Lennox International Inc (LII) 2010 Q2 法說會逐字稿

Good morning ladies and gentlemen.

Welcome to the Lennox International Q2 2010 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 second quarter.

I am here today with Todd Bluedorn, CEO, and Bob Hau, CFO.

Todd will review highlights for the quarter, and Bob will take you through the Company's 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 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 let me turn the call over to CEO, Todd Bluedorn.

Good morning.

Thank you for joining us.

End market conditions continued to improve in the second quarter, and all four of our business segments realized strong revenue and profit growth, with another solid quarter of operational execution to meet market demand.

Revenue was up 11% as reported, and up 10% in constant currency.

The success of our new products and our productivity initiatives helped drive gross margins up 140 basis points to 30.4% , and total segment margin up 220 basis points to 10.1%,a new second quarter record for the Company.

Adjusted EPS from continuing operations was up 45%.

In our residential business segment revenue was up 8% at constant currency.

Residential profit margin was up 230 basis points to 12.7%.

We saw robust growth in the replacement market.

Warm weather helped with cooling degree days above normal and above last year.

The new construction market also showed good growth in the quarter, although as expected it slowed as housing starts softened in May and June with the expiration of the government tax credit.

In the second quarter we successfully launched two major new products in the residential market.

First we introduced a complete new line of compact furnaces that extend our leadership in energy efficiency, comfort, and quietness.

Second, we launched a new advanced residential control system called icomfort, it is simple and intuitive to use, andsynchronizes our most advanced heating and cooling and humidity controlled products, and provides equipment diagnostics.

Icomfort is easy to install and retrofit since it requires only the four basic wires already in the house, and saves our dealer contractors a significant amount of time, in the installation and initial setup of the system.

There is a lot of excitement among our dealer customers about these products, and we expect a lot of success from them.

In our commercial business segment, revenue was up 9% at constant currency.

Commercial profit margin was up 390 basis points to 15.8%.

Replacement business was up in the quarter on the strength of planned replacement business at big box retailers.

New construction business was up slightly from the year ago quarter as well.

On a national account front, we won four new customers in the second quarter, and have won 75 in total since the start of 2007.

Our K-12 school business continued to do well in the second quarter, it was up for than 35% in the first half of the year.

Schools are an area of increased focus for us in 2010, and we are well-positioned with a great product line-up, and a focused sales force.

We expect this business to be up 50% for the year.

As you see in our commercial results, our new products, Energence and Landmark are doing extremely well in the market, and have positioned us for further share gains this year.

Finally in commercial, Europe HVAC grew double digits at constant currency, and was profitable in the quarter.

Turning to our Service Experts business segment, revenue was up 12% at constant currency, and profit margin was up 160 basis points to 7.6%.

We saw solid growth in residential business ,and very strong growth in commercial service, as we further leveraged our relationships with national accounts.

In our Refrigeration business segment, revenue was up 10% at constant currency, Refrigeration profit margin was up 300 basis points to 10.9%.

Growth was led by strong North and South American business, and Europe also was up.

By end market cold storage and supermarkets wee strong, and food services stabilized.

stabilized.

On the strategic initiative front, in June we opened the Global Technology Center in Chennai, India, to support our global R&D and information technology operations.

Chennai has one of the world's most highly trained engineering and information technology resource pools.

We are excited to work with the best and brightest to further extend our technology leadership in innovative HVAC and refrigeration systems and solutions for our markets around the world.

Before I turn it over to Bob, let me talk about our stock repurchase program.

In the second quarter we repurchased $60 million of stock.

We have repurchased approximately $95 million of stock through the first half of the year, or 2.2 million shares to achieve our previously stated full year goal to at least offset normal dilution.

Looking at the second half of the year, we plan to continue the share repurchase on an opportunistic basis.

The total amount for the second half will most likely be less than what we bought back in the first half.

Since 2007 we have repurchased more than $650 million of stock.

As of the end of the second quarter, about $190 million remained under our current stock repurchase authorization.

