Lennox International Inc (LII) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Lennox International third-quarter 2015 earnings conference call.

(Operator Instructions) As a reminder, this call is being recorded.

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

Please go ahead, sir.

Good morning.

Thank you for joining us for this review of Lennox International's financial performance for the third quarter of 2015.

I'm here today with Chairman and CEO Todd Bluedorn and CFO Joe Reitmeier.

Todd will review key points for the quarter and year and Joe will take you through the Company's financial performance and outlook.

To give everyone time to ask questions in the Q&A, please limit yourself initially to a couple of questions or follow-ups and requeue for any additional questions.

In the earnings release we issued this morning, we have included the necessary reconciliation of the 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 website at www.lennoxinternational.com, where it will also be archived 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 risk and uncertainties that could cause actual results to differ materially from such statements.

For information concerning these risk and uncertainties, see Lennox International's publicly available filings with the SEC.

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

Before I turn the call over to Todd, I would like to announce the date of our annual investment community meeting, which will be the morning of Wednesday, December 16 in New York City.

Please mark your calendars.

Invitations and more details will follow.

The event will also be webcast.

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

Thanks, Steve.

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

With significant margin expansion across all three business segments, Lennox International set a new high for total segment margin on strong revenue growth in the third quarter.

Total Company revenue was up 11% at constant currency, with growth in all 3 businesses.

Total segment margin for the Company expanded 140 basis points to a record 13.7%, and adjusted EPS from continuing operations rose 26% to a third-quarter record: $1.82.

In our residential business, we set third-quarter records for revenue, margin, and profit.

Revenue was up 13% at constant currency on broad strength in both replacement and new construction.

Residential margin expanded 240 basis points to 17.4%, and residential profit was up 30%.

Our residential business continued to benefit from favorable price and a richer mix of business year over year in the third quarter.

Improved mix benefited from the regulatory transition of 14 SEER air conditioners in the south and southwest regions of the United States and for heat pumps nationally.

14 SEER and above air conditioners and heat pumps were 59% of cooling product shipments in the quarter, up 17 points from the third quarter last year.

14 SEER pricing in the market has been disciplined.

On the operational front, we opened 5 new Lennox PartsPlus stores in the third quarter.

We currently have 175 stores across North America and now expect 184 total stores by the end of the year.

Our target for 2017 remains 250 locations.

Turning to our commercial business, segment profit and margins set new highs on 8% revenue growth at constant currency.

Commercial margins expanded 70 basis points to 18.2% in the third quarter.

Segment profit rose 6% to a new high of $45 million.

In North America, non-national account revenue was up low double digits at constant currency in the third quarter.

We are seeing a broad commercial recovery continue, including mid-teens revenue growth in emergency replacement.

As previously discussed, national account business in North America has been choppy this year.

National account equipment revenue was flat in the first half of the year, down in the first quarter, up in the second quarter, and now down mid single-digits in third quarter.

Given the uncertain retail sales environment this year, we are expecting national account equipment business to continue to be soft in the fourth quarter.

The fast growth in our non-national account business compared to the softness in our national account business, which features premium high-efficiency systems, creates a lower mix that is a headwind on the business in the second half the year.

Lennox continues to win new national accounts with our high-efficiency system and advanced controls and has brought 20 new national account customers on board this year, including 2 more in the third quarter.

Our national account service business saw strong growth in the third quarter, with revenue up mid-teens.

Our VRF business, while still small, saw solid expansion.

In Europe, commercial HVAC revenue was up high single-digits at constant currency in the third quarter.

On the operational front, we opened up another commercial distribution center in North America in the third quarter, for a total of 44 commercial dedicated locations, a key element to our growth strategy in the emergency replacement market.

In refrigeration, revenue was up 8% at constant currency.

Refrigeration margin expanded 220 basis points to 10.7% and segment profit was up 23% from the prior-year quarter.

Looking at revenue of constant currency by region, North America and Europe were up low double digits in the third quarter.

South America was up mid-teens, Australia was flat, and Asia was down mid single-digits.

While the third quarter saw strong top-line growth and margin expansion, looking ahead, we expect more choppiness in international markets and are applying additional caution to our outlook in those regions.

We expect refrigeration segment margin to be flat on a full-year basis versus our outlook earlier in the year for segment margin to be up as much is 50 basis points.

But I would point out this guide, it still indicates solid margin expansion in the fourth quarter for refrigeration.

