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Operator
Ladies and gentlemen, thank you for standing by.
Welcome to the Lennox International Q4 2009 and full-year 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 conference is being recorded.
I would now like to turn the conference over to Steve Harrison, Vice President of Investor Relations.
Please go ahead.
Steve Harrison - VP IR
Good morning.
Thank you for joining us for this review of Lennox International's financial performance for the fourth quarter and full-year 2009.
I'm here today with Todd Bluedorn, CEO; and Bob Hau, CFO.
Todd will review highlights for the quarter and year, 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 to 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.
Now I would like to turn the call over to CEO, Todd Bluedorn.
Todd Bluedorn - CEO
Thanks, Steve.
Good morning, everyone, and thanks for joining us on the call this morning.
Let me touch on several highlights, and then Bob will walk you through the financial details for the quarter and the year.
In the fourth quarter, our continued strong focus on productivity drove margin expansion and 12% growth in adjusted EPS, despite revenue being down 6% being down of constant currency.
Gross margin increased for the third straight quarter up 350 basis points to 30.5% after adjusting for a special charge for a vendor-supplied materials quality issue.
Gross margin, as reported, was up 100 basis points to 28%.
Gross margins increased primarily due to lower costs from our global sourcing initiatives, lower commodity costs and other productivity initiatives across the enterprise.
The actions we have taken over the last few years are providing clear benefits, as reflected in our margins and profitability, and additional restructure and projects were initiated in the quarter.
We saw continued improvement in end-market conditions in the quarter, led by growth in the residential market.
A constant currency residential segment revenue was up 5%, including the impact from our Hearth business, which was down more than 30%.
The unit shipments in our core residential HVAC were up mid teens for the quarter, roughly in line with industry shipments.
The strength in residential sales was driven by a robust replacement market.
The extreme cold weather across the country in December helped drive furnace replacement demand.
In our commercial unitary business the market remained down from a year ago, although the rate of decline slowed in the fourth quarter.
In the first three quarters of 2009, North America commercial unitary market was down approximately 30%.
In the fourth quarter the rate of decline slowed to 17%.
In our refrigeration business we also saw the year-over-year rate of decline slow.
In the first three quarters of 2009 volume was down approximately 20%.
In the fourth quarter the rate of decline slowed to 8%.
So going into 2010 we are cautiously optimistic about residential market growth and that the rate of decline will continue to slow in the commercial and refrigeration markets.
Turning to productivity, we achieved our targets in 2009.
We saved $20 million from our global sourcing initiatives and saved $25 million as a result of our restructuring activities.
We also benefited from $20 million in lower commodity costs as expected in 2009.
Our restructuring activities continued in the fourth quarter.
In European HVAC we sold a non-core airside business in the Czech Republic.
In European refrigeration we announced the closure of our Parets, Spain, manufacturing facility.
Looking at restructuring savings for 2010, we now expect $13 million in savings from our announced programs, versus our prior guidance in December of $11 million.
We continue to expect $35 million in incremental savings from our global sourcing initiatives.
However, as we talked back in December we expect commodities to be at a headwind of about $5 million to $10 million in 2010.
In 2010 we are excited about growth opportunities in our target markets from new products and enhanced distribution as well as some key customer programs.
In residential, production is starting on our new gas furnace platform as well as our new control system called [iComfort].
Our new furnaces are 33-inch tall and extend our leadership in heating products, in energy efficiency, comfort and quietness.
The new furnaces use our precise comfort technology that constantly monitors and automatically adjusts to heat and airflow from 35% of the rate of capacity to 100%, in increments as small as 1%.
This new line of furnaces will be available at the start of second quarter.
iComfort is the first full-color, communicating, touch-screen thermostat available on the market.
Simple and intuitive, iComfort synchronizes our most advanced heating, cooling and humidity-control products.
iComfort is available starting this month.
On both of these products we've had great feedback from dealers and expect to gain share in our target markets on the strength of these additions to our product portfolio.
The multi-year transformation of our North America residential distribution network is progressing well.
As I talked about in December, we ended 2009 with 4 of the 8 regional distribution centers in place and 23 of the planned 120 new storefronts in place.
The southeast network is on track to be completed by the end of this quarter.
These activities position us for incremental share gains and higher productivity.
Upon completion of the entire network, targeted for 2012, we expect to realize an incremental $35 million of EBIT.
