we shipped a lot of the volume during the first half of the year.

I think if you go back first half of the year, we significantly out performed the market.

For a full year we will out perform the market, but not quite as much as we did during the first half.

Okay that's good color.

I'll get back in queue.

Thanks.

The next question comes from the line of Steve Tessa with JP Morgan.

Please go ahead.

Hi, good morning.

Hi Steve.

Good morning Steve.

Thanks for the color on the end markets and your share and the like.

Just on Commercial, I mean, is there any visibility here as to the pipeline of stuff that's going on out there?

Short answer is no.

Longer answer is, when we talk to our major national accounts, the further out you get in the planning cycle the more optimistic they are.

You hear some confidence about 2010, when you look at the more in close business either from our national accounts or Replacement business the book and ship that you get, markets continues to be soft.

Okay.

When you look at the Resi business, big mix benefit in the second quarter negative this quarter can you maybe talk about the dynamics around mix and Resi?

Really what happened on mix and Resi is our New Construction business was up, at least on the line or on the script we talked about being flat year over year, so we out performed the market on Residential New Construction.

So we make a little bit less on Residential New Construction than we do on our Replacement business.

At the same time, if we look at the growth of our business toward high efficiency, that continued in third quarter.

We were about 45% of our air conditioners that we sold during the quarter were 14 SEER and above.

I think it is more of a reflection of our mix skewing a bit towards R&C versus Replacement for the quarter.

Cara talked about a little bit of pull forward from the refrigerant changeover, anything you saw there?

No we really didn't see that.

Again I think it maybe reflects how we go to market which is as you know, for the vast majority of Residential we own our distribution.

So sort of a pull ahead at least as I understood their comments probably meant they pushed out on a last buy to independent distributors r22 product.

We don't have that phenomena.

It will then weed out of our distribution in fourth quarter.

Just two more quick ones, when you look at those buckets, restructuring commodity costs, 2520 this year, what were those numbers in the third quarter and what have they been year to date if you could just remind us?

I don't think I have given that color.

The color I've given has been that restructuring was really spread through the year in that commodities, given the timing of the hedges and the like was back end loaded and on the material global sourcing initiatives, also back end loaded although more split between third and fourth quarter.

Are you concerned about the recent move up in commodity prices and given you are holding price but you are not getting additional price is that a concern for 2010?

Clearly it's a concern when inflation comes back into the business if the markets don't recover.

If we wake up in a scenario where commodity costs are up and the markets are still down, I think that will create a drain on margins.

I'm optimistic in a belief that says I think markets will recover if commodities are inflating, and then I think maybe we are in a position to get price in the marketplace.

I also have said this before I think a little bit commodity inflation is good for the industry, it reminds people that doing what we are doing, which is holding our price in the marketplace, is probably a good response when you are not sure what our input costs are going to do.

One last quick one.

Inventories were, your total inventories were up in the quarter.

Kind of unusual from a seasonal perspective.

Anything going on there?

I think maybe there were two things were going on.

One was just with the FX rates of some of our international inventory, most specifically in Refrigeration and how it was valued quarter-over-quarter.

The other piece which I think will be taken positively is in our Residential business you are starting to see a reloading of some inventory.

And I think that foreshadows our expectations of what we think the markets are going to be doing.

That is ahead of 2010 they are doing is that now?

That in -- on behalf of fourth quarter and as we go into 2010.

Interesting.

Okay, thanks a lot.

Thank you, our next question from Robert Wertheimer with Morgan Stanley.

Yes, good morning, everybody.

My question is basically on the stimulus that's going on at the federal level, is that driving a new replacement cycle at the educational institutions?

In other words is it more than offsetting potential weakness from budget tightness, is it driving into your replacement cycle or is it just offsetting some of the weakness that would have been there?

I understand the question.

It's hard to tell the difference between the two quite frankly, we see that as one of the few markets that continues to hold up in the current environment.

And we've made some changes in our sales force, in addition obviously with the product line that we have.

So we are focused on that marketplace.

It's hard for me to say if they didn't have the money what they would do or not do.

I guess, maybe a different way of asking it.

I'm not sure you would know this level of detail.

But when you go out into the business you are winning related to stimulus is it units that wouldn't have normally been replaced because they are working okay but they are just not efficient enough?