Looking at 2015 guidance for the Company overall, we are narrowing guidance for revenue growth at constant currency: from 4% to 7% to a new range of 5% to 7%.

And we are narrowing adjusted EPS from continuing operations guidance from $5.25 to $5.50 to a new range of $5.25 to $5.40.

In summary, overall for 2015, we expect another record year for Lennox International, strong revenue growth, and new highs for total segment margin and profit.

Now I will turn it over to Joe.

Thank you, Todd.

Good morning, everyone.

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

In the third quarter, revenue from residential heating and cooling was a third-quarter record $518 million, which was up 12%.

Foreign exchange had a negative 1% impact on revenue.

Volume was up 10%, and price and mix combined was up 3%.

Residential profit in the third quarter was a record third quarter, $90 million, which was up 30% from the prior-year quarter.

Segment profit margin was a third-quarter record 17.4%, which was up 240 basis points.

Segment profit was positively impacted by higher volume, favorable price and mix, lower material costs, and higher productivity.

Partial offsets included unfavorable foreign exchange and investments in SG&A and distribution expansion.

Now turning to our commercial heating and cooling business.

In the third quarter, commercial revenue was $247 million, which was up 2%.

Foreign exchange had a negative 6% impact on revenue.

Volume was up 7% and price and mix combined was up 1%.

North America commercial HVAC equipment and service revenue was up mid single-digits.

Europe commercial HVAC revenue was down low double digits, including the negative foreign exchange impact, although up high single-digits at constant currency, as Todd had mentioned.

Commercial segment profit in the third quarter was a record $45 million, which was up 6% from the prior-year quarter.

Segment profit margin was a record 18.2%, which was up 70 basis points.

Segment profit was positively impacted by higher volume, favorable price, and lower material costs, with partial offsets from negative mix, unfavorable foreign exchange, and investments in SG&A.

In refrigeration, revenue in the third quarter was $190 million, which was down 2%.

Foreign exchange had a negative 10% on revenue.

Volume was up 7% and price and mix combined was up 1%.

From a regional perspective, Todd already addressed revenue growth in constant currency.

On a reported basis, including the negative impact from currency, North America was up high single-digits, Europe was down high single-digits, Asia-Pacific was down about 20%, and South America was down more than 20%.

Refrigeration segment profit was $20 million, which was up 23% from the prior-year quarter.

Segment profit margin was 10.7%, which was up 220 basis points.

Segment profit was positively impacted by higher volume, favorable price, lower material costs, lower SG&A, and higher productivity.

Partial offsets included negative mix in the North American supermarket business and unfavorable foreign exchange.

Regarding special items in the third quarter, the Company had after-tax charges of $2.9 million, including $800,000 for special legal contingency charges, $700,000 related to contractor tax payments in a non-US subsidiary, and $500,000 for the net change in unrealized losses on unsettled futures contracts.

Corporate expenses were $24 million in the third quarter compared to $18 million in the same period a year ago.

Overall, SG&A was $144 million in the third quarter compared to $141 million for the prior quarter.

Cash from operations in the third quarter was $159 million, which was up $97 million from the prior-year quarter.

We continue to monetize in 13 SEER inventory we strategically built in the fourth quarter of 2014 to support our customers in the minimum efficiency regulatory transition affected for certain products at the start of 2015.

Capital expenditures were $14 million in the third quarter compared to $19 million in the quarter a year ago.

Free cash flow was $145 million for the third quarter compared to $78 million in the prior-year quarter.

Total cash and cash equivalents were $35 million at the end of September, and total debt was $918 million.

And we ended the quarter with a debt to EBITDA ratio of 2.1.

Now turning to our outlook for 2015.

For the residential market in North America, we continue to expect HVAC shipments to be up mid single-digits for the industry.

For the commercial unitary market in North America, we now expect HVAC shipments to be up mid single-digits versus the prior expectation for low single-digit growth for the industry.

As Todd mentioned, the market growth being driven more by non-national account business mix is now a headwind.

For the refrigeration market in North America, we continue to expect industry shipments to be down low single-digits for the year.

However, continue to expect our refrigeration business to do significantly better on the strength of specific national account business.

For refrigeration markets outside of North America, we have seen choppy market conditions and expect this to continue to be the case near term.

With these underlying market assumptions, our performance year to date, and one quarter to go left in the year, we are narrowing revenue growth guidance at constant currency from 4% to 7% to a new range of 5% to 7% for the Company in 2015.

