Steve Harrison - VP of IR Todd Bluedorn - Chairman and CEO Joe Reitmeier - CFO and EVP.

Rich Kwas - Wells Fargo Securities Keith Hughes - SunTrust Rob Wertheimer - Vertical Research Partners Josh Pokrzywinski - MKM Partners Jeff Hammond - KeyBanc Capital Markets Nigel Coe - Morgan Stanley Samuel Eisner - Goldman Sachs Drew Pierson - J.P. Morgan.

Ladies and gentlemen, thank you for standing-by and welcome to the Lennox International First Quarter 2014 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 first quarter of 2014. I'm here today with the Chairman and CEO, Todd Bluedorn; and CFO, and Joe Reitmeier. Todd will review key points for the quarter and Joe will take you through the Company's financial performance and outlook.

Financial results in prior periods have been revised to reflect sold businesses and discontinued operations. In the earnings release we issued this morning, we have included the necessary reconciliation for 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 Web site at www.lennoxinternational.com. We’ll archive the webcast on that site and make it available for replay.

We’d 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.

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

Thanks, Steve. Good morning and thank you for joining us. In the first quarter Lennox International grew revenues 6% at constant currency. EBIT margin expanded 70 basis points to a first quarter record of 5.1% and adjusted EPS from continuing operations was up 27% to a first quarter record of $0.42.

The Company’s performance in the first quarter continued to be led by our Residential business. Residential revenue was up 10% at constant currency, and profit was up 19%. Replacement business remained strong with mid-teen growth as we continue our distribution expansion in North America. Cold weather was also a factor.

The cold weather that began in November and December continued in the first quarter, with heating degree days above both normal and the prior year. While cold weather was on balance, a net positive for Residential replacement business.

The severity of it in many parts of North America significantly impacted our new construction business, both in Residential and in Commercial. Residential new construction revenue was down mid single-digits in the first quarter, but we expect an improved construction environment moving now into spring and summer.

In Commercial revenue was up 6% at constant currency, profit though was down 8% from the prior year quarter. Europe was down and we made strategic investments in the business for growth, including expansion of our distribution and service networks in North America, and start-up cost to enter the VRF market in the second half of 2014.

Europe Commercial HVAC business can be chunky on a quarter-to-quarter basis, and revenue was down mid single-digits at constant currency in the first quarter. North America Commercial service revenue was relatively flat against a tough comparison to last year.

North America Commercial equipment revenue was up low double-digits, with replacement revenue up nearly 20%. Impacted by the severe weather, Commercial new construction was up low single-digits in the first quarter. On the new business front we signed up 11 new National Account customers, a great start to the year.

In Refrigeration, market conditions remained challenging in the quarter as expected. Revenue was down 6% as reported, with segment profit down 28%. At constant currency, Refrigeration revenue was down 2%. South America was up low double-digits. Europe was up high single-digits, and China was up mid single-digits.

North America was down slightly, and we continue to expect the region to pickup in the second half of the year based on new National Account business. Australia revenue was down high single-digits at constant currency, and we expect that market to be soft through balance of the year. Talk to you on our strategic initiatives.

In Residential, we are on-track with expansion of our manufacturing facility in Mexico. We are transferring certain furnace production there from the United States and also we’ll be in-sourcing sheet metal fabrication as part of our Mexico operations. We expect furnace production to be up and running in Mexico in the second half of 2014.

We are making a $30 million U.S. investment in total over 2013 and 2014 and by 2016 we expect 15 million in annualized savings from this initiative. In our Residential distribution expansion we opened five new Lennox PartsPlus stores in the first quarter.

We are targeting 25 new stores in total for 2014 as it continues to be a big reason for our market share gain momentum. We plan on exiting this year with 160 stores on our way to at least 215 stores in 2016.

In our Commercial distribution expansion we continue to move Commercial products and strategic distribution points to meet the needs of the emergency replacement market, this expansion and the success of our Raider rooftop systems are creating strong momentum. Emergency replacement revenue was up more than 20% in the first quarter.