Or it really needed to come out anyway?

Maybe that's a pretty good -- question.

-- answers, I'm not really sure, Robert, at that level detail.

I'll talk to the sales guys, I think quite frankly probably a combination of both, which is we like when we sell off the higher efficiency product and the government stimulus money does that.

And then I'm sure there are break even economics or close to break even economics that sort of kick into the positive when they know the federal government is going to be picking up the bill.

Yes, can you talk a little bit about the time line of that end of the business the bidding and quoting whether it is accelerating still and whether schools and educational institutions have really started to take full advantage of it?

The school market's very seasonal in nature obviously, which is business is done in the summertime.

You have lots of dialog and conversations with folks.

But then you actually do the work during a reasonably narrow period of the year.

I think the bidding activity continues to bubble along in that market.

And more interest over the last eight months or nine months as they know they have more money.

But when we look at our total quoting activity, I don't see any spikes.

Perfect.

Thanks much.

Thanks.

Thank you.

Our next question comes from Keith Hughes with Sun Trust.

Thank you.

As you were talking about Residential you quoted some NHB predictions.

Do you believe that the fourth quarter will see the industry up year-over-year in Residential HVAC?

For the overall Residential HVAC?

Yeah.

I don't think so.

I think if you take our math of up 9%, I think is what we quoted on NHB and then we said down mid single digits on Replacement, I think if you take the weighted average the market is still down.

Okay.

Within Residential, you quoted you had talked about the Lennox brand being flat --

For R&C.

R&C, okay.

That's first question.

Second question, if you look within the Hearth business and the non-Lennox branded, are they performing substantially worse than that?

Yes.

Because the way to think about them at least as a proxy is what housing's doing year-over-year.

So even though, sequentially we are seeing good news third quarter was still down 20% plus in new housing and the first half of the year was down 50%.

That is sort of the way I would think about those businesses.

Okay.

Thank you.

Thank you.

Our next question comes from Glen Wortman

Given all the restructurings and cost initiatives you guys have been making, do you guys have any revised figures on some of the margin goals for your various businesses over the longer term or in a more ideal operating environment?

Yes.

We'll clean that up when we are together in December.

The answer is we do and we are working through it and directionally, it is what you are suggesting, which is the last time I talked about this, last December, we said 10% EBIT ROCE at a $4 billion revenue level and given all the work we have done, getting a 10% is going to be at a lower revenue level and we'll sort of clean all that up and give guidance in December for -- on a long term basis.

Okay, it just sounded like you had some tough comparisons maybe on the Replacement side of the business in Commercial?

-- If I'm mistaken, please correct me.

-- Can you just give us what the number was year-over-year?

I think it was less tough comparisons on Replacement.

I think the tough comparisons was the timing of national account deliveries that several of our major national accounts just the timing of when they wanted deliveries was -- and we knew this coming into the year, was different this year than last year.

Last year was skewed toward the second half of the year.

This year was skewed toward the first half of the year.

So the if you look at some of those customers the comps become more difficult and some of them were some of our largest customers.

Okay.

Thank you very much.

Thank you, our next question comes from Jeff Hammond with KeyBanc Capital Market.

Hi guys, just a couple of clean up items here.

I think you are affirming your corporate expense fund of $60 million which would imply $18 million in the fourth quarter.

Is there something sizable that comes in the fourth quarter?

Or is there some downside risk to there?

And same on CAPEX.

I think $65 million CAPEX would imply like a $30 million CAPEX quarter in 4Q.

Yeah, first on the CAPEX, if you recall it, the second quarter call we had back in July, we talked about $75 million.

We had released quite a few projects and the timing of getting those projects done and in-house, has slid a little bit to the fourth quarter and actually into next year.

We took our guidance down about $10 million.

But we do believe the $65 million, given what we have in the pipeline right now.

And the first part of your question?

Corporate expense.

Yes.

The answer on corporate expense, Jeff, is in fourth quarter, there is that sort of the catch all for accruals and sort of true ups at the end of the year.

That is our best guess of where we think the number is going to be.

If your question is do we think there is downside risk there, I don't think so.

I think we are going to be reasonably close to that number.

Okay.

And looks like in service experts you closed some additional branches, underperforming branches.

Is that process still ongoing?