Now I will turn it over to

Thank you, Todd.

Good morning to everyone.

I will provide some additional commentary on the business segments for the quarter, starting with residential heating and cooling.

In the second quarter revenue from residential heating and cooling was $413 million, up 9%.

Currency had a positive 1 point impact, volume was up 10%, price and mix were down 2%, driven by mix from two factors.

First an increase in the sale of indoor coils and air handlers to support new R410A system installations, and second, the effective of consumers buying equipment at the minimum required level still qualify for the government $1,500 tax credit for high energy efficient systems.

Residential segment profit was $52 million, up 34%, and segment profit margin was 12.7%, up 230 basis points over the second quarter a year ago.

As a standard practice we review our warranty reserve in the second quarter of each year.

This year, the Company had a $6 million favorable adjustment in the quarter, with $4 million of that in residential and $2 million in commercial.

Looking at the second quarter of 2010 adjustment versus the year ago quarter, the adjustment to Residential was $4 million less favorable, and the adjustment in commercial was the same as last year.

Turning to our commercial heating and cooling business, in the second quarter revenue from the commercial business was $176 million, up 8%.

Currency had a negative 1 point impact, volume was up 7%, and price and mix were up 2%.

Segment profit was $28 million, up 44% from the second quarter a year ago.

Segment profit margin was 15.8%, up 390 basis points from the year ago quarter.

Our North America Commercial HVAC revenue was up mid-single digits at constant currency, primarily driven by an increase in planned replacement business at retail national accounts, and strong school business.

Our new product Energence, the most energy efficient rooftop available, saw strong uptake in these markets.

Our Europe commercial HVAC revenue grew low-double digits at constant currency, on strong growth in eastern Europe in the quarter.

Moving to our Service Experts business, in the second quarter revenue was $168 million, up 14%.

Currency had a positive 2 point impact, volume was up 7%, price and mix was up 5% due to very strong commercial services growth in the quarter.

Segment profit in the second quarter was $13 million, up 45%.

Segment profit margin was 7.6%, up 160 basis points from the second quarter a year ago.

In our Refrigeration segment revenue in the second quarter was $140 million, up 14%.

Currency had a positive 4 point impact, volume was up 8%, and price and mix were up 2%.

Refrigeration segment profit was $15 million in the second quarter, up 59%.

Segment profit margin was 10.9%, up 300 basis points.

Restructuring charges and other items in the second quarter were $6.0 million after tax.

This included $2.1 million for after tax for restructuring activities, and $2.9 million for a special legal contingency charge related to litigation.

In total, these charges impacted GAAP EPS from continuing operations by $0.11 in the second quarter.

Corporate expenses were $20 million in the second quarter, compared to $15 million in the prior year quarter on higher variable compensation expenses.

For 2010 our corporate expense guidance remains approximately $65 million.

SG&A was $181 million in the second quarter versus $164 million in the prior year quarter, up on higher new product launch expenses and variable compensation expense.

For the second quarter, cash from operations was $15 million.

In the second quarter a year ago cash from operations was $66 million as inventories were being worked on in declining market conditions.

The second quarter last year last year also included the benefit of a $14 million return of collateral posted for hedges.

Capital spending was $9 million in the second quarter, compared to $12 million in the prior year quarter, and free cash flow was $5 million in the second quarter, compared to $55 million a year ago.

Working capital as a percent of trailing 12-month sales for the Company was 16.7%, compared to 18.7% in the prior year period.

Second quarter ending working capital ratio was 19%, compared to 18% a year ago.

Looking at liquidity, cash and cash equivalents were $62 million at the end of June, and debt to EBITDA was 1.3 ending the second quarter.

Total debt was $356 million at the end of the quarter, after the completion of our 7 year notes offering of $200 million at 4.90% interest.

The offering locked in a low fixed rate in the Company's capital structure and extended maturities out to 2017.

Before I turn it over to Q&A, I will briefly talk about our updated outlook for 2010.