Also in Commercial, our partnership is progressing well with Midea to launch Lennox branded VRF Commercial products in North America, leveraging Lennox company-owned distribution. The team is tracking with plans for entering this fast growing $500 million market in the second half of this year.

We will continue to drive our strategic initiatives in 2014 and are well positioned for continued momentum with our expanding distribution network and leading product portfolio. The year is off to a good start with the first quarter and we are looking forward to the seasonally strongest quarters of the year. Now I’ll turn it over to Joe..

Thank you, Todd and good morning everyone. I’ll provide some additional comments and financial details on the business segments for the quarter, starting with the Residential Heating & Cooling. In the first quarter, revenue from Residential Heating & Cooling was $342 million, up 9%. Currency had a negative one point impact.

Volume was up 7% and price and mix combined was up 3%. Residential profit in the first quarter was $24 million, up 19% from the prior year quarter. Segment profit margin was 7.1% which was up 60 basis points. Segment profit was positively impacted by higher volume, favorable price mix and lower material cost.

Partial offsets including negative impact from foreign exchange and investments and distribution expansion and other growth initiatives. Turning to our Commercial Heating & Cooling business, in the first quarter Commercial revenue was $173 million, up 6%. Currency was neutral, volume was up 6% and price and mix combined was flat.

North America Commercial HVAC equipment and service revenue was up high single-digits. Europe Commercial HVAC and revenue was down low single-digits on a reported basis. Commercial segment profit in the first quarter was $10 million, down 8% from the prior year quarter. Segment profit margin was 5.9%, down 90 basis points.

Segment profit was negatively impacted by investments in the business for growth, including North American distribution and service expansion, as well as startups cost to enter the VRF market in the second half of 2014. Partial offsets include higher volume and lower material cost.

In our Refrigeration segment, revenue in the quarter was $180 million, down 6%. Currency had a negative four point impact. Volume was down 1% and price and mix combined was down 1% on a revenue basis.

Todd mentioned the revenue change by region at constant currency, at actual currency Europe was up low double-digits, China was up high single-digits, North America was down low single-digits, South America was down high single-digits and Australia was down about 20%.

So, there was significant negative currency impact from South America and Australia. Segment profit was $12 million, down 28% from the prior year quarter. Segment profit margin was 6.7%, down 200 basis points.

Segment profit was negatively impacted by foreign exchange, SG&A, lower volume and factory investments for future growth, partial offsets included favorable price mix and lower material costs.

Looking at special items in the first quarter, the Company had a total after tax charges of $900,000 which included $400,000 for the net change and unrealized losses on unsettled futures contracts and $200,000 for a special legal contingency charge.

Corporate expense was $11 million in the first quarter, down from $19 million in the first quarter a year ago on lower incentive compensation as planned. Overall, SG&A was $136 million in the first quarter which was flat with the prior year quarter.

Cash used in operations was $125 million in the first quarter, compared to $137 million in the prior year quarter. Capital spending was $17 million which was up from $12 million in the first quarter a year ago as the factory expansion in Mexico continued.

Free cash flow was a negative $142 million compared to a negative $149 million in the prior year quarter. As most of you know, we tend to use cash in the first half of the year and generate cash in the second half due to the seasonality of our business. Looking at liquidity, cash and cash equivalents were $39 million at the end of March.

Our debt-to-EBITDA ratio was 1.5 and in the quarter within our targeted range of 1 to 2 times. Total debt was $564 million at the end of March. Now before I turn it over to Q&A, I’ll review our outlook for 2014. Our market assumptions for 2014 remain the same.

For the industry, we expect North American Residential HVAC shipments to be up mid single-digits. We expect North America Commercial unitary shipments to be up low single-digits and we expect Refrigeration shipments to be flat global for the industry in 2014.

Based on these underlying market assumptions, our revenue growth guidance for the year remains 3% to 7% at constant currency. Given currency movements, we now expect a 1 point of negative impact from foreign exchange on the full year basis for revenue growth for up 2% to 6% with this headwind.

Looking at our other guidance points for 2014, we still expect about $30 million of savings in our sourcing and engineering led cost reduction programs for the full year, weighted to the second half of the year.