Or are you kind of getting through that analysis of those sites that maybe don't make sense in the portfolio?

I think we are closer to the end than the beginning.

I think the other thing obviously that's going to help us the markets appear to have bottomed or close to the bottoming and our -- will recover in 2010.

So I think that helps.

But I wouldn't expect a whole lot more of that, if any.

Okay and then just finally, if we take commodity costs as they stand today, you know, copper, steel, aluminum, do you think commodities are kind of a neutral next year, head wind?

Tail wind?

You are going to try and get guidance out of me for 2010.

I think the thing you can start to model it a little bit on your own.

Which is we talk about how we are hedged.

50% on copper, 12 months out.

And I think the actual number is we are close to 40% hedged copper right now.

I think the actual number is like 38% for 2010.

So you can start to figure what that means and when the hedges went in and make some of your own assumptions on if the spot price on copper today is $2.85 or whatever it is today.

Steels, I think the way to think about steel is we buy it at a discount to what the CRU pricing is, which is an industry standard.

I think you can lay out -- we buy it pricing quarter in arrears if you will.

So whatever the CRU was during a prior quarter, then we get a discount that we have negotiated off that, depending on our different grades of steel.

I think you can start to lay out what's happening with steel what has happened with steel, what you think will happen with steel, how you lay copper and draw some conclusions.

I spent a lot of words and didn't answer your question.

Sounds like a complicated analysis.

I guess final question.

You mentioned I think, being below your net debt to EBITDA target of one to two.

But you thought by year end you would kind of be back within that band.

So maybe just walk me through priorities on cash flow.

I assuming you'll generate a nice chunk in the fourth quarter.

Well, I think it continues to be the things that we have talked about, which is investing in the business.

And we talked a little bit about how we saw from second to third quarter Residential inventory go up, which is unusual for the business, which indicates the business is starting to grow, or we think it's going to grow.

Inventories are starting to be reinflated.

I think we'll see some of that.

Then as always, the focus on investment of the business on the CAPEX side and then finally, giving the money back to the shareholders.

As you know we have an open authorization on the share buyback and Bob used his words and parsed the phrase correctly which is we'll opportunistically do share buy-backs as it makes sense.

Okay, perfect.

Thanks guys.

Thank you, our next question comes from Michael Coleman with Sterne Agee.

Mr.

Coleman, your line is open.

Next caller please.

(Operator instructions) Next question comes from Steve Tusa with JP Morgan.

Hi, just to follow-up on the Resi side.

At what point do you think we will start to see the distributors's behavior next year in or the end market channel begin to fill up a little bit more to get an idea of how consumers are feeling on HVAC purchases next year?

Will it be, do you think we'll have to wait until May like we did this year?

Or do you think that people are going to look out and project a little bit better demand and start to stock a little bit earlier?

What are your guys in the channel telling you?

Well you know, again, Steve, we are a little different than the others.

Which is we own our distributors.

Right.

So I think that numbers that I gave you on inventory indicate where we are placing our bets a little bit on what we think the Resi markets are going to do.

At the end of the day though we don't realize a sale until we sell it to a dealer and a dealer doesn't buy it until -- in most cases until he sells it to a customer an end-use customer or consumer.

So I think you really don't know what the Residential market is going to do until you get to the May-June time period.

Got you.

Robert, maybe you could talk about your initial impressions and you know what you are most excited about there you know what your plans are to improve things at Lennox.

Sure.

What I'm in the middle of week three here and impressions are good.

Lots of due diligence coming in and thought highly of what I was walking into when I did walk in the door and those assumptions have been proven out.

It's a great company.

Terrific cost control over the last 12 or 18 months in very difficult markets.

Looking forward to those markets starting to come back.

Great.

Thanks.

Thank you and there are no further questions.

If you have any closing comments?

Great, thanks.

End markets remain difficult in the third quarter.

But cash generation remains strong.

While the Commercial market continues to look soft the rate of decline in the Residential and Refrigeration markets has been slowing.

While we continue to realize the benefits from our previously announced cost savings initiatives, additional restructuring initiatives are underway for further savings.

We continue to focus on strong execution through this down turn and continue to position the Company for strong earnings leverage as end markets recover.

I want to thank everyone for their interest and joining us on the call.

Thanks.