We still expect a negative 3 point impact from foreign exchange for revenue growth guidance of 2% to 4% in actual currency versus prior guidance of 1% to 4% for the full year.

We are narrowing guidance for adjusted EPS from continuing operations for the full year: from $5.25 to $5.50 to a new range of $5.25 to $5.40.

Incorporating this change and $0.06 more of special charges in the third quarter, guidance for GAAP EPS from continuing operations moves to a range of $5.08 to $5.23 for the full year.

Now looking at the headwinds for 2015 on a full-year basis, we continue to expect foreign exchange to have a $20 million negative impact on earnings net of specific price increases that we have enacted to help mitigate unfavorable foreign exchange movements.

Most of this headwind is coming from the Canadian dollar and the Australian dollar.

The mid-2014 repeal of the carbon tax in Australia had a negative $10 million impact on us in 2015.

Corporate expense guidance remains $80 million for the full year, up $6 million from last year as we make some investments in the businesses to support the Company's growth.

A headwind of $3 million is still expected from investments in VRF for the year, and we have ongoing investments in the expansion of our residential and commercial distribution network across North America as well.

Now looking at the tailwinds for 2015 on a full-year basis.

On the commodities front, we continue to see a $15 million benefit to earnings from lower metal prices -- copper, steel, and aluminum -- as well as lower fuel costs year over year.

We continue to expect $40 million of savings from our sourcing and engineering-led cost reduction programs and we still expect $10 million of incremental price for the full year.

And this is separate from the price we are capturing specifically to help offset negative foreign exchange.

We are on track for about $4 million from incremental savings this year in our residential business from our second plant in Mexico, and we continue to expect residential mix to be a $5 million benefit in 2015.

And now I will finish up with just a few more guidance points.

We still expect net interest expense for the year of nearly $25 million.

Our effective tax rate guidance remains 34% to 35% on a full-year basis.

We continue to expect the weighted average diluted share count for the full year to be approximately 45 million shares.

Capital expenditures are still expected to be $80 million for the year.

And for free cash flow, we are now targeting $240 million for the full year compared to our prior target of $265 million.

And this is primarily due to the residential inventory positioning for the quarter and as we move into 2016, which includes some 13 SEER inventory for the ongoing regulatory transition.

And with that, we will go to Q&A.

(Operator Instructions) Jeff Hammond, KeyBanc Capital Markets.

So pretty good strength in commercial and you talked about the nuances between national accounts and emergency replacement.

Can you speak to some of the more mixed macro data points we're seeing and anything that gives you pause about just commercial recovery in general?

Jeff, it continues to percolate for us or bubble along.

And in commercial, we continue to see the broad recovery, as we talked about in the call.

I think we're certainly gaining share.

We are happy with the mid-teens growth in emergency replacement and the overall growth in our non-national account business, as we talked about on national accounts.

There is chunkiness and softness as some of these replacement projects get pushed out.

And there's certainly been some headlines from some large customers -- or certainly with Walmart in the last few days, but we knew a lot of that.

They've been in conversation with us.

And so overall, it still feels solid.

As we enter fourth quarter, our backlog in commercial is flat year over year.

And so we're reflecting some caution I think in our guide.

But so far, things continue to be pretty solid.

Okay.

And then just on price costs, I'm surprised you didn't take that number up.

Can you maybe just speak to where you are seeing additional opportunity for lower input costs and maybe how some of that rolls into 2016 based on hedges?

The lower -- as commodities have gone down through the year.

From about July on, it's been more of a 2016 story than a 2015 story.

As the bulk of our hedges are through the -- in 2016 that we are buying very little on the spot at this point for 2015.

Okay.

Thanks, guys.

Steve Tusa, JPMorgan.

So I'm still not quite sure why the top end is clipped.

Is that just the mix dynamics in commercial that you are reflecting there for the EPS guide?

I think it reflects two things.

One is the softness in commercial HVAC and national accounts, which results in lower mix.

And then the caution that we talked about on international markets -- I mean, softness in refrigeration in Europe and Brazil, and to a lesser degree, Australia and China.

And so that's what --

Okay.

That's what the clip -- reflects those two items.

Okay, that makes sense.

On the resi front -- so volumes are up 10%.

I guess you are still holding some of the 13 SEER.

How would you describe the demand dynamic there with -- are you a bit surprised that you haven't -- is the lack of sellthrough on 13 SEER a bit of a pleasant surprise?