We continue to expect $10 million on favorable product mix in residential in 2014 and we still expect $5 million of net benefit from pricing commodities with a positive $10 million from price and negative $5 million from commodities. Corporate expense is still expected to be approximately $70 million for this year, down $18 million from 2013.

Last year corporate expense jumped from 60 million in 2012 to 88 million in 2013 on higher incentive compensation as annual incentive plans were exceeded and long-term plans trued up in line with the Company’s performance. As mentioned last quarter, headwinds for the year include our entrance in the VRF market in North America.

Our continued expansion in Residential and Commercial distribution and strategic investments in resources for continued market share gain momentum. More normalized weather in the summer could also be a year-over-year headwind and foreign exchange is now expected to be a negative impact as well.

Just a few more guidance points, we still expect net interest expense for the full year of about $16 million.

Our effective tax rate is still expected to be between 34% and 35% on a full year basis, and we are targeting $150 million in stock repurchases, and the weighted average diluted share count for the full year is expected to be approximately 49 million shares.

We expect capital expenditures of $90 million as we continue to invest in the Company for growth. And finally to wrap-up, our 2014 guidance for adjusted EPS from continuing operations remains between, $4.20 to $4.60. And now with that, let’s go to Q&A..

Question:.

and:.

Thank you. (Operator Instructions) And your first question comes from the line of Rich Kwas of Wells Fargo Securities. Please go ahead..

Hi, good morning everyone..

Hi, good morning everyone..

Good morning..

Just wanted to follow-up on the investment spending, I know you’ve got the facility in Mexico but you’ve also are expanding in distributing as well and distribution points. Any views on -- any color you could provide in terms of quantifying that impact here in the quarter? And then how should we think about that as we move through the year.

Todd, I know you don’t quarterly guidance but any color around that would be helpful? Thanks..

Just wanted to follow-up on the investment spending, I know you’ve got the facility in Mexico but you’ve also are expanding in distributing as well and distribution points. Any views on -- any color you could provide in terms of quantifying that impact here in the quarter? And then how should we think about that as we move through the year.

Todd, I know you don’t quarterly guidance but any color around that would be helpful? Thanks..

The color that we’ve given so far has been, on VRF we’ve said it’s a $3 million to $5 million investment for the year for us. And the net expense is going to be more first half of the year than second half of the year because we want revenue second half of the year to offset the expense. I think about that 3 to 5 is primarily first half of the year.

The investments that we’re making in distribution, I think that’s in large degree a timing issue where our seasonally lowest quarter of the investments don’t have as much volume to cover it. And so I think for the balance of the year we’ll see some of that washout.

Although, you didn’t ask and I’ll sort of talk about it, I mean, some of the other, the other headwind that we had for the quarter that we haven’t talked about and usually don’t mention is FX and FX that affected us was a decline in the Australian dollar and the Canadian dollar and we had a negative two point impact from FX on revenue in the first quarter.

And the headwind of EBIT of about 4 million or so on our earnings and so we now think on a full year basis we expect a one point negative impact on revenue and we’re taking actions to mitigate the impact on earnings based on FX for the balance of the year..

And then Joe what are you benchmarking in the Canadian dollar and Australian dollar right now what’s embedded battle in the guide?.

And then Joe what are you benchmarking in the Canadian dollar and Australian dollar right now what’s embedded battle in the guide?.

Well, right now, we’re holding our FX rates flat with where they’re currently and taking action as Todd said against where those current rates are..

Okay, great and then Todd, what’s -- I know that we’re only a few weeks into April here but what’s the yearly read so far what you’re seeing on the Residential market and then Commercial on the National Account side?.

Okay, great and then Todd, what’s -- I know that we’re only a few weeks into April here but what’s the yearly read so far what you’re seeing on the Residential market and then Commercial on the National Account side?.

We’re seeing solid business trends continue both in Residential and Commercial. You talk to our dealers and customers, I think people are optimistic. Replacement business has been strong and we expect new construction to gradually normalize moving into the spring and summer. Although you didn’t ask about Refrigeration I’ll talk about it.