Looking at our underlying market assumptions, we now expect North American residential market to be up high single digits for the full year, versus our previous guidance of up mid-single digits.

We now expect North American Unitary market to be down mid-single digits for the full year, versus our prior assumption of down low-double digits.

And we expect the global refrigeration market to be up low single digits for the full year led by strength in North America.

Based on these assumptions and with the first half of the year behind us, we are raising our revenue growth guidance for the full year from a range of up 4% to 7%, to a range of up 5% to 8%.

The new guidance range includes a positive 1 point impact from foreign currency versus the prior range that included a 2 point impact, so on constant currency we are raising the revenue guidance range by 2 points, from a prior range of up 2% to 5%, to a new range of up 4 to 7%.

While we have been encouraged by the 8% revenue growth at constant currency in the first half, our guidance implies about half the rate in the second half, due in part to the more difficult year-over-year comparisons, specifically in the fourth quarter, and of course, there are a lot of macroeconomic uncertainties, from unemployment to consumer confidence to housing, to name just a few.

We are on track with our plans to save $35 million from our global sourcing initiatives, and $15 million from our announced restructuring projects in 2010.

However if commodities flip on us from a tailwind to a headwind, we still expect $20 million to $25 million of headwind in the second half from higher commodity prices.

We are raising our 2010 guidance for adjusted EPS from our continuing operations, from a range of $1.90 to $2.30, to a new range of $2.20 to $2.45.

Our GAAP EPS guidance range is $1.98 to $2.23,reflecting the higher adjusted EPS guidance, and the full year impact of our announced restructuring activities through the second quarter.

Tax rate is still expected to be 35% to 36% for the full year.

Our average diluted share count for the full year is expected to be approximately 55 million to 56 million shares, and capital spending guidance for 2010 is now $65 million, versus prior guidance of $75 million.

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

Thank you.

(Operator Instructions).

The first question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

Please go ahead.

Hi, guys.

Good morning.

Just on the guidance, it looks like if you take your back half and apply guidance at the mid point, you are about flat on the year-over-year basis.

I understand the commodity headwind, but I would think between productivity and growth in the business you would be doing better than that at the midpoint.

I mean, anything I am missing, any kind of aberrations in the commercial strength in 2Q that should give us any pause in the second half?

I think it goes down to some of the points that you raised.

One is we have commodities of $20 million to $25 million headwind second half.

The other point as Bob talked about in his comments, at constant currency we had a growth rate about 8% first half, in our guidance we are implying about half of that for the second half.

We may be wrong, we hope it is more robust than that, but some of the things we see are the macroeconomic crosswinds that everyone sees, and plus fourth quarter last year the resi market as an industry was up 20%, so the comps in the fourth quarter are a bit more difficult than they were during the first three quarters of the year.

Okay.

And then anything as you look into the July that suggests you are losing momentum in commercial res, in terms of the selling season?

No just the opposite, the weather is helping.

It is warm most places in the country, and cooling degree days are up, so we are tracking well in July, and the big switchover in third quarter is going to be how September lays out, because that is when we on the shoulder season where we switchover from cooling to heating, but so far in July things are tracking well.

Okay.

Just to clarify on the fourth quarter comp, most of the industry growth was R22?

I mean, you guys didn't really participate in that?

When we called it at the time, we said industry was up about 20 points, and we thought 4 to 5 points of that was R22, so the portion of the industry uptick that we participated in we thought was up about 15 points from 2008.

Okay.

Great.

Last question.

You talked about commercial service being strong and synergies kind of between the equipment business and service.

Can you just talk about what you are doing there to work more closely, and where specifically you are seeing success?

We reorganized about a year ago to have portions of the commercial service business work more closely with our commercial equipment business, and what we see is many of our large, especially in the current environment where people are looking to outsource things, and also want to have a national footprint, that they are talking to us about specifically big box retailers who we have very close relationships with, are talking to us about doing planned replacement programs, planned maintenance programs, and emergency maintenance programs, and we are well-positioned to do that with our national footprint, in a division of ours called IBS, and so national account services, and so we re doing a very good job with that.