In commercial we're excited about two new products for 2010, Landmark and Energence.
Landmark is a low-cost rooftop platform for the at-once replacement market, a segment that offers tremendous growth opportunities for us.
Energence is the only 17 SEER rooftop in the industry.
It offers not only the highest efficiency but also the most factory-installed options available, including advanced zoning capabilities, humidity control and indoor air quality.
Energence is perfect for schools, restaurants, horizontal office buildings and small- to big-box retailers.
K through 12 schools especially have been a bright spot for us, with growth of more than 40% in 2009.
With most of the stimulus money still out there to be spent, this market is expected to see very strong growth for the next several years.
Lennox is well positioned with its rooftop product lineup and focused sales organization to capitalize on this market.
In refrigeration we continue to gain share with our industry-leading high-efficiency products.
Our revenue from North America supermarkets was up mid teens in 2009.
Of note, we have a significant position in targets, P-Fresh grocery program, which added more than 100 stores in 2009.
And plans have been announced for another 350 stores in 2010.
Before I turn it over to Bob, let me touch on cash generation, which was near record levels in 2009, despite lower net income.
Cash from operations was $225 million, up 23%.
Free cash flow was $167 million, up 38%.
Cash has been a real area of focus for us through the downturn and will remain so as end-market conditions improve.
Our business market target is for free cash flow to approximate net income.
Finally, our balance sheet remains strong with a debt-to-EBITDA ratio of 1.1, well within our target range of 1 to 2.
We are well positioned with our balance sheet to advance our premium position in the market and will continue to invest in the business, consider acquisitions that make sense and would be a great fit with our core business and return cash to shareholders.
Now I'll turn it over to Bob.
Bob Hau - CFO
Thank you, Todd, and good morning to everyone.
I'll provide some additional commentary on the business segments for the quarter and full year, starting with residential heating and cooling.
In the fourth quarter, revenue from residential heating and cooling was $321 million, up 7%; volume was up 6%.
Price and mix were down 1%.
And currency had a 2% positive impact.
Volume was up compared to the prior-year quarter on a strong replacement market, but this was offset some by our Hearth business, which was down more than 30%.
Residential segment profit was $38 million, up 40%.
Segment profit margin was 11.9%, up 280 basis points from the fourth quarter a year ago.
For the full year, residential segment sales were $1.29 billion, down 13% with no impact from currency.
Volume was down 15%, mix was flat and price was up 2%.
Segment profit was $112 million, down 23%, and segment profit margin was 8.6%, down 120 basis points.
Turning to our commercial heating and cooling business, in the fourth quarter, revenue for the commercial business was $146 million, down 23%.
Volume was down 30%, mix was up 4% and price was flat.
Currency had a positive 3% impact.
Segment profit was $11 million, down 46%, and segment profit margin was 7.5%, down 310 basis points from the fourth quarter a year ago.
Our Europe commercial HVAC revenue was down in the mid 20% range at constant currency.
And our North American commercial HVAC revenue was down in the mid 20% range, primarily [owing to] continuing softness in the retail market.
However, the year-over-year rate of decline continued to slow.
For the full year, sales in the commercial segment were $595 million, down 29%.
Volume was down 31%, mix was up 4% and price was flat.
Currency had a 2% negative impact.
Segment profit was $49 million, down 47%, and segment profit was 8.3%, down 290 basis points.
And moving to our service experts business, in the fourth quarter revenue was $146 million, up 7%.
Volume was up 3% and price and mix were flat.
Currency had a 4% positive impact.
Residential replacement business was very strong in the quarter, offset by some softness in the commercial services.
Segment profit was $7 million, down 10%, and segment profit margin was 4.8%, down 100 basis points.
Segment profit is down due to the timing of expenses between the third and fourth quarters, as we had mentioned would be the case in the last conference call.
Looking at the second half of 2009 versus the second half of the prior year, segment profit was up 20% and segment margin is up 100 basis points to 5.3%.
For the full year, revenue and service experts was $535 million, down 9%.
Volume was down 8%, and price and mix were flat.
Currency had a negative 1% impact.
Segment profit was $17 million, down 10%, and segment profit margin was 3.1%, down 10 basis points.
In 2009 discontinued operations, the Company exited businesses of five unprofitable service centers.
In our refrigeration segment, revenue in the fourth quarter was $143 million, up 9%.
Volume was down 8%, product mix was flat and price was up 1%.