It remains soft and we expect that to be the case through the first half of 2014. We’re continuing to execute on the strategic initiatives that I talked about. So, April it’s early and June is the month for second quarters everybody knows, so we have 40% to 45% of our revenue.

We need the weather to warm up, it was -- as pointed out -- I was listening on the radio on the way in. It’s going to be mid-50s, low-60s in Boston today. Two years ago it was 87 when the marathon was run and so we need some of that 87 Boston degree weather to come back..

Okay, thank you. .

Okay, thank you. .

Thanks. .

Thank you. The next question comes from the line of Keith Hughes of SunTrust. Please go ahead..

Thanks. I have two questions.

First on the VRF initiative, will you be shipping in the second half of this year systems?.

Thanks. I have two questions.

First on the VRF initiative, will you be shipping in the second half of this year systems?.

Yes..

And how long do you think that will take to ramp-up or it becomes the meaningful number for the Commercial segment?.

And how long do you think that will take to ramp-up or it becomes the meaningful number for the Commercial segment?.

We talked about this back in December as we think over a five year period we can turn this into 100 million revenue business.

And I think part of that, I think lot of that under our control but a big part of it Keith is going to be how fast the market grows because implied in that is that the market continues to grow over the next four or five years like it has in the past, three to five years, which is 20% to 25% a year. But we set 100 million in five years..

Do you think it’s a $500 million market right now?.

Do you think it’s a $500 million market right now?.

We think it’s a $500 million market right now..

Right now. Okay. And second question.

In Commercial as well, you were talking about low double-digit unit shipments in the quarter, is that correct?.

Right now. Okay. And second question.

In Commercial as well, you were talking about low double-digit unit shipments in the quarter, is that correct?.

Correct..

Okay.

Did you see -- was this any one specific end-user market or you saw some strong growth what’s across the board, any kind of color there would be great?.

Okay.

Did you see -- was this any one specific end-user market or you saw some strong growth what’s across the board, any kind of color there would be great?.

Yes I think what we’ve called out in the script was new construction was mid single-digits -- low to mid single-digits and replacement was up 20% and then we called out emergency replacement up over 20%. So I think it continues to be planned replacement with Nation Accounts continues to chug along.

And then the initiative with emergency replacement with Raider and with the distribution, just as it did last year I think we’re off to a really fast start this year in that segment of the market..

Could that be weather -- the emergency replacement would be weather driven or is that or just a function of better -- your better operations?.

Could that be weather -- the emergency replacement would be weather driven or is that or just a function of better -- your better operations?.

I think it is better operations..

Okay. Thank you..

Okay. Thank you..

Good. Thank you. The next question comes from the line of Rob Wertheimer of Vertical Research Partners. Please go ahead..

Hey, good morning everybody.

Could you talk just a bit about the modest diversions and trend on Commercial versus Refrigeration, I don’t know whether -- I don’t know whether geographic or product or what do you think causes the split there?.

Hey, good morning everybody.

Could you talk just a bit about the modest diversions and trend on Commercial versus Refrigeration, I don’t know whether -- I don’t know whether geographic or product or what do you think causes the split there?.

I think part of the -- well, one is this emergency replacement initiative that we have in Commercial has helped quite a bit. I think that’s one point on the Commercial side.

I think the other point is just the segments that we’re in, in Refrigeration in North America, obviously our prime -- our largest exposures is to grocery and some of those customers have deferred some spending on their Refrigeration, but as we said in the script we think second half of the year we’ll see a bounce back in that market..

Okay.

And then let me just ask about resi -- actually I don’t know if you’ve ever talked about it in great detail, but the driver for resi in the quarter heating versus cooling, are you able to say how much that was, whether the cooling business was as solid as the overall number?.

Okay.

And then let me just ask about resi -- actually I don’t know if you’ve ever talked about it in great detail, but the driver for resi in the quarter heating versus cooling, are you able to say how much that was, whether the cooling business was as solid as the overall number?.

We never spike it out that way Rob, I understand the question, but I’d anecdotally say that we saw strength across the enterprise as we have for the last couple of years and given where the revenue was up 10% of constant FX, it was an overall good quarter, so across the enterprise for Residential.