Okay, great.

I will get back in the queue.

Thank you.

The next question comes from the line of Steve Tusa with JPMorgan, please go ahead.

Good morning.

Just on the commercial side, digging a little bit deeper, could you just maybe talk about some of the growth drivers there in some of the verticals, and whether what you are seeing there is driven by the weather, or some pent up demand because nobody was doing anything for the last couple of years?Could you maybe dig into the medium term trends in commercial, and how we should expect that to grow over the next couple of quarter if it is indeed maintaining the growth rate?

I don't think Commercial is weather-related.

I think it is a couple of things.

I think on our retail customers on a year-over-year basis, it is pent up demand, so what we are seeing is retailers who deferred planned replacement last year, are now completing planned replacement.

What I mean by that is sophisticated retailers have detailed models where they know how often they need to sweep a roof and replace the rooftops, based on a trade-off between operating costs and capital costs.

Last year in the throes of the economic crisis, they deferred what the models were telling them, and were trading cash for operating costs.

And what we see this year, is given our over-exposure in that segment, and we are big beneficiaries of that.

Point one.

Point two, we talked about it in the script we are seeing great traction in the school markets.

It is an area where we realigned our sales force.

We have the right product, and year-to-date we are up 35% on that market, and we think we are going to be up 50% full year.

And I think the third point underlying both of those is our new products Energence and Landmark, are just of sort of in the sweet spots of the marketplace, and we are finding good success with the new products.

On the margin there, the 15.8, a pretty big number, I think you did a 16% back in third quarter of 2008.

Do these margins get better as this business continues to improve?

Is there something unusual that you have in the 15 mode, I guess the commodities hit that a bit over the next couple of quarter.

But how should we think about how good these margins can actually be, if you do see a sustainable upturn in the business?

In this quarter there was nothing abnormal in the numbers.

What it reflects is volume growth flowing across a lower cost fixed asset base, lower material costs from our global sourcing initiative, and also the costs that we designed out of our new products, Energence and Landmark.

To your point over the next couple of quarters there will be some commodity headwinds, but you sort of wash that out and look longer term as the market recovers, we expect the margins to continue to rise.

So you can see nice incrementals there, comfortably in excess of a 30% range over the long-term over the next few years?

I understand your question, I am not going to directly answer it, I mean we have talked about our long-term margins incrementals as an enterprise, as being 25% and so between now and 2012.

On the residential side there is a lot of noise this quarter, and I think it is maybe a little bit of a hangover affect from R22, perhaps Watsco had their same store sales increase of 25%, Carrier and Trane putting up mid-teens numbers, you guys come out with 9%.

Can you maybe talk about what you think is going, I guess Trane talked about the motor bearing market being up 9%.

I mean who is losing share here, or is it again, just kind of dynamics, around, it is unclear because some guys still have R22 at least in the distribution channels?

I am just curious what your take is on all of the moving parts in resi, and how you guys thought you fared from a share perspective?

The Watsco number is an outlier that I don't completely understand.

Versus Carrier and Trane, if you look at our core Lennox residential business, we were up double digits, we are off maybe a tick or two below where they were at, but sort of giving the timing of them reloading, and the pendant distribution and we owning all of our distribution, I think that is pretty close.

Where we didn't do as well in the quarter was in our Allied two-step brands, but we had a good first quarter there, and I think we will have a good balance of the year, so again I think it is the timing of reloading.

High level I think we did fine for the quarter.

We didn't gain share, we probably lost a little bit of share in our two-step, but I think we will gain it back in the second half of the year.

Got you.

One more question, is there because of the weather, do you feel like there may be a little bit of an unusual restock here later in the third quarter, or is the channel I guess industry-wide, how do you guys feel about your inventory, your production rates, heading into the back half of the year?

Anything unusual that is being driven by the weather here from a comp perspective?

The obvious statement is the weather helps, and if it continues in the third quarter it even helps more.

The whole reloading phenomena really affects our two-step, our Allied.