Currency had a positive 16% impact.
In constant currency, sales were up double digits in China, down single digits in North America and Australia and down double digits in Europe and South America.
Segment profit for refrigeration was $16 million, up 42%.
Segment profit margin was 11.2%, up 260 basis points from the fourth quarter a year.
For the full year, sales and refrigeration segment were $513 million, down 17%.
Volume was down 16%, mix was flat and price was up 2%.
Currency had a negative 3% impact.
Segment profit was $49 million, down 19%, and segment profit margin was 9.5%, down 20 basis points.
Looking at restructuring charges and other items in the fourth quarter, the Company had net after-tax charges of $23.2 million.
The following are the key components of that charge.
There was an $11.3 million charge for a vendor-supplied materials quality issue.
This relates to out-of-spec coding on materials used on limited portion of production in 2006 and 2007, and we are now working with our customers to fix systems with this issue.
Restructuring charges in the quarter were $10.9 million, including $8 million from the new Parets, Spain project announced in the fourth quarter.
This new project will provide approximately $2 million in annualized savings, starting in the second half of 2010.
The Company also sold a non-core airside business in the Czech Republic in the fourth quarter.
This resulted in a net charge of $1.3 million.
In total, special charges impacted our GAAP EPS from continuing operations by $0.41 in the fourth quarter.
For the full year, Lennox had net after-tax special charges of $38.5 million from restructuring activities and other items, and this impacted GAAP EPS from continuing operations by $0.68.
Corporate expenses were $20 million in the fourth quarter, compared to $17 million in a prior-year quarter.
The fourth quarter of 2009 included variable compensation true-ups for the full year, and corporate expenses were $63 million for all of 2009.
For 2010, our corporate expense guidance remains approximately $65 million.
SG&A was $172 million in the fourth quarter, versus $152 million in the prior-year quarter.
Excluding the negative impact from foreign exchange and excluding the $10 million one-time benefit in the fourth quarter a year ago from the vacation policy change, SG&A was up 2%.
This increase is due to higher R&D investment and the variable compensation true-ups.
For all of 2009, SG&A was down 7% after adjusting for the one-time benefit from the vacation policy change in the fourth quarter of 2008.
Salaried headcount was down 13% in 2009.
In looking ahead, our long-term guidance for SG&A continues to be that it will grow at no more than half the rate of revenue.
Cash from operations was $225 million for the full year, up 23%.
For the fourth quarter, cash from operations was $12 million, compared to $43 million in the year-ago quarter.
A couple of items to note for this year's fourth quarter include a $30 million payoff of our asset securitization line and discretionary $18 million pension contribution.
Capital spending was $59 million in 2009, compared to $62 million in 2008.
And free cash flow was $163 million for the full year, up 38%.
Working capital as a percent of trailing 12-month sales for the Company was 18.2%, the same as the year-ago period.
And the quarter ending working capital ratio was 16%, the same as the end of last year.
Looking at liquidity, cash and cash equivalents were $124 million at the end of December.
Debt to EBITDA was 1.1.
Our total debt was $232 million at the end of the year, down $189 million from a year ago.
We have a $650 million revolving credit facility in place through 2012, and we have $100 million asset securitization in place that is currently not utilized.
We're well positioned with our balance sheet continued-- to continue executing on our strategic initiatives and returning cash to shareholders.
We will do this through dividends.
And given the emerging recovery and a Company's strong cash generation potential through stock repurchases as we restart the repurchase program this year, at a minimum we look to offset normal dilution.
There is $285 million remaining under our current stock repurchase program.
Now, before I turn it over to Q&A, I'll briefly talk about our outlook for 2010.
As Todd mentioned, end-market conditions continued to show improvement in the fourth quarter, led by growth in residential.
One month into the new year, our market assumptions for 2010 remain the same as those described at the analyst day in mid December.
We expect North American residential markets to be up low single digits.
We expect North American commercial unitary to be down in the low teens for the year.
And we expect Europe, HVAC and refrigeration markets to be down in the mid-single digits.
Based on these assumptions, our revenue guidance for 2010 is to be up 3% to 7%, and this assumes two points of positive FX [imply that].
We reiterate our 2010 guidance for adjusted EPS from continuing operations of $1.85 to $2.25.
Our share count assumption remains to be roughly flat with ending 2009 level, and our tax rate is expected to be 35% to 36% in 2010.