Especially when you consider new construction, where we’ve always talked about, we have such strong share it was actually down mid single-digits, so for us to be up 10% overall, when new construction was down 5%, that means we had a really strong quarter in replacement..

Great.

And then price was up as well as price mix in resi?.

Great.

And then price was up as well as price mix in resi?.

Correct..

Thank you..

Thank you..

Thanks..

Okay. Thank you. And the next question is from the line of Josh Pokrzywinski of MKM Partners. Please go ahead..

I don’t know a Josh Pokrzywinski..

Me neither, although, I hear the name on a lot of conference calls..

Me neither, although, I hear the name on a lot of conference calls..

How are you Josh?.

I am doing well, thanks.

How are you guys?.

I am doing well, thanks.

How are you guys?.

Good. Thanks..

Just back to the investment question, I know you guys don’t give quarterly guidance, but assuming there is some internal forecast. How did the quarter play out versus that? It seems like Residential top-line was a bit of an upside surprise.

And with the tone on this investment spending seems like, none of it was a surprise all consistent with what you’d planned throughout the year.

So I guess, first what was your take on the quarter relative to expectations going in?.

Just back to the investment question, I know you guys don’t give quarterly guidance, but assuming there is some internal forecast. How did the quarter play out versus that? It seems like Residential top-line was a bit of an upside surprise.

And with the tone on this investment spending seems like, none of it was a surprise all consistent with what you’d planned throughout the year.

So I guess, first what was your take on the quarter relative to expectations going in?.

I think we had a nice quarter. And we managed it, we really don’t get surprised on cost investments, we know what our costs are, and we know what investments we’re going to make and we guide to them in December and then we execute during the year.

And so to me the variable within the quarter is execution, and we executed well than what the end-markets do. So if the tone appears to be everything one as we hoped and expected that’s right..

Excellent. And then just on the Commercial business, Europe a little more sluggish there seems to be an aberration versus where you guys had been. I think the past couple of quarters that it started to firm up. And it seems like Europe in general is turning as an economy.

Is that -- does that affect the business...?.

Excellent. And then just on the Commercial business, Europe a little more sluggish there seems to be an aberration versus where you guys had been. I think the past couple of quarters that it started to firm up. And it seems like Europe in general is turning as an economy.

Is that -- does that affect the business...?.

I think it’s just timing, I think if you look inside the business I think I touched or Joe and I touched a little bit on the script. We are up in Refrigeration in Europe and we were down in Commercial HVAC in Europe.

And then we said something like it can be chunky, I think that’s code for we’re not such a big business in Europe HVAC and so depending on what some customers do we’re down to things can be pushed around.

I think if you look at the trend line in Europe over the last two or three quarters, it continues to be going up and we’re -- that’s consistent with what our guide is for the full year for it to be up, I believe well single-digits is what we’ve called out..

Got you and that’s helpful. And then on price mix in Commercial being flattish, is that a function of price going one way and mix going another.

Is there a competitive dynamics there? Is it different than the residential business, any color on how you expect that to play out, as the year unfolds?.

Got you and that’s helpful. And then on price mix in Commercial being flattish, is that a function of price going one way and mix going another.

Is there a competitive dynamics there? Is it different than the residential business, any color on how you expect that to play out, as the year unfolds?.

No. We’ve been very good in our Commercial business over the last three, four, five years of getting both price and mix and we ended the year last year at 14% margins for the segment.

And as you can imagine we probably make higher than that in North America getting sort of the footprint of our Europe business, so our team in North America is very good at getting price mix, with some very challenging customers, we do that through innovation and we’ll continue to do that in 2014..

Got you, alright, thanks guys..

Got you, alright, thanks guys..

Thanks..

Thank you. And the next question comes from the line of Jeff Hammond of KeyBanc Capital. Please go ahead. .

Hey, good morning guys..

Hey, good morning guys..

Hey Jeff, how are you?.

Great, so just on price cost I mean it seems like we saw some relief in commodities but your guidance is unchanged, any room for upside there as we move through the year?.