Or is that something that you planned on having a little bit of a tail on the inventory front heading into 2016?

We planned on having a tail going into 2016, and the demand for 13 SEER has been -- quite frankly, it's been about where we thought it had been.

We review that monthly and it's tracking about where we thought it would be.

The pricing support that we've been able to keep with 14 SEER has been a pleasant surprise and we've reflected that in some of the -- in the mix number that we raised last call.

But we always wanted -- quite frankly, wanted to go into 2016 with some inventory of 13 SEER.

I think you always want to have the lowest cost option in the marketplace.

And we have until July to sell it and one of the advantages of owning our own distribution is this stuff doesn't let us.

If we have some stuff in July, we will ship it north and sell it up there.

Got it; makes sense.

And then just lastly on the Walmart front, is there any costs that you've kind of put up to support that that would be at risk of being an overhang if production becomes a bit of an issue next year or going forward with the Walmart business, given that you are a little bit more leveraged there now?

Can you ask the question one more time?

Was there any kind of costs that was put up to support all this Walmart business and the ramp this year and in refrigeration.

And you know, if that remains relatively weak heading into next year and perhaps in 2017, is there stuff that you're going to have to then take out?

The bottom line is is this kind of an unusual one-time revenue bump that you've had to put cost into that creates some risk going forward?

In the refrigeration business, specifically to your point, we've added some cost certainly in our North America refrigeration [cost your warrant] to support the additional demand from Walmart.

Good news is we are seeing everything we thought we would see second half of the year and we expect to continue to see some in -- increases in 2016.

I think that is all consistent with their public comments over the last week.

We've been in conversations with them nonstop over the last six months and know where they are at.

But the honest -- the truthful answer to your question is if volume goes down, we will rip out costs.

We know how to do that and we will adjust our cost structure if we had to.

Okay.

One more quick question for you.

There's a bit a concern that oil and gas is hitting everything that's industrial-related, which is not too much of a surprise, given all the CapEx that's involved there.

There is a bit of a concern this is going to kind of leak into the more important parts of the economy, like the consumer.

You guys are down in Texas, I guess, in your business -- in your HVAC business.

Are you seeing anything there from an economic macro perspective that has changed the behavior of consumers or even your commercial customers that would be at all linked to what's happening in oil and gas and regions related to that?

No.

I keep checking, keep pushing, keep asking.

Even in Houston, which is more tied to oil and gas then we are here in the Metroplex in Dallas, builders are still building, there's still new construction, lots of stuff going on in the Woodlands, for example, in new construction.

And so the market continues to percolate.

I understand the question and I understand people are looking, but you'd have to really look hard in our business to think lower oil and gas is bad news for us.

It's good news.

We are a distributed product business, so our cost to distribute product goes down and it puts more dollars in the consumer's pocket with lower gas prices.

So I understand the macroeconomic implications to many industrials, but not to be too jargonistic, we are sort of a safe harbor on this one.

I don't think it really impacts us, except in a positive way.

Right.

Okay, thanks a lot.

Appreciate it.

Rich Kwas, Wells Fargo Securities.

So Todd -- so on the non-res stuff, though, as you look at some of the macro indicators here weaken lately, and you talked about the non-national account being pretty strong Q3, just to ask it a different way, what do you look at in terms of your business from a macro standpoint?

What has the most influence when you look forward here over the next 6 to 12 months?

Is there a particular metric that you follow?

I know obviously you have your orders and what not and you are weighted more toward retail, but what are you looking at right now?

No, we're looking at the same thing you are.

We're looking at the architectural forecasts; we're looking at new construction being put in.

But the honest answer is we spend a lot of time talking to our customers and so it's a lot of micro rather than macro, where we are talking to contractors who know what engineers are working on who are talking to owners and you get a flavor of what's happening in the verticals that we participate in.

And schools continues to sort of chug along, light manufacturing continues to chug along, small rise office buildings continues to chug along.

And I get that things can change, but beyond the headlines, things continue to chug along for us in the verticals that we play in.

So the message is with this macro data: you are seeing a divergence, basically, in your business to some degree?

I think a lot of the macro data is tied to heavier, larger projects that we are not involved with.

So we tend to -- by definition, we are called light commercial; these are light projects.

And those end markets continue to build.

Okay.

And then on the pricing front, what are you thinking about in terms of pricing for next year on the resi and then also on the commercial side?