Our GAAP EPS range is $1.75 to $2.15, reflecting the full-year impact of our announced restructuring charges.
And for capital spending we expect $75 million in 2010 focused on new product introductions and continuing transformational investments in the business.
With that, let's go to Q&A.
Operator
(OPERATOR INSTRUCTIONS) Our first question today is from the line of Keith Hughes with SunTrust.
Please go ahead.
Keith Hughes - Analyst
Thank you.
Two questions.
Number one, you had mentioned revenue breakdowns in the commercial business between Europe and North America.
Can you talk about profits there?
Is Europe kind of ramping up the curve, or where do they stand?
Todd Bluedorn - CEO
We lost money in fourth quarter in Europe, Keith.
And after gaining money full year last year we lost this year, and that reflects the markets being down significantly and our revenue being down mid 20% for the full year.
And I think you see that reflected in the significant restructuring actions that we have taken and continue to take in the European marketplace.
Keith Hughes - Analyst
It was down in the-- you lost money in the fourth quarter and for the full year; is that correct?
Todd Bluedorn - CEO
Yes.
Keith Hughes - Analyst
Okay.
And, you know, the restructuring you're doing, we closed the Spanish plant, and what were the other things you've done there?
Todd Bluedorn - CEO
We did two things.
We-- well, we announced in fourth quarter we closed the Spanish factory and are moving productions into our French factory.
We sold a business in the Czech Republic that was non-core and wasn't making money for us.
And throughout 2009 in our European HVAC we've done significant restructuring at the end of last year and this year around our distribution, going from Company-owned distribution in many markets, to independent distribution and taking out the SG&A associated with it.
Keith Hughes - Analyst
Okay.
Second question within residential.
The cold weather, was that big of an influence on the numbers?
And do you think there was some other kind of core growth outside of that?
How do you look at that situation?
Todd Bluedorn - CEO
I think there was some core growth outside the cold weather.
But, you know, when it's snowing in Dallas and it's in the 20s in Miami it helps furnace sales.
And so we saw some of that the last couple weeks of December.
And we had talked about, on the third-quarter call, that we were building some extra inventory, and we're glad we did.
But I understand your question, which is what's going on underneath there.
And it still seems to us that the recovery is happening, but it feels fragile at times.
And so the cold weather, I think, was a big deal in fourth quarter.
I also think from the industry numbers there was a little bit of R22 sold at the end of the year.
And I think you've seen those in some other folks' numbers.
Keith Hughes - Analyst
Okay.
Thank you.
Operator
Thank you.
Next we'll go to the line of Jeff Hammond with KeyBanc Capital Markets.
Please go ahead.
Jeff Hammond - Analyst
Hi.
Good morning, guys.
Just to follow on that, maybe just give us a sense of business momentum in the first quarter.
And I know first quarter last year was pretty ugly.
Would you-- and I know you don't provide quarterly guidance, but would you expect it to be in the black in 1Q '10?
Todd Bluedorn - CEO
You answered my question for me.
I-- we don't provide quarterly guidance, but I'll talk about the markets.
And some of it I'll repeat, Jeff, which is residential feels like we hit the bottom midyear in 2009, and we saw some recovery the second half of third quarter, and you've seen the numbers in fourth quarter.
But overlaying on top of that is the weather impact.
And you heard the answer to Keith of trying to disaggregate that.
On our commercial businesses there's-- the trend line is still year over year down, although the rate of the-- rate of decline slows some.
And-- but, you know, given the full-year guidance that-- on the market side that Bob gave, we still expect the commercial markets in 2010 to be down.
Jeff Hammond - Analyst
Okay.
And then, you know, a pretty good performance certainly on the return side in res HVAC and refrigeration.
Any positive aberrations there that you don't think repeat?
And separately, what was your tact on R22?
It seems like some of the industry, you know, had some pre-buy activity, you know, towards the end of the year.
Todd Bluedorn - CEO
Yes, if I understand your question on resi and refrigeration, no one-time-- no sort of-- no abnormal one-time things.
What it reflects is the restructuring that we've talked about, both on headcount and specifically refrigeration.
We're seeing the full benefits of the closure of the Danville factory that we did a year and a half ago and moved the production into Tifton, and we're all ramped up.
You're also seeing in both those businesses the flow through all the material cost reduction that we always talked about was going to be second half of the year.
And it really turned out a lot of it was in fourth quarter.