Great, so just on price cost I mean it seems like we saw some relief in commodities but your guidance is unchanged, any room for upside there as we move through the year?.

I think the big variable is going to be steel, second half of the year Jeff, I mean the copper as you know given our head strategy and aluminum were to a large degree baked and our guidance reflects that, I think the variable is going to be what happens with steel..

And then FX, I mean should we expect kind of a similar top income headwind into 2Q and I think you mentioned some things that you’re doing to offset it, what are you doing exactly and how does that mitigate it..

And then FX, I mean should we expect kind of a similar top income headwind into 2Q and I think you mentioned some things that you’re doing to offset it, what are you doing exactly and how does that mitigate it..

I think a high watermark will be first quarter in terms of negative FX unless things continue to move, but the issue is in Canada and Australia which are pretty big markets for us, the costs are denominated in U.S.

dollars because we manufacture a lot of the products here, certainly for Canada and some for Australia but a lot of the costs even of where we buy things elsewhere denominated in U.S. dollars.

And so then you sell into those markets, you get some headwind unless you’re able to get some price to offset your cost increases and that’s what we’re in the process of working through the system..

Okay and then just Commercial replacement being up 20, is that an easy comp or seasonal weakness or building momentum in Raider and sustainable, just how should we think about that growth rate?.

Okay and then just Commercial replacement being up 20, is that an easy comp or seasonal weakness or building momentum in Raider and sustainable, just how should we think about that growth rate?.

I think it’s a bit of a breathless number that I wouldn’t necessarily expect 20% plus for the entire year although we did something close to that last year. I do think a couple of things; it’s seasonally low quarter, so the percentage increases can look a little bit better.

Also we didn’t really sort of get in the full swing of Raider last year until second quarter so I think it’s the last quarter where we have an easier comp, but all that being said, we feel great momentum in emergency replacement and Raider we just launched last week to larger unit so we now have a full product line of the Raider product line and so we’re excited..

Okay, great, thanks guys..

Okay, great, thanks guys..

Thanks..

Okay, thank you. And the next question comes from the line of Nigel Coe of Morgan Stanley. Please go ahead..

Thanks, good morning guys..

Thanks, good morning guys..

Nigel..

Did you call out how the Residential market tracked during the quarter?.

Did you call out how the Residential market tracked during the quarter?.

We did not call it out, I mean we called out what we did but we didn’t call out the market, it’s the industry numbers for March aren’t out yet so it’s really sort of hard to know..

Okay, great.

And obviously we talk about the Commercial performance in North America in some depth, but one of your major competitors trend had some well publicized production issue, was there any benefit from that, even if only modest?.

Okay, great.

And obviously we talk about the Commercial performance in North America in some depth, but one of your major competitors trend had some well publicized production issue, was there any benefit from that, even if only modest?.

The honest answer is I don’t know, I mean we should have asked some of those questions to people in the field after we saw what Ingersoll Rand had to do, we had a very good quarter in Commercial in North America, especially considering the weather on new construction, without being sort of too acidic about it I mean I think it’s one mistake maybe amongst others and so we continue to win in the marketplace against….

Okay. That wasn’t too acidic. And then finally as you’re rolling out the – obviously being very successful, how do the productivity or same-store sales of the each incremental store compare, I mean are they comparable, are we seeing a slight attrition in the same-store sales, I mean how does it go from 160 to 210.

Do you expect to have similar performance metrics?.

Okay. That wasn’t too acidic. And then finally as you’re rolling out the – obviously being very successful, how do the productivity or same-store sales of the each incremental store compare, I mean are they comparable, are we seeing a slight attrition in the same-store sales, I mean how does it go from 160 to 210.

Do you expect to have similar performance metrics?.

So far we have, I mean the way I like to think about it is, the economics or the ramp-up curve of our last 20 stores are very similar to what they were 100 stores ago, so we haven’t reached diminishing returns on the incremental investment of the stores we put it in, so it continues to be a very good investment for us..

Okay great, thanks so much..

Okay great, thanks so much..