I think that was my comment earlier.

To be clear on my comment earlier, I think we will see more volume in the third and fourth quarter out of that business as we load up some of our distributors in the way that we did in the second quarter.

On the Lennox brand, since we own distribution, it tends to flow more evenly, if we see end use demand, then the product flows.

Got you.

Okay, thanks a lot.

Great, thanks.

The next question comes from the line of Robert Wertheimer with Morgan Stanley.

Thanks, good morning everybody.

I guess I wanted to go back on some of the same ground, on the commercial side you had said that this was both a resumption to sort of normalcy and scheduled replacement.

The question is, are you confident that this is not a bounce-back?

In other words people deferred last year, and they bounced above, or is this just a straight up return to normalcy?

I understand the question.

I am just pausing.

I don't think it's quite a bounce-back to normalcy, and what I mean by that, is if you look at the volume rates of commercial versus 2008 or 2007, we are still down, the industry is still down on an absolute basis, so it is a bounce-back from last year, but sort of the color that I put around that, is when you talk to the customers, there is sort of a normalcy about how they are thinking about things, where they are making more optimal operating cost decisions, rather than managing cash.

I would expect that over the succeeding quarters as the economy continues to stabilize, we will see even more of that released, point one.

Point two is we have talked about all of the national accounts that we have won over the last few years, 75 national accounts since the end of 2007.

When we won those accounts last year, they weren't buying a whole lot of equipment, so you didn't see it flow through our P&L.

We are now seeing the fruits of that labor flow its way across the P&L, which is those 75 national accounts if you will, are now starting to buy equipment.

That makes sense.

Are you pretty comfortable that the new build is sort of a wash as to the decline, and new construction we have seen the trough on that, the numbers are pretty low obviously, so I am just questioning whether you --?

On the resi side or the commercial side?

Commercial, I am sorry.

I think we are close to the bottom, and what we saw in the quarter was a pickup on a year-over-year basis on new construction, albeit from a very low base.

And then also, again, sorry, on the commercial side, I am sorry I just got distracted.

I beg your pardon.

Well, let me stop there I will get back in queue.

Are you trying to add up all of those big numbers?

Well, the question was I wasn't sure how to ask it.

The question is really, are you going to have a weather effect, right?

You mentioned that the people have a more stable maintenance, so they are less able or less willing to defer than the resi side.

But I don't know whether your comments to a strong July, whether you are starting to see a weather effect.

And whether you think that could last a year or more?

Right, you see a weather effect in commercial, but it is less pronounced than you do in resi.

And it is also less pronounced with the verticals where we play, so retailers have planned replacement, they so some emergency replacement, but it is predominantly planned replacement.

Schools tend to be planned replacement, some emergency replacement, but they try to work their way through the summer if things are broken.

And the emergency replacement has been a big focus of ours, and the Landmark product is focused on that the question has been a business focus of ours and the landmark product is focused on that marketplace, so yes, the weather is going to help us, but just given our split of verticals, we are a little less exposed to weather in the commercial, than maybe some of the other competitors are.

Perfect, thank you.

The next question comes from Keith Hughes with SunTrust, please go ahead.

Thank you.

I just wanted to follow-up on your comments on the price/mix and then residential, about buying at a minimum level still for the tax credit?Can you expand on that a little bit?

Yes.

When we saw the $1,500 tax cut for high efficiency, it is obviously mixing up, but it is on a year-over-year basis what we see is the type of product that people are using to get to $1,500 tax credit is more optimized to be right on the line.

What I mean by that is last year when the tax credit came out, we sold a lot of 17 SEER air-conditioning systems, and our highest end furnace product line, is sort of packaged together systems that got the $1,500.

On the succeeding year, us and our competitors have tweaked our systems so we have taken some efficiency out of the product and cost, but have gotten it right on top of the $1,500 tax credit, so while we are quote-unquote mixing up, the product that we are selling in many cases to optimize the $1,500 tax credit is a little lower margin product than what we sold last year.