But those are real costs that are taken out and stay out.
R22 we didn't participate like others did.
And you understand that, understanding our business model, we own our distributors, and so there's no big advantage of sort of doing a one-time sale to them.
Dealers who wanted R22 at the end of the year we sold some to, but there wasn't a big spike.
So our number doesn't-- materially doesn't reflect any of the R22 last-time sale.
Jeff Hammond - Analyst
Okay.
And then last question.
Just walk me through this materials quality issue.
What happened?
Are you comfortable this is one time?
Does this tie in at all with your sourcing initiative and the act maybe differently on the pace, if that's the case?
Todd Bluedorn - CEO
I think the short answer to that last part, I'll answer that because I think that's probably the most important thing, no, it doesn't.
It's not tied to what we're doing on our material sourcing.
It is a vendor supply material quality issue related to an out-of-spec coding that we used in production back in 200-- limited production in 2006 and 2007.
So the quality problem predates our aggressive global sourcing and, quite frankly, the team we have in place today.
And as Bob talked about, we're working the-- with our customers to fix the system.
And we accounted for it with a special charge and are in litigation with the vendor to sort of recoup it.
Jeff Hammond - Analyst
Okay.
That's good to hear.
Thanks, guys.
Todd Bluedorn - CEO
Thanks.
Operator
(OPERATOR INSTRUCTIONS) Our next question today is from the line of Steve Tusa with JP Morgan.
Please go ahead.
Steve Tusa - Analyst
Hi.
Good morning.
Todd Bluedorn - CEO
Hi, Steve.
Steve Tusa - Analyst
Just on the resi side I'm just trying to-- you know, you talked about some of the pre-buy at others, but some of the numbers that we're hearing out of others for their forecast in 2010 are, you know, definitely more robust than you guys are talking about.
I mean, you know, is there any way to reconcile that?
I think Carrier talked about double digit.
York same thing.
And some of the distributors we've been talking to are saying (inaudible) mid-teens plus in some region.
So I'm just curious as to are you guys losing share, or, you know, what is it, just conservatism?
What is the difference between those forecasts and yours in your mind?
Todd Bluedorn - CEO
We're definitely not losing share on a forecast, right, so off-- on actual results in fourth quarter in our HVAC business we were up mid teens.
And if you adjust for the R22 effect that we think existed, we think that's roughly in line with the industry.
Steve Tusa - Analyst
Okay.
Todd Bluedorn - CEO
On a full-year basis we think we gained some share in resi.
So and then the question is forecasts are forecasts.
And, you know, if Trane thinks it's mid teens I hope they're right.
And, you know, as we talked about in December and we gave you some visibility on incremental margins, if the markets are up then we'll do better.
But all that being said, I'm cognizant of-- not to rain on the parade, but I'm cognizant that there's been a lot of government stimulus money focused on resi during the second half of the year, whether it's the new construction tax credit, whether it's the high-efficiency tax credit and that there was a lot of cold weather in December that helped stimulate demand.
And that 40% of our business is in the May to August time period.
And when unemployment's about 10% and consumer confidence is 55% to 60%, you're still relying a little bit on weather to drive demand, I'm not ready to sort of wave the flag and say double-digit growth.
That being said, operationally, we're leaning forward in the foxhole, and we'll have inventory, and we'll have production, and if the market's there we'll capitalize on it.
Steve Tusa - Analyst
Do you-- this strong-- incrementally you put up this quarter I think it was 50% incrementals.
You know, early on, if we get the-- you know, some very nice growth, I mean, do you guys have to add any expenses to, you know, kind of deliver on a double-digit growth number, or should we see, you know, some pretty nice fall through similar to the fourth quarter as we move out just early in the cycle?
Obviously you're going to invest through the cycle, but early on in the growth curve if we have it.
Todd Bluedorn - CEO
I won't-- I'm not sure I'd put the full 50% in my model, so I'm not signing up for the 50%.
But let me more qualitatively answer your question, which is we don't have to add brick and mortar.
We don't have to add sales guys.
We don't have to add a whole lot of cost.
If the market's there we'll sell the product to the customers, and we'll be positioned to do that.
Steve Tusa - Analyst
Right.
And do you think there's going to be a rush towards the end of the year as contractors get the word out on these-- you know, the tax incentives running out-- running their course at the end of 2010?
I mean, is the-- do you think the industry is kind of prepared to make that-- make a little bit of a marketing push here?
Todd Bluedorn - CEO
I think, depending on what the lay of the land looks like in third and fourth quarter, we'll react to it.
Your question presupposes that there isn't more stimulus money at the end of 2010.
And so I think we'll have to go through the year, see how the market went in the summertime and where we're at as a company and as a marketplace.
And we'll certainly react to it.
Steve Tusa - Analyst
I won't ask you to comment on a second stimulus package.
So thanks a lot for the color on the market.
Appreciate it.
Todd Bluedorn - CEO
Okay.
Thanks.
Operator
Thank you.
Next we'll go to the line of Glenn Wortmann with Sidoti & Company.
Please go ahead.
Glenn Wortmann - Analyst
Good morning, everyone.
Todd Bluedorn - CEO
Hi, Glenn.
How are you?
Bob Hau - CFO
Hey, Glenn.
Glenn Wortmann - Analyst
I'm just looking at the sequential margin.
Can you just-- was there anything specific going on in say-- in refrigeration and margins fell sequentially but revenues are up?
And then commercial, you know, margins did decline on-- I mean the top was down there.
Was anything specific going on that we should be focused on?
Todd Bluedorn - CEO
No, I don't think you should be concerned about it.
I mean, I-- you know, here's timing of how expenses fall into the P&L, especially at the end of the year.
And also just the seasonality of how our customers buy and some of our international markets and when they grow and when they don't grow.
I think on refrigeration I would look more on the year-over-year margin expansion story in our refrigeration business, which was very strong the third quarter and continued to be very strong in fourth quarter.
On our commercial HVAC business, margins are down.
It just reflects the continued drop in volume.
We continue to take restructuring actions to get out ahead of it.
And, you know, the cost [through all] the system, we just need volume and (inaudible).
Glenn Wortmann - Analyst
Can you just remind us in the residential sales how much Hearth products accounts for?
Todd Bluedorn - CEO
I'm looking at Steve.
Has he ever publicly said?
Steve Harrison - VP IR
Yes, we'll get you that information in just a second.
Glenn Wortmann - Analyst
Okay.
Yes, that's all I got for now.
Okay.
Thank you.
Todd Bluedorn - CEO
Thanks.
Operator
Thank you.
Next we'll go the line of Jeff Hammond with KeyBanc Capital Markets.
Please go ahead.
Jeff Hammond - Analyst
Hey, Todd, just to follow on the balance sheet, I think when you came in a few years back you felt like the balance sheet was under-levered.
You went in and bought back stock, and now we're kind of back to that under-levered scenario again.
So how are you thinking about using the balance sheet, you know, going forward?
Todd Bluedorn - CEO
Well, just to sort of characterize a little bit, you know, three years ago our gross debt to EBITDA, which is how we talk about it, was under 0.5, and now it's 1.1.
So it's not quite as underleveraged, if you will, as it was a few years ago.
I think Bob sort of hinted at it, right, which-- or not hinted at it.
He said.
That we think 1 to 2 debt to EBITDA, as we publicly said, is where we will be.
We'll invest in the business.
We'd love to do M&A where it makes sense, but it's a pretty reasonably consolidated market set of where that might happen.
And then third is we'll give it back to the shareholders, either in dividends or share buyback.
Bob talked about given the recovering economy and our cash generation we're going to restart up the share buyback on the 285 authorization we have.
And at a minimum we would dilute-- excuse me, but we would offset dilution, which on any given year is 1 million to 2 million shares, so at a minimum I think you should expect us to do that.
Jeff Hammond - Analyst
Okay.
Thanks a lot.
Operator
Thank you.
And at this time there are no further questions.
Todd Bluedorn - CEO
(Inaudible).
Yes, Glenn, if you're on the line, our Hearth business is, depending on the quarter, 5% to 10% of our revenue in the res business.
Okay.
I want to thank everyone for joining us.
We expect end markets to continue to show improvement in 2010, led by our OE cycle residential.
We're excited about our new product introductions in residential, commercial and refrigeration and are well positioned to gain share in our target markets.
We remain highly focused on managing productivity and maximizing leverage in the business model 2010 as end-markets condition-- conditions improve.
Thank you for joining us today and have a good day.
Thanks.
Operator
And ladies and gentlemen, that does conclude our conference for today.
Thank you for your participation and for using AT&T Executive Teleconference Service.