Okay, thank you. And the next question is from the line of Samuel Eisner of Goldman Sachs. Please go ahead..

Good morning everyone..

Good morning everyone..

Hi. .

Good morning..

Just a few cleanup questions here, regarding the move down to Mexico I was curious if there were any headwinds or inefficiencies associated with that move that may have shown up in this quarter?.

Just a few cleanup questions here, regarding the move down to Mexico I was curious if there were any headwinds or inefficiencies associated with that move that may have shown up in this quarter?.

Not really much in this quarter, I think we’ll see a little bit more next quarter and second quarter, I mean we’ve brought some people on but really we’re going to see the inefficiencies for a while for a quarter or so is when we staff up and are sort of qualifying the product before we produce it, so we’ll see more second quarter but again that’s all anticipated by our guidance..

Sounds good, and then regarding the guidance and the kind of guidance of corporate expense around 70 million or so, just curious how you guys are thinking, there’s about 60 million left for the course of the year, is that about 20 a quarter, I know you don’t give quarterly guidance, I’m just trying to understand may be from a timing issue of it’s more first half way to second half way at this point?.

Sounds good, and then regarding the guidance and the kind of guidance of corporate expense around 70 million or so, just curious how you guys are thinking, there’s about 60 million left for the course of the year, is that about 20 a quarter, I know you don’t give quarterly guidance, I’m just trying to understand may be from a timing issue of it’s more first half way to second half way at this point?.

I think the way to, to your point we don’t give quarterly guidance but the way I would do it if I were you is I’d look over the last two or three years and sort of, and plot them all out and then last year we talked about when we were so high in corporate expenses at 88 that a lot of that was or 18 million of it was incentive comp related and that was going to go away this year.

And I think if you look at last year corporate expenses by quarter compared to the couple of prior years before I think it’s pretty obvious sort of where the spikes are at which first to fourth quarter is when we tend to take adjustments. And I think if you lay that out I think you can figure it out..

And then just a follow-up on that I mean this year it was around 11 million change I mean that seems to be the lowest first quarter corporate expense in the last couple of years here.

So just curious if there is something more to this year than just timing of incentive comp that’s impacting that expense line?.

And then just a follow-up on that I mean this year it was around 11 million change I mean that seems to be the lowest first quarter corporate expense in the last couple of years here.

So just curious if there is something more to this year than just timing of incentive comp that’s impacting that expense line?.

No, that’s more than the 80-20 of what happens I mean there is always sort of timing of things of corporate expenses this year last year the next year but there was sort of no major structural change of things, it was as I suggested that and we continue to take term corporate expenses as we have since we’ve been here, and so continuing to take cost out is something that we do..

Understood. And just one last question just on PartsPlus I think you opened about five new stores this quarter and you’re going to be doing about 25 for the remainder, I guess for the full course of the year.

Just curious on the timing of all that, is that mostly in the middle part of the year during the selling season or is that phased out through the course of the year just curious on timing..

Understood. And just one last question just on PartsPlus I think you opened about five new stores this quarter and you’re going to be doing about 25 for the remainder, I guess for the full course of the year.

Just curious on the timing of all that, is that mostly in the middle part of the year during the selling season or is that phased out through the course of the year just curious on timing..

Broadly speaking it’s linear. I mean and again if we’re doing 25 for the year and we did five in the quarter it’ll be some ramp-up during the balance of the year. But we have sales force sitting in our operational team here at headquarters and we sort of deploy the people do to it and really don’t have a search.

We’re not like a retailer where everything has to be done by ThanksGiving we just implement them during the year..

Understood, thanks so much. .

Understood, thanks so much. .

Thanks..

Okay, thank you. And the next question is from the line of Drew Pierson of J.P. Morgan. Please go ahead..

Thanks and good morning.

Hi, Todd so we had what looks to be the final resolution on the regional standards I just was hoping to get your color on that and then I guess specifically as you look into year-end if you guys would consider sharing us what 13 SEER inventory and through the 2015 grace period?.

Thanks and good morning.