When you are talking about packaged products, you are talking about you can change the tonnage of the air handlers associated with the coil and --?

Correct.

You optimize the system, right, so you drive to an efficiency standard by matching the coil and the outdoor unit and the furnace, and you can optimize them all in multiple and different ways.

Building on that, is there any was to tell at this point how much demand, regardless of how you get to the tax credit package, how much demand or volume that is driving, versus weather or some pent-up demand and things like that at this point?

I understand the question.

I am not really sure.

I mean, as you suggest, lots of cross currents this year.

I think I made one point which is given the weather, you would expect the market to be up, and it was.

What we have said over time has been we think, and we think we are seeing some pent-up demand sort of on the margins through the vision that we can see with our service experts business, we think there is a move towards replace from repair on the margins.

Then the final piece is we have felt that the tax credits have been more about mixing up rather than driving demand, but I am sure on the margins it is also driving some demand.

All right, thank you.

The next question come from the line of Glenn Wortman from Sidoti & Company.

Good morning everyone.

On the education piece, first of all, how large of a business is that for you, and are these improvements sustainable, is that anything one-time in nature going on there, perhaps some stimulus help?

It is less than 10% of our commercial segment, number one.

Number two is the stimulus money is helping, and what we are seeing is it is flowing through, and the focus on high efficiency plays to our Energence product line.

And again, I mentioned earlier, we realigned our sales force and have a direct vertical sales force that is focused on that market, and I think that is helping us also.

On the planned replacements is this always the busiest quarter for planned replacements, and how should we think about that sequentially into the third quarter?

That is a good question.

I want to say it sort of bleeds between second and third quarter.

The retailers want to have everything done by Thanksgiving on any planned replacement, so it is this quarter and early in the third quarter.

And finally, can you just give us an update on the overall pricing environment for residential and commercial?

Say that one more time?

The overall pricing environment, are there any projected price increases on the table, or are pricing falling?

What we were able to do in commercial is when you have a new widget then you price the new widget, so with Energence and with Landmark, we were able to price the product for the value.

On our residential product line, as the new furnaces rolled out, we have been able to sort of reposition the price of the new furnace.

On the other residential product line, still a difficult environment to be getting price in the marketplace.

All right, thanks for your time.

The next question comes from the line of Michael Coleman with Sterne Agee, please go ahead.

Good morning.

Could you just update your distribution realignment strategy where you are at year-to-date on that?

Yes.

I am just somewhat shuffling notes to make sure I have the right numbers in front of me, Michael.

We continue to make progress very consistent with what we have been telling you, that we have five of the regional distribution centers open, Atlanta, Columbus, Calgary, Toronto, and Dallas.

We had 40 storefronts open out of the 120 by the end of Q2, and then 12 additional new storefronts that we are going to have in place by the balance of 2010.

The whole Southeast network where I have talked about, where we have the regional distribution center and the storefronts was completed in Q2, and we are still tracking to get the $25 million in incremental EBIT in 2012 from the initiative, about half of it from cost savings, and half of it from incremental share gain, and we are seeing that kind of performance in our Southeast region.

Okay.

So the Southeast region is performing to your expectations on the top line as well?

Correct.

Okay.

In terms of your guidance, I know you have addressed this, but in terms of the season and the weather and so forth, I mean, are you expecting residential to be down sequentially in terms of revenues top line?

Sequentially it is always down as we go into fourth quarter, right?

No, I mean from the second to the third quarter, given the acceleration of June, July.

I realize September there is some contingency there in terms of the heating season and so forth.

But in terms of the third quarter relative to the second quarter on residential, just in dollars, would your guidance say that is down?

I understand the question.

As you know, we don't give quarterly guidance.

I think I would just reiterate a couple things I said before.

July has been warm, so we are off to a good start for the quarter.

Two is Q4 last year was where the markets spiked up in resi, so in the conversation I had with Jeff, industry up 20, we sort of called last year, and then maybe 5 points of that was R22, and so 15 points of it was base market being up.

Q4 is where the comps are the most difficult.

Okay.

Good.

If you could remind on your steel purchases in terms of how the lag in terms of how that flows through to your P&L, there is some softening in steel prices, and further expectations in softening in steel prices.

What is it, I think a three-month lag approximately, in terms of when it rolls through your P&L?

Correct.

A couple of things.

One, it is a three-month lag, so whatever the CRU pricing was during the prior quarter we have negotiated a discount with the mills and the service centers, and that is what we buy in the current quarter.

And our call on commodities doesn't reflect any softening in steel.

We are sort of looking at a steel market at least as much today that hasn't softened, if you are right then that is opportunity.

Okay thank you.

Thanks.

The next question comes from the line of Steve Tusa with JPMorgan.

One more follow-up, what was commodity, was there any commodity impact in the quarter?

When we think about your forecast for commodity costs in the second half, how does that kind of split out between the businesses?

We had a bit of headwind in second quarter, $2 million to $3 million of commodity headwind after having tailwind in the first quarter, I believe I will look at Bob, $5 million or $6 million of tailwind in the first quarter.

Second half of the year in terms of the headwind, I would tend to view is at look at the three equipment businesses, and lay it out pro rata based on revenue, and I think in order of magnitude that gets you where you need to be.

Okay, $3 million of headwind in the second, and then something in the range of like $10 million or whatever, split them both in the third and the fourth, about $12 million year-over-year, so if I just took, this quarter's incremental margin of I think reported it was around 37%, and I hit that with, I don't know, $10 million of extra commodity headwind, I am still getting a low to mid-20s incremental margin?Is that a fair way to look at it, or are there other puts and takes here that would make that significantly different medium term?

I think the only thing that makes it a little bit different would be the volume flowing across our factory fixed assets isn't the same during the second half of the year as the first half of the year, so when you think about, I understand it is not an incremental margin story, but the layout across the fixed costs, and then the second point is, given our refinancing, the interest expense is going to be higher during the second half of the year than the first half of the year.

Okay.

Thanks a lot.

Appreciate it.

Appreciate the details.

(Operator Instructions).

The next question comes from the line of Jeff Hammond from KeyBanc Capital Markets.

Just a couple of housekeeping items.

On CapEx, you lowered the forecast, is this just project timing, or do you think you are holding back on capital projects, or managing those better?

No, Jeff, you hit it, it is project timing.

Okay.

Working capital, it looks like a pretty big use, which I understand there is some seasonality there in the front half.

But how should we look at working capital for the year, how should we think about free cash flow for the year, it looked a little light in the second quarter?

If you go back in time, historically our cash flow is back half weighted, so you are right, we have used cash in the first half of the year, but that is certainly the norm as you build inventory going into the second and third quarter.

Our new product introductions, the rate of new product introductions has caused that to be a little bit higher than norm, but not out of ordinary, and the second half is historically, and will be cash positive for us.

When you look at the underlying operational metrics about inventory turns and Receivable collection, and sort of all of the operational metrics around working capital, we made progress last year, we continue to make some pretty good progress this year.

As you suggested, just so far has been a reflection of reinflating the business when revenue is up 10%.

Finally what is the end share count in the quarter, and I think you might have mentioned the share count you are expecting for the year?

Yes, we are expecting 55 million to 56 million for the year, and let me look real quick for shard count, ending the quarter just over 56 million.

Okay, great, thanks guys.

There are no further questions.

Please continue.

Great.

Thanks for joining us.

We are encouraged by the improvement in end markets that we have seen in the first half of the year.

And are raising our end market assumptions for the full year, as well as our guidance for 2010 revenue and earnings per share growth.

Obviously there are a lot of macroeconomic uncertainties, and in the second half of the year we face strong commodity headwinds and year-over-year comparisons become more difficult.

Lennox will remain focused on driving revenue growth and profits through strong operational execution and continued productivity improvements.

Thank you all for joining us today.

Ladies and gentlemen, that does complete our conference for today.

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