Commodity costs you referenced earlier are down; should be a tailwind for you.

Is it going to be tougher to put through price next year?

What is your initial --?

My experience in the industry over the years is you put in price every single year.

And some years, commodities are down and some years, they are up.

And you have to get price every year to be able to offset the big spikes in commodity costs when they bounce, back.

So we will be announcing a price increase, as we always do as we get closer to the end of the year, both in commercial and residential and maybe to a lesser degree in refrigeration.

Consistent with the last year in terms of magnitude?

Yes.

Short answer is yes.

All right.

Last one on buyback.

Now that the ASR is done, what's the methodology here as we move out the next several quarters?

Again, I'm a bit of a broken record on this.

If I was going to -- if I was an analyst and I was modeling it, I would look at our debt to EBITDA closer to 2 than to 1, model the cash flow, what dividends grow with earnings.

We'll do acquisitions if they make sense, which is a very narrow focus group, as we've discussed.

We will invest in the business with CapEx, and then we will give the rest back to the shareholders.

And the vehicle that we've used in the past has been share buyback.

At the December analyst day on December 16, we will give -- as we always do -- give fresh numbers for what we plan on doing in 2016.

Okay.

Thank you, I will pass it on.

Jeff Sprague, Vertical Research.

Just a couple follow-ups.

Just on free cash flow, I'm a little confused.

You are saying 13 SEER is tracking as you thought, but you did lower your free cash flow guide by 9% or 10%.

Is there something else going on in the free cash flow number that's creating pressure?

No.

I think it ties to our net income being a little lower as we lowered our guide and so I think that reflects cash from operations being down a bit.

And our inventory in resi, more broadly speaking, is up a little bit higher than what we had thought, but again, we are fine with that.

And sort of minor inventory pre-build as we go into 2016.

So I wouldn't read much into that, other than the cash flow from operations, it will all bounce back next year.

Okay, great.

And then on your hedges and how the raw mats are playing through, I'm sure it would be a December 16 conversation, but can you give us some indication if you snap the line today where commodities are; what kind of tailwinds you are looking at into next year?

I understand the question.

I'm going to answer it obliquely and say copper and aluminum is a decent tailwind for us as we go into 2016 because we started the hedges 18 months out.

And so you can imagine what it looks like on a year-over-year basis.

The variable that's uncertain to us is steel, given some of the tariff litigation that's ongoing.

We will know better of what's going to happen with steel as we run up to the December meeting.

So our concern is the benefits of copper and aluminum will be partially, if not a lot of it, offset with steel pricing year over year.

And again, we will give clearer guidance in December.

And then just one other quick one.

On the non-national accounts stronger, are there any particular subverticals that standout that's driving that?

No.

It's not so much a vertical, but just a channel, which is emergency replacement, which is -- significant investments we've made in Raider and in our distribution to be able to deliver same-day.

That was up mid-teens.

That's across all verticals.

That's more of an ownership structure, which is the contractor is making the decision rather than the owner and is looking for first price and immediate delivery.

Great.

Thank you very much.

Robert Barry, Susquehanna Financial.

Hey, good morning guys.

This is [Phillipe Forlorne].

I'm on the call for Rob today.

First question is regarding the furnace season.

How would you characterize the start of the winter season?

It's early, but the broad commentary is the momentum of the business continues.

We are off to a solid start in fourth quarter.

If you are watching the baseball games, I always get excited when we are in playoffs and people in many parts of the country have heavy coats on.

That's a good sign and we are seeing that.

So the weather is starting to cool and that helps us.

But dealers are confident as we going into the furnace season.

Okay, great.

And then in terms of the VRF business, you mentioned strong performance.

And if you can help us quantify versus the target of $10 million to $20 million from VRF for 2015.

How is it tracking to the target?

We started slow.

We've talked about that, that as we've gotten into this business, we've learned that the sales cycle is longer than what we're used to, as we have to be specified and then work with the engineers and the owners as well as the contractor that we have existing relationships with.

We're probably going to be on the lower end of that $10 million to $20 million target, but third quarter was an important quarter for us as we turned the needle and our pipeline of projects looked good and we had some nice wins on a very small business base.

And we've talked about 5 years out being $100 million business plus or minus and we're still comfortable with the trajectory.

Okay, that's great.

Thanks so much.

Shannon O'Callaghan, UBS.

Question on the tougher commercial mix.

I guess it was present this quarter already.

National accounts I think you said were down mid single-digits and you still had really strong commercial margin improvement.

Is that going to get tougher from here or can you still put up that kind of strong margin improvement?

We will see as we go into fourth quarter.

I think it is clearly a headwind, both in third and increasingly in fourth quarter as we see -- our national accounts are down mid single-digits.

We are signaling that there may be even more softness in fourth quarter.

And that's all incorporated in the guide.

We will play it out as it comes, but we thought it was important to highlighted it as a risk and reflect it in our guidance along with the weakening softness we are seeing in international markets.

But underlying it is fourth quarter is still going to be a really good quarter for us.

And residential remains strong, our non-national account business is strong, and we put up 200 basis points of margin expansion in refrigeration and we will see something similar to that in fourth quarter.

So I understand we lowered the guide and you're right to push on it, but we still feel pretty good about things as we go into fourth quarter.

Okay, thanks.

And then on the refrigeration -- international choppiness that you mentioned, how much of that is actual things you are seeing in those markets in 3Q or exiting versus just kind of a macro caution, given the environment.

Maybe just a little more color on those specific markets you mentioned.

I think it's a bit of both.

We had a nice quarter in Europe.

We were up double digits -- doing this from memory.

Double digits in HVAC, as I look to the rest of the group, and up I think mid single-digits in refrigeration.

So we did well in Europe.

We continue to defy gravity in Brazil, where our business was up again in third quarter on a year-over-year basis nicely.

But as we talk to our businesses there, there's some concerns.

I think it's a combination of macro call as well as knowing our customers.

And they are showing some caution, but our team has done a great job of defying gravity and we will see what happens.

But again, we thought it was appropriate to reflect it in our guide.

Okay, thanks Todd.

Thanks.

Julian Mitchell, Credit Suisse.

Just a question longer term on the approach within refrigeration.

The EBIT in just dollar terms is probably stable or flat this year, year on year, after the big drop last year.

When you're looking ahead, is there any change in strategy or any approach in terms of potential acquisitions or for the cost reduction that you think can reignite earnings growth in that business?

In many parts of our business, we've actually seen nice growth and we are highly profitable.

And where we've seen the headwinds over the last few years has been in Australia and in North America supermarket business or grocery business, which is really our Kysor/Warren acquisition.

In Australia, we've done some aggressive restructuring over the last six months.

We think that will position us well as we go into 2016.

We've talked about the regulatory change there, but it's also more broadly just a soft market in Australia, given their exposure to the commodity and mining industry.

Our supermarket business in North America -- again, we've taken aggressive action, both on the cost side with restructuring as well as with a big customer, Walmart, which we publicly talked about.

We saw benefits in third quarter and we think we will see benefits as we go in the fourth quarter.

And we know we need to get that part of the business turned around and we are committed to do that.

Or if we can't, we'll look at other options.

Thanks.

So then just a follow-up on the capital deployment.

Obviously, the Lennox share price is much higher than when you'd launched the ASR 12 months ago.

So when you're talking about target leverage range, is there any kind of urgency around that?

Or on the buyback, do you think you will wait to reassess that for when the price -- if and when it weakens?

I'm like all CEOs -- at least the good ones.

Not saying I'm a good one, but all good ones assume their stock price is going up.

I assume our stock price is going up.

I actually believe our three-year plans and if we do that, we will outgrow our multiple.

So the short answer is I'm not afraid to buying stock at $1.20.

What we will do is at the December meeting, we'll give the guide.

I think mechanically you can figure out what I'm going to say, so I never want to surprise people on the what.

But the how and the when we'll think through the right way to do things and we will communicate that in December.

Very helpful.

Thank you.

Keith Hughes, SunTrust.

Two questions.

Just shifting back to steel real quick.

You guys have been running more or less spot all year on steel.

Is that correct?

Say that one more time?

On your steel, there were not formal agreements in place for this calendar year.

Is that correct in terms of your steel?

There were formal agreements.

But what we do, Keith, is we buy off the prior-quarter CRU pricing for steel and that we have negotiated agreements with the mills or service centers, depending on the grade, where we buy at a discount to the CRU pricing.

So it's prior-quarter CRU less the negotiated discount.

Do you expect that to be the case in 2016?

A mechanism that way or there would be something more permanent in place?

No, it will be that.

Okay.

And a question back on cash flow usage.

You've kind of signaled what's going on, as you said, in several answers on share repurchase.

But -- because my question is are there acquisitions out there that would cause you to change that plan?

We have publicly talked about this and so I will repeat it.

The focus would be on consolidating North America HVAC; that's where our strength is at.

People who own assets would have to decide to sell assets, and so something would have to open up.

On refrigeration, I think longer term that is certainly an area internationally that we could grow through acquisitions in Europe, for example, in an industry that is fragmented, and we think we have a strong position.

But we've been pretty clear that until we see some nice improvement in margin expansion, refrigeration, and address our issues in North America grocery, we don't want to put more capital against that segment.

But once we've demonstrated externally that we are on the right trend on margin expansion and have addressed it, then I could see us spending money on acquisitions in refrigeration, maybe in Europe.

And what about commercial?

I put that under the same category as what I said earlier about consolidating North America HVAC.

And yes, Europe -- fair enough.

When I'm talking Europe, I should be talking HVAC at the same time.

I think if we could add some more mass to our business in Europe, that could make sense for us.

And right now, given the strength of dollar, it might be a reasonable time to do a deal if we find the right one.

Okay.

Thank you very much.

Johnny Wright, Nomura.

So on the residential side, the focus obviously on the SEER 13, SEER 14 shift.

Is R22 also a meaningful mix benefit this year, just given the shift down the consumption allowance?

Not in a material way and I think that just reflects it was low -- reasonably low last year to reasonably low this year.

I think year over year, it might be a little bit lower mix, but order of magnitude, I think it's close to about the same number.

Okay, sure.

And on the commercial side, just international account customers.

I know you always give us sort of a new customer every quarter.

Where are we at in absolute number now?

And what I'm getting at really is is there much of an attrition rate there?

Do you see customers dropping off or once they -- once you house them, maybe they are kind of sticky for the long term?

I don't have the number off the top of my head.

We will find it and make sure we give it to you.

When we give these customers that we win, obviously they are not all the same, to state the obvious.

But what we want to try and do is convey that given our product innovation and our focus on this segment of the market that we continue to win.

Yes, there are customers who we win we eventually -- someone else takes them from us.

We don't publicly announce that.

But net-net, we are winning new customers every year.

And so the big question is which one of them are going to pop and be a big format that really drives revenue.

And that's why it's a bit of a portfolio strategy that we are on as many -- involved with as many different customers as we can.

But net-net, we are winning new customers year over year.

Okay, great.

Thank you.

Walter Liptak, Seaport Global.

I wanted to ask, one, about the SEER mix, the 14 plus at 59%, which is a really good number.

And if we can just get some more color on how much is being driven by the health of the consumer versus the regulations.

And just any color on the geographic regions that are strong versus weak, etc?

This is a regulatory impact.

To see that kind of spike, it's driven by regulations.

When there's a non-regulatory environment, as there has been the last couple years, we've talked about a point or two that we move up every year -- quarter year over year in the summer selling season as we mix people up to our high efficiency product.

But I would say this is almost exclusively maybe a point or two for other reasons.

But this is tied to the regulatory changes in the South and Southwest.

Okay.

How do you think about the SEER mix from here on out?

Is 13 SEER a product of the past and it's 14 SEER that is going to be the main product for the next couple of years?

Well, certainly in the South and Southwest, where the regulation says after July we can't sell 13 SEER, that's going to be the case.

And so we will have -- as we mentioned earlier, we have some inventory that we're going to be carrying into 2016 of 13 SEER.

We will continue to sell it until either we run out or the regulatory deadline hits us.

In the North, we are still going to be selling 13 SEER.

We focus on premium and we do mix up and we do this I think as well as anyone in the industry.

But half the market is entry-level and if entry-level is 13 SEER, that's -- half the market will be 13 SEER in the northern regions.

Okay, thank you.

Josh Pokrzywinski, Buckingham Research.

Just a follow-up on that last question about the 59% in 14 SEER.

If I had to look at goal state or industry target for once this inventory buffers behind us, what does that 59% go to?

I guess in the absence of voluntary mix, just clearing out the 13 SEER in the Sun Belt today and converting the rest of that?

I understand the question.

I honestly haven't worked the math, Josh.

Let us work the math and we will get back to you.

But I at sort of high level look at HVAC that goes -- or excuse me, air conditioners and heat pump -- or air conditioners that go in the South and Southwest.

And say half the market now is going to be 14 SEER and look at heat pumps nationally and say it's going to be 14 SEER and -- or half the market is going to be 14 SEER.

And in the markets in the rest of the country for air conditioner, half the market will be 13 SEER and then sort of distribute the rest amongst the SEERs from 14 to 21.

I haven't done all that yet, so I'm not sure with 59% goes to, to be honest with you.

I think in many ways, the way we will talk about it next year, though, will be the portion of our mix that is above regulatory minimums.

I actually think that's a more useful way to have the conversation.

So next year, we will talk about last year, what percentages were at regulatory minimums, and this year what percentage are at regulatory minimums.

Because now that we have regional standards, I think that's a more thoughtful way to have the conversation.

That's fair.

I guess what I'm trying to get at is you've enjoyed some early migration to 14 SEER, maybe a little faster than you would have expected.

I'm trying to get at maybe what's left into next year.

If we thought it was, as an industry, 3-ish points of price mix, maybe 4 over time, did you get 2 this year and there's 1 left.

Did you get 1.5 and there is 1.5 left?

I'm sure you get the question.

It's kind of a different way of asking the same earlier one, so you probably don't know the math on that.

From a financial viewpoint, I would say we've called out that we had $5 million mix this year.

And that, in large part, we thought that was from the 13 to 14 SEER mix up and it's been good news.

And that was because we could hold on pricing at 14 SEER.

I also said that the mix of -- or the sale of 13 SEER is about what we thought it would be and we're going to carry some inventory into next year.

So I -- if I was modeling 2016, I wouldn't be -- I don't think it's good news or bad news.

I think it will be relatively neutral to 13 to 14 SEER mix.

I think the bigger mix opportunity for us is and has been and will continue to be us selling people up to 16 SEER or 18 SEER or 21 SEER.

We've come out with some new products this year in that mid-tier range, in 18 SEER product, the 16 SEER product, and that's helping us and it will next year, too.

Got you.

And then just back to commercial margins, I understand that you have some mix headwinds maybe coming down the pipe a little bit more from national accounts.

But just looking at it sequentially, it seems like mix probably went in the wrong direction, just given that you had some healthy pull-through there on national accounts in 2Q; less so in 3Q; and margins went up quite a bit.

I can't imagine that pricing helped a lot sequentially.

Can you just dimension out is that investment; is it better price costs sequentially?

What are the big factors there to keep in mind?

We've had aggressive cost reduction programs in our commercial business on the material cost reduction side, and we saw some real benefits in third quarter that's really helped us.

Again, all that was in our guide.

So what I'm saying is not inconsistent with our new guide, but we've seen aggressive material cost reduction in our commercial business and that's helping us.

Okay.

So this is just kind of a second half bias to some of that value engineering and material cost structure [to help you cost] you target every year?

Correct.

And it's been more commercial -- the commercial number is higher this year than it's been in prior years.

Our team has done a really nice job.

And then just one last one.

I know you guys don't give quarterly guidance, but in the spirit of this 50 basis points of margin expansion that you have targeted for the year and for duration, anything we should keep in mind from a seasonal mix perspective, 3Q to 4Q, in refrigeration that could make that easier or harder?

No.

I'm just playing through my head.

In our North America business -- not our Kysor/Warren business, but our traditional heat craft business, second and third quarter are stronger quarters for us in the sense of the distributed product, it has weather impacts that, much like it does, although to -- not much, like it does in HVAC, but to a lesser degree.

So no, the news in fourth quarter that's going to help drive margins is the continued ramp-up in our North America grocery business and the benefits from restructuring that we've done in Australia and Kysor/Warren.

And again, we don't guide, but when you give full-year guidance and you are through three quarters, it's sort of easy to connect the dots.

And the implication is we're going to get close to another couple hundred basis points of margin expansion in refrigeration in fourth quarter and that's what we are targeting and feel pretty good about.

All right.

Thanks, guys.

Okay, so that's it for Q&A.

A few points to leave everyone with.

On strength in all three businesses, the Company posted EPS growth of over 25% in the third quarter on strong revenue growth and significant margin expansion.

We are well positioned for continued momentum in the fourth quarter and as we look ahead to 2016.

We remain focused, as we always do, on capitalizing on end market growth, capturing additional market share, and driving operational initiatives for higher profitability.

Thanks, everyone, for joining us today.

And ladies and gentlemen, that does conclude your conference for today.

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

You may now disconnect.