Hi, Todd so we had what looks to be the final resolution on the regional standards I just was hoping to get your color on that and then I guess specifically as you look into year-end if you guys would consider sharing us what 13 SEER inventory and through the 2015 grace period?.

Yes, let me ramble a little bit Drew for those on the call who aren’t up-to-date on the latest regional standard rulings of the OE.

As we now have sort of clear set of rules where minimum efficiency for air conditioners will go from 13 to 14 SEER in the south and the southwest and minimum efficiency for heat pumps is going to go from 13 to 14 SEER nationwide.

And the way it’s being implemented as you suggested Drew is that OEMs must stop manufacturing the product by January 1, 2015 the distribution has an additional 18 months or until mid-2016 to sell through the 13 SEER product. We’re talking to our dealer contractors and our independent distributors to sort of see how they’re thinking about things.

But directly to your point in our Lennox business which is about 80% of our residential segment, we have company-owned distribution and we don’t expect to pre-buy in fact there is not a pre-buy but rather a pre-build.

And to directly answer your question as we in fact do plan to use some dollars to stock 13 SEER in our distribution locations in ’14, in 4Q 2014 for dealers to pull through over the next 18 months will be closer to them to be put our plans together we’ll sort of indicate exactly what that investment will be.

In our alloy business which is about 20% of our Residential segment there we do expect to see some pre-buy from independent distributors in fourth quarter of 2014 and we’re not exactly sure yet what that looks like because all this is relatively new.

And then again I would remind folks that we expect our OEM competitors that have a higher percentage of independent distribution than we do we’ll see more of a pre-buy dynamic from them as they sell to independent distribution in fourth so independent distribution then has product for the following year, year and a half..

Okay, thanks Todd, I appreciate that. And then lastly just quickly on price, obviously you’re rolling out the price increases. May be just a quick update on realization early in the season? Thanks..

Okay, thanks Todd, I appreciate that. And then lastly just quickly on price, obviously you’re rolling out the price increases. May be just a quick update on realization early in the season? Thanks..

I mean it’s early and we feel confident of getting the price that we’ve committed to which is 10 million of price and we put it into system and we’ll go through the major part of the selling season and we’ll see how it goes. But we’re optimistic..

Okay, thank you very much..

Okay, thank you very much..

Thanks..

Okay, thank you. And the next question is a follow-up from the line of Rich Kwas of Wells Fargo Securities. Please go ahead..

Okay Todd, just on the segments when you look at the three segments it seems like there is a fair level of comfort with Residential and there has been some noise in Commercial and I guess some more noise in Refrigeration.

But if you look at the three segments for the year particularly on the margin front where do you feel most optimistic or on the reverse side where do you think there is the most risk particularly in delivery?.

Okay Todd, just on the segments when you look at the three segments it seems like there is a fair level of comfort with Residential and there has been some noise in Commercial and I guess some more noise in Refrigeration.

But if you look at the three segments for the year particularly on the margin front where do you feel most optimistic or on the reverse side where do you think there is the most risk particularly in delivery?.

Yes, I mean, I think it attracts my confidence on revenue. We talked about Refrigeration last year and in December and said we needed some additional volume to drive margin expansion there and we needed some tailwind to do that. And so far we haven’t had it this year. In Residential I feel very good about the end-markets as I talked about.

And our Commercial business is a very good business, that’s our target margins are 14 to 16, they’re already at 14, they’ll continue to chug along and get margin expansion but again, I have less clarity in my own mind about what the markets are going to be, so in terms of confidence it’s Residential, Commercial and Refrigeration probably not ordering it’s tied to what the end-markets are going to do..

Okay, got it, thank you..

Okay, got it, thank you..

Okay, thank you. And back to you gentlemen for closing remarks..

Thanks operator, a few points to leave you with, we’re focused on driving our strategic initiatives in ’14 including significant cost reduction and productivity programs and plans for continued market share gains. The year is off to a good start with the first quarter and we are well positioned for continued momentum.

With our expanding distribution network and leading product portfolio we look forward to the seasonally strongest quarters of the year. I want to thank everyone for joining us today..

Okay, thank you. And that concludes our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect..