Steve Harrison - VP, IR Todd Bluedorn - Chairman & CEO Joe Reitmeier - CFO.

Robert Barry - Susquehanna Jeff Hammond - KeyBanc Keith Hughes - SunTrust Julian Mitchell - Credit Suisse Rich Kwas - Wells Fargo Samuel Eisner - Goldman Sachs Jeff Sprague - Vertical Research Mark Douglass - Longbow Drew Venker - Morgan Stanley Steve Tusa - JPMorgan Walter Liptak - Global Hunter Glenn Wortman - Sidoti Josh Pokrzywinski - Buckingham Research.

Ladies and gentlemen, thank you for standing by. Welcome to the Lennox International Third 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 conference call is being recorded.

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

Good morning. Thank you for joining us for this review of Lennox International's financial performance for the third quarter of 2014. I am here today with Chairman and CEO, Todd Bluedorn; and CFO, 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 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 Web site at www.lennoxinternational.com. We will archive the webcast on that site and make it available for replay.

We 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 also like to announce the date of our Annual Investment Community Meeting. It will be the morning of Wednesday, December 17th 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..

Good morning, and thank you for joining us. In the third quarter, Lennox International grew revenue 4% at constant currency. EBIT margin expanded 40 basis points to a third quarter record of 12.3% and also matched the all-time record level set in the second quarter of this year.

Adjusted earnings per share from continuing operations was up 11% to a third quarter record of a $1.44. The company's performance in the third quarter continued to be led by our Residential business. Residential revenue was up 7% at constant currency and profit rose 22%.

Our Residential business set third quarter records for margin at 15% and profit at 69 million. Revenue from both replacement and new construction business was up high single-digits from the prior year quarter.

We continue to see a higher SEER mix in the quarter, with 14 SEER and above products comprising 41% of cooling product shipments, up three points from the prior year quarter. Our 22 products were 10% of cooling product shipments, down one point from the prior year quarter. In Commercial, revenue was up 1% at constant currency and profit rose 8%.

Our Commercial business set records for segment margin at 17.5% and profit of 42 million. Looking at our North America commercial equipment business, our momentum continued in the emergency replacement market with high single-digit revenue growth, despite a cooler summer than last year.

Planned replacement revenue was down low single-digits on the timing of certain national account business shifting from the third quarter to the fourth quarter. Commercial new construction revenue is flat from the prior year quarter. We won four new national account customers in the third quarter to total 25 wins year-to-date.

In Europe, commercial HVAC revenue was down low single-digits at constant currency, with the uncertainty of political environment in Eastern Europe, as well as softer market conditions for Europe in general.

International account service business revenue was up high single-digits as we continue to leverage our commercial national account relationships. In Refrigeration, revenue was down 1% at constant currency, and profit was down 31% from the third quarter a year ago.

Looking at revenue of constant currency by region, Asia was up 20%, North and South America were flat, Europe was down low single-digits, and Australia was down mid single-digits. In North America, we continue to expect improved growth from national accounts supermarket business in the fourth quarter and then on into 2015.

As expected in Australia, general economic conditions remain soft, our profitability was down following the July repeal of the carbon tax in that country that negatively impacted our wholesale refrigerant business.

To update you on our strategic initiatives, in Residential, I previously mentioned that we were transferring certain furnace production from United States to Mexico, we are also in-sourcing sheet metal fabrication as part of our Mexican operations.

Our second factory in Saltillo began shipping units early in the third quarter, and production is going well to support the heating season. By 2016, we expect [$15] [ph] million in annualized savings from this initiative.

In our Residential distribution expansion initiative, we opened four new Lennox PartsPlus stores in the third quarter to bring our total stores to 154. With 19 new stores opened this year through September, we are on track with our target to open 25 new locations and exit the year at 160 stores.

In our Commercial distribution expansion, we opened three new local distribution centers in the third quarter to bring the total of dedicated commercial locations to 36. In addition, commercial products to support the emergency replacement markets are positioned at select Lennox PartsPlus store locations.

To update you on VRF, we entered the market in North America early in third quarter as planned. Our partnership with Midea is going well as we launched Lennox branded VRF products through Lennox company-owned distribution. We've won our first business in VRF on the path to our target of $100 million of revenue by 2018.

VRF market is more than $500 million today in North America, and it's been growing 30% annually. Last point before I turn it over to Joe is to update you on our stock repurchase plans. We've bought back a total of 100 million of stock in the second and third quarters this year.

With our solid balance sheet and a view on the company's strong market position and prospects, we're announcing today plans for a new 450 million accelerated share repurchase program starting in October.

This amount includes the 50 million we previously were planning to purchase in fourth quarter plus another 400 million, now all rolled into a new ASR.

To update you on where we stand with our stock repurchase authorizations, we had a 146 million remaining at the end of third quarter under existing authorizations, and the Board of Directors recently authorized $700 million more for a total of 846 million.

After the ASR we announced starting in October, we'll have a little less than 400 million, 396 million in remaining -- under the current authorization.

We believe stock repurchases to be an efficient way to return cash to shareholders as we drive the operational performance of the business and focus on creating total shareholder value over the long-term. I'll now 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 & Cooling. In the third quarter, revenue from Residential Heating & Cooling was $463 million, which was up 7%. Currency was neutral. Volume was up 6%.

Price and mix combined was up 1%. Residential profit in the third quarter was a third quarter record of $69 million, which was up 22% from the prior year quarter. Segment profit margin was a third quarter record 15%, up 190 basis points.

Segment profit was positively impacted by higher volume, favorable price mix and lower material costs with partial offsets from higher SG&A and investments in distribution expansion. Turning to our Commercial Heating & Cooling business, in the third quarter, Commercial revenue was $242 million, up 1%. Currency was neutral.

Volume was up 1%, and price and mix combined was flat. North American Commercial HVAC equipment and service revenue was up low single-digits. Europe Commercial HVAC revenue was down low single-digits. Commercial segment profit in the third quarter was a record $42 million, which was up 8% from the prior year quarter.

Segment profit margin was a record 17.5%, up 110 basis points. Segment profit was positively impacted by higher volume, favorable price mix and lower material costs with partial offsets from investments for future growth. In the Refrigeration segment, revenue in the third quarter was $194 million, which was flat with the prior year quarter.

Currency had a negative one point impact. Volume was flat. Price and mix combined was down one point, and -- excuse me, with the price up and mix down. Todd mentioned the revenue change by region at constant currency.

At actual currency, Asia was up 20%, South America was up low single-digits, North America was flat, Europe was down low single-digits, and Australia was down mid single-digits. Segment profit was $17 million, down 31% from the prior year quarter. Segment profit margin was 8.5%, down 380 basis points.

Segment profit was negatively impacted by unfavorable mix in our North American supermarket business and Australian refrigerant profitability with the partial offset for the segment from favorable price. Looking at special items in the third quarter, the company had total after-tax charges of $2.8 million.

This includes $800,000 for restructuring activities, and $800,000 for special inventory write-downs related to our regulatory changes in Australia. Corporate expense was $18 million in the third quarter, up from $17 million in the third quarter a year ago. Overall SG&A was $141 million in the third quarter, up 3% from the prior year quarter.

Cash from operations was $97 million in the third quarter, down from $153 million in the prior year quarter as we began to build 13 SEER inventory to support our customers ahead of the regional standards transition.

We expect this inventory build will have a minimal benefit to earnings of a couple of cents in the fourth quarter, which is incorporated into our guidance. Capital spending in the third quarter was $19 million, up from $18 million in the third quarter a year ago. Free cash flow was $78 million compared to $136 million in the prior year quarter.

Cash and cash equivalents were $48 million at the end of September. Total debt was $596 million at the end of the quarter. And our debt to EBITDA ratio was 1.5, ending the quarter within our general target range of one to two times.

With the $450 million accelerated share repurchase program, we announced that will start this month, we expect to be higher than this range exiting 2014, and then back within the one to two times debt to EBITDA range in 2015. Before I turn it over to Q&A, I will review our outlook for 2014.

Following the cooler summer weather that was a headwind to the industry shipments in North America, we now expect Residential HVAC shipments to be up mid single-digits for the industry versus our prior assumption of high single-digit growth.

For North America commercial unitary shipments, we now expect the industry to be up mid single-digits from our prior guidance of low single-digits. And we continue to expect refrigeration shipments to be flat globally for the industry in 2014.

Based on the company's performance year-to-date and current outlook, we are reiterating a revenue growth guidance of 5% to 7% for the year. We still expect foreign exchange to have approximately one point negative impact.

And now looking at our other guidance points for 2014, we still expect $30 million from our savings from outsourcing and engineering led cost reduction programs for the full year. We still expect $10 million from favorable price in 2014, and commodities are expected to be a $5 million benefit in 2014 versus our prior guidance of that being flat.

We now expect $5 million of favorable mix in Residential in 2014 due to the customer mix versus our prior guidance, up $10 million. Among the headwinds for the year, we still expect a negative $10 million impact from foreign exchange that will not be offset by price in 2014.

In our Australia business, we still expect a negative $10 million impact in the second half versus the prior year period with a repeal of the carbon tax in that country, including about $7 million in the fourth quarter. Corporate expense is still expected to be approximately $70 million for this year, down $18 million from 2013.

And a few more final guidance points; we still expect net interest expense for the year of about $15 million. Our effective tax rate is still expected to be between 34% and 35% on a full year basis. We continue to expect capital expenditures of $90 million.

And looking at our weighted average diluted share count for 2014, we still expect to be approximately 49 million shares on a full year basis. And finally for 2014, we are reiterating our guidance for adjusted EPS from continuing operations of $4.30 to $4.50 per share.

A couple of points at this time on 2015; with the impact to the accelerated share purchase program, we expect our weighted average diluted share count to be approximately 45 million shares on a full year basis for 2015. We expect interest expense to be approximately $25 million in 2015, up from $10 million in 2014.

As is our practice, we will discuss and give the other guidance points for next year at our Annual Investment Community Meeting in December, as Steve mentioned. Now with that, let's go to Q&A..

Thank you very much. (Operator Instructions) First in queue is Robert Barry with Susquehanna. Please go ahead..

Hi, guys, good morning..

Hey, Robert. Good morning..

Congrats on the solid quarter..

Thanks..

Thank you..

Just, if you could maybe share a little bit more detail about the ASR, when you expect it to be completed, the financing, and it sounds like maybe it's adding a couple of cents to earnings this year..

Yes. Let me ramble, make sure I get all the points and if I don't, re-ask the specific points I didn't get. We think it will add a couple of cents in fourth quarter. We're going to initiate it in October, the way the deal is structured, about 70% of the shares will get immediately and then 30% when it's completed.

Given our trading volume and our flow, it will be sometime in the second half of 2015 before the program is completed..

Okay, perfect. That's helpful. And then maybe just digging into Commercial a little bit, given the profitability there were so strong, just maybe you can unpack that a little bit, the drivers and the sustainability of it, especially some of the business that sounds like got shifted roles on.

Is that mix positive, or any additional color there would be helpful. Thanks..

No, I think it just reflects the continuing strong performance of our commercial business. With strong material cost reduction, strong factory productivity, we continue to get positive mix and price in the business. And the business has been pushed out as you can take from our call is some national account business.

And it's no less profitable than the business that we had in third quarter. So, that won't be dilutive. And we think we'll have a stronger top line in fourth quarter. When we look at the order rates, the momentum in that business continues, so just some things got pushed out from third quarter to fourth quarter..

And you feel good about the visibility that it will actually come in 4Q or is there some risk that given the macro, it keeps getting pushed right?.

Yes. The short answer is yes, there is always risk and they can push things out, especially some of our big customers. But I think even with all that, we're optimistic for what fourth quarter is going look like, we think the momentum -- the underlying momentum continues..

Okay..

But all that being said, there is enough uncertainty that who knows in the long-term, but we feel pretty good about fourth quarter right now..

And then just finally, it sounds like you mentioned a couple of cents of benefit from the regional efficiency standard change in 4Q.

Is that all about volume in the Allied brands?.

No. It's really driven by -- as we pre-build the inventory, and I won't get into the technicalities of our accounting, but given that we use LIFO accounting, we'll have a little bit of benefit for absorption for the quarter. And so, there will be a few cents of absorption benefit in fourth quarter.

But the majority of absorption benefit and the full margin will see when we sell the product in 2015. But that's where that few cents is from..

Yes.

Is there an expectation that the Allied brand portion of the business, I know it's only about 20% and only about 60% of that is impacted, but it seems like that 12% could be up quite meaningfully?.

I think we'll have some benefit. But I'll be honest with you Robert, and I assume our competitors are finding the same thing to get the inventory levels that we think we need even for independent, we're going to end up carrying some of it and then selling it to them during the year..

Yes. Okay, thanks very much..

Thanks..

Thank you. Our next question in queue will come from Jeff Hammond with KeyBanc Capital. Please go ahead..

Hey, good morning guys..

Good morning..

Good morning, Jeff..

So, clearly with the buyback, you're expressing confidence in the business, can you just talk -- and I know you'll address this in more detail in December, can you just talk about how you're feeling about business momentum into '15, and then any outside of just the lower share count, any obvious large headwinds or tailwinds you're thinking about?.

Yes. As you suggest, we'll give details in December.

But where we sit now, we expect North America markets to continue to be up in 2015 underlying our third quarters, especially in Res, and to a less degree emergency replacement and commercial is even with the year-over-year core weather and degree cooling days or cooling degree days in third quarter were down 6% or so.

In July, down 12% year-over-year. We still drove Residential revenue growth in high single-digits and our emergency replacements are up high single-digits. So we think all that continues -- we think all that underlying momentum continues in the 2015.

In our Refrigeration business, during the first half of 2015, we'll continue to have some headwinds from Australia Refrigerant business. A little less than what we had during the second of this year, but it will still be a meaningful number and we'll guide to that in December.

Continuing with the theme of Refrigeration, we expect some improvement in our North America Supermarket business, which has been a drag this year. We went through all of the math on the share buyback. We also mentioned that interest expenses are going to go up 10 million from 15 to 25.

Then on material cost reduction, we can -- what I'd put in my model, what I'd encourage everyone to put in their models, similar number of around 30 million of material cost reduction next year, similar number that we've had the last few years.

So I think that's the balance of things we're going to talk about right now and then we'll give the rest of the guides in December..

Okay, great. And then just -- so on the pre-buy I guess, you get a couple of pennies in 4Q and then you give that back next year. But it sounds like it's more of a pre-build than a pre-buy. It seems like most people won't really see much pull forward given that -- like you said, the reticence for distributors to hold the inventories..

Yes. I’ll speak for ourselves. It's a pre-build rather than pre-buy. There may be a little bit of pre-buy that we haven't really rolled into our numbers. But I think it is almost exclusively a pre-build.

And I can't really speak for the competitors other than to assume that there is maybe a mix of both, but I think even if you're 100% independent distribution, you probably are going to do some pre-build too..

Great. Thanks, guys..

Thanks, Jeff..

Your next question comes from the line of Keith Hughes from SunTrust. Please go ahead..

Thank you.

Two questions; one, with the accelerated share repurchase, does this preclude anything other than small acquisition activity moving forward?.

No. I guess I wouldn't think about it that way. As we've consistently said, one to two times debt to EBITDA, closer to two over the longer term, that we'll invest organically, we'll do strategic acquisitions. We'll give money back to the shareholders. If you do the math in all this, and make some assumptions for growth next year.

We start to de-lever as we go through the year and get back down to midpoint maybe even the low end of our one to two. And as I've said all along, for a value creating change the game acquisition that we thought to create shareholder value we'd find a way to finance it.

I think though Keith that reflects an honest opinion of what are the assets that are available right now that fit that description. And we thought it made sense, given our view of our business that investing share buyback made sense to do now..

Refrigeration, the numbers came in -- it's been a troubled sector for a while now.

Do you sense a bottoming going on in some of the regions of the business or is it too soon to say that?.

Yes, I mean, short answer is yes, longer answer is doesn't matter what we feel, it matter what we post. I think in Australia, we're not quite at least on a year-over-year comps, we're going to have some headwind first half next year.

In North America, grocery business, I saw Dover's had similar comments of things being pushed out and some pressure on the business. We think fourth quarter, going to 2015, things going to look better, that's certainly what our backlog and order rates look like. But there's enough uncertainty out there. We got to book it.

We got to sell it and move forward. But we think operationally we clearly have bottomed out and turned the corner, seeing it in the financial results it’s going to be tied a little bit about what some of our customers do..

Thank you..

Thanks..

Your next question comes from the line of Julian Mitchell from Credit Suisse. Please go ahead..

Hi, thank you. Just on the growth margins, overall I think that was up about ten basis points year-on-year in Q3. In Q2, it had been down 50 bips or so. This quarter you had obviously the Australian impact.

What was really driving that gross margin turnaround? Is there something dramatic to happen with input costs or mix?.

I think just overall we had a very good quarter. We continued to have positive price mix across the enterprise. Our material costs reductions as we talked about earlier in year, it tended to be more second half of the year than first half of the year. We continued that strong factory productivity. So I think it's just across the board good performance..

Thanks, and then secondly, going back to refrigeration; it sounds like the hit from Australia is going to be bigger in Q4 than in Q3.

So, is there a chance that the margin performance year-on-year is similar or worse in Q4 than what you just reported?.

I think you can back into the different numbers, I mean specific on the narrow question to put in your model, yes, we've said Australia refrigerant headwind was going to be $10 million. We said it was $3 million in third quarter. So it's $7 million in fourth quarter.

So, yes, we expect a significant headwind in fourth quarter and our guidance for the full year is the guidance for the full year, incorporates all that..

But do you think that the U.S.

piece recovers somewhat in Q4 so that should offset it?.

I think in refrigeration, as I suggested, we're -- operationally we think we've turned the corner and we think we'll have some pick up in our revenue and volume in fourth quarter. I don't think enough to offset the $7 million, but it will offset some of it.

Just refrigeration segment, and then, the strength in commercial as I talked about, we think we will have a nice quarter there and residential, the momentum continues with the caveat as in fourth quarter we shift from cooling to heating.

That's always during that bridge period, you got to have the weather go right and you have some things to really get fourth quarter up and running strongly..

Understood. Thanks..

Thanks..

Your next question comes from the line of Rich Kwas from Wells Fargo. Please go ahead..

All right. Good morning, everyone. Just following up on the refrigeration, as we think about the first half of next year, I think you started to feel the impact on the Australian piece in the second quarter was that $3 million.

Do we think of the $10 million as being the impact in the first half of next year on a year-over-year basis or is it going to be less than that?.

I think it's going to be less than $10 million. Again, we'll guide in December, as we get some more better understanding on pricing and house holding up in Australia, but right now we think it will be somewhere between $5 and $10 million headwind in the first quarter -- for the first half of the year..

Okay.

On the buybacks, does 70% gets done here before end of Q4? And then 30% in the first half of next year? Sometime during the first half?.

70% in fourth quarter and then 30% we'll complete at sometime in second half of 2015..

Okay. So, it's second half. Okay.

Just on -- with Walmart out the other day saying they're pushing out some of the super store concepts, going to smaller stores, I assume that's been considered in the outlook, but how impactful do you think that will be on the longer-term growth for a while?.

Walmart is an important customer. We work with them both on new stores, replacements, large formats, small formats on the HVAC side. We're largely exclusive on refrigeration. We can compete with others, but we have a large part of their business.

Shore answer is it's certainly baked into 2013, as we roll in the 2015, it will be baked in, a lot of we roll in the 2015 that will be bagged in and lot of things are said publically we know about those earlier. We talked to them and I think that reflects some of the comments.

I think you can read some of public Walmart comments into what we saw in commercial in third quarter. What we seen in refrigeration in North America last couple of quarters, things have been pushed out..

Okay. Todd, last one on new construction. Some of the guys that are more levered to US non-res have talked more positively on what they've seen in the third quarter.

How do you see the business? I know that you're going to be later in the game in terms of putting stuff in, but what do you say in terms of project activity and how do you feel about the light commercial piece?.

Yes. We think momentum is heading the right direction and we called new construction down being flat for the quarter. Again I think that's timing up national accounts that draw that and so when we say new construction, that's skewed a lot by national accounts, but the underlying momentum I think ….

Okay thank you..

Thanks..

Your next question comes from the line of Samuel Eisner - Goldman Sachs. Please go ahead..

Hey, good morning everyone..

Hi, Samuel..

Good morning..

Just a couple follow ups here, so the residential business, obviously up 7% in the quarter, curious how that phased in July, August and September? Obviously, the AHRI data was weak in those first two months, so just curious how that looked throughout the course of the quarter, in particular in September?.

We had a strong September, and again that's always the case. Just from a technical counting point, it's a five-week month versus the others being four weeks. The cool weather in July, on a year-over-year basis hurt us, and then in August and September on a relative basis the weather wasn't quite as cool and we saw pick up in the business.

So we closed well..

Understood. I think late last week we got some finalization on R22 virgin production. Just curious how you guys are thinking about that going forward and the impact of the business? Obviously, you called out the 10% level of shipments.

Are you expecting that to go down meaningfully into next year and how does that change your thinking going forward?.

Yes. For those two don't follow quite as closely as you do, what's coming out of the EPA, there are couple of different regimes, if you will, that were potential step down on our virgin R22 production. They went with a pretty aggressive step down from 14 to 15 and then 15 to 16. I think that will help put pressure on the R22.

That being said, even at those production levels, combination of virgin plus recycled R22 still makes the economics for customers who are just managing for near-term cash flow, which is anyone would buy a dry charge unit even today. The economics are still favorable to do that versus putting a 410 A system.

We think year-over-year we'll continue to trend down, but it's not cleared to us that it's a step function down..

Maybe just lastly in terms of mix looking out to next year -- I know you're not giving any guidance on actual EPS or sales, but how do you think about mix in particular, SEER 13 versus SEER 14? Do you think that will mix up, mix down?.

I think there's a couple of facts, sort of ignoring what we do just from an industry viewpoint. What we expect to happen is where regional standards kick-in, obviously it will go from 13 SEET to 14 SEER. And from a dollar viewpoint we'll get dollar margin higher on those units, which is positive.

But what will happen will be the percentage margins that we used to get on 14 SEER will go down as it becomes to battleground for the entry level. So I think from a dollar margin point, it'll be helpful. I think from a percent viewpoint, I don't think we'll have a positive or negative. I think we'll tend to be neutral. That from a self-help viewpoint.

We continue to mix up. We continue to mix up on high efficiency given our product strategies, our distribution strategies. We've done that for the last couple of years, and I think we've outperformed the market. On mix, I think that will continue as we go into 2015..

That's helpful..

Thanks..

Your next question comes from the line of Jeff Sprague from Vertical Research. Please go ahead..

Thank you. Good morning gents..

Hey Jeff..

Just one more on the ASR. It sounds like you've actually entered a structured deal with a bank or something.

I'm just wondering if that is in fact the case, and is that a done deal? Did you do that at last week's prices? Is that happening now as we speak? Just a little bit more color on the mechanics there?.

The way it work is -- and, yes, we do have -- [it sounds] (ph) like we're coming to terms with the banks, now finalizing the agreement. What happens we get the 70% of shares up front? And then it's valued at a weighted average price over the term of the ASR, which we true up with the 30% share delivery at the termination of the agreement..

Okay. Great. Got it. Just thinking about price cost and materials cost, some of the cost benefits that you're enjoying are driven by your own actions and execution, but the industry seems to still be successful getting some price in what is still a very subdued cost environment.

Obviously, there's always mix effects and material transition and everything going on that clouds the waters a little bit.

What do you actually see for the asset types for the industry, the supply chain to continue to take price in this really quasi deflationary environment that we're in?.

I think as an industry we've been good at -- and as a company we've been good on passing on price year-over-year. And again I think our channel understands that given our exposure to commodities when they spike up we don't pass it all on in one year because we know that the channel can't accept it.

And so what we do is take a nibble every year on price increasing. And then when the commodity spike up, we don't have to pass it all in once, and my expectations will be in a market, North America HVAC market that continues to grow. We'll continue to be able to get price..

Just one or two other quick ones. You characterized the transition as a pre-build not a pre-buy, but could you provide a little bit of color on what the channel's appetite is for the pre-build, really how it plays into next year? I was also just wondering, you did maintain the range for the year down to a quarter.

We had a $0.20 range now for the fourth quarter.

Are there, really, factors here in the fourth quarter that you think would drive that big of variance of potential outcome?.

Let me answer the 13 or the regional standard question first. As you can imagine we've had lots of conversation, both with our dealer contractors who we sell the Lennox brands to, and then our independent distributors about what they see in eth marketplace. Then we've all -- many of us live through the last regional standard change.

So we saw what happened in the marketplace. Highest level logic what we want to ensure is that we have a competitive product line that can compete on the low end in the south and then the north where heat pumps in and rest pack.

We need to make sure we have enough inventory during this 18-month period that we're not at a cost disadvantage so we need to pre-build enough 13 SEET to do that. And we're doing that.

As I say, we have a couple of sense of absorption impact in fourth quarter as beneficial, but the major part of the margin and the absorption, full part of the margin and absorption benefit will see in 2015 as we sell it.

In December Analyst Day will be precise about the inventory build and give you exact numbers of what the end of the year is going to look like. Right now we're still working through things, but in December we'll update it. What was the second question? I got chill and gross to the pre-build, I forgot the second question..

Sorry about that and I'll move on after this.

Just the $0.20 range for Q4, is there really variables that you think could drive that wider range of outcomes?.

No, I mean nothing abnormal. I actually just went back before the call over time. As we go in the fourth quarter, our history is been from 15 to 25 depending on the year. I think the biggest variable quite frankly would be – and I've talked about it and we've had some questions about, it is commercial and refrigeration volume.

We think customers, we have some commitments for fourth quarter, but it's a uncertain environment. And then whether obviously always place an impact on our Residential business as we make the transition from cooling to heating. Everything was within our control, we feel very good about.

I think that market variables in an uncertain world is what we're concerned about..

All right, thank you very much..

Good. Thanks..

Your next question comes from the line of Mark Douglass from Longbow Research. Please go ahead..

Hi, good morning, gentlemen..

Hi, Mark..

Did I hear you correct that you took up your North America unitary assumptions from low-single to mid-single digits?.

Yes..

Is that and that's the market, correct?.

Correct..

Correct.

So, what are you seeing in the market that's really driving end of the year performance on the unitary side?.

Well, when you look at the AHRI data, which is public data, through August, which is most current data we have. Industry is up 5%. And as we think about the piece of the markets that we see going in the fourth quarter, I think I've signaled that we were up, low single-digits in third quarter.

And we think we're going to do better which puts us in mid-single. And so, if it's up, if the industry's up through August 5 and we think fourth quarter we're going to be up amid. And we're one of the leading players. It makes sense thus its prior going to be up mid.

That's the math, but I think the underlying point I'd make is as what I said earlier is it feel solid. The momentum continues, your order rates look good, backlog looks good. It's a matter of timing on some of the orders. Emergency replacement, which is the book and ship business. We are up high single-digits and so that remain solid also..

Right.

Is that some of that planned replacements that didn't happen in third quarter, people are expecting a lot of those to come through in an entire market in the fourth quarter?.

Yes. I don't … You added it lot. I would just say we would expect, we're expecting some of the third quarter order, third quarter plant replacement that we expect it happen at third quarter will now happen in fourth quarter.

And given how large a part of the market we are, especially in that segment, we think that'll continue to make them, given that it's up 5% year-to-date, we think that'll sort of continue through the year..

And the one last question.

Restructuring, what is left, what kind of plans do you have right now for further restructuring it and where was your restructuring focused in the third quarter?.

The restructuring was focused in our Australia business and sort of given a performance, you, if I not surprised by that. So we took some headcount actions. And as always any restructuring we have, we announce when we're ready to go. And given our optimistic, not optimistic but our views are going forward on our end markets.

We don't have any restructuring plan right now but if that changes, we'll let you guys know..

Okay, thank you..

Thanks..

Your next question comes from the line of Nigel Coe from Morgan Stanley. Please go ahead..

Hi, good morning, guys. It's Drew on for Nigel..

Hi..

Could you just talk a little bit about the trends you're seeing in Europe and Latin America, specific to your businesses? Then, just some general color on the market overall?.

Yes. In South America, we were flat for the quarter. And so to give in all the uncertainty especially in Brazil, which is our largest end market. I think that reflects that we're winning and gaining share. So our Brazilian business on a year-to-date basis continues to hang in there.

Europe … We continue to see uncertainty in Eastern Europe that affects our end markets there and even in old Europe, at least for the quarter we saw that start to flat and slow down a little bit.

But again, we have a small keyhole into Europe up and we think we have an opportunity, unless the markets take a significant step down to continue to do self-help and gain share and win in the marketplace and continue to keep our revenue growing. That's our intent in Europe..

That's helpful. Then on the ASR, it sounds like reviewing stock price, reviewing capital allocations from the Board, we're going to be hearing a lot and we're hearing it already, just the first week here from other companies.

What really triggered it? I know you mentioned confidence in the business trends, but was it more stock price or was it more weighted towards business trends and your outlook for the longer term??.

I think its multiple things because I was optimistic and confident when the stock was in 94, I thought it was a buy then, right. So, I always think it's a buy. So, it's sort of hard to time it by that, I think it's a couple of things. I think one is given our cast generation, we were going to de-lever unless we did more of a share buyback.

And I think we sort of been clear that it's one to two closer to two, and if we don't do deals, we're going to either need to grow dividends which we did this year and do a share buyback. And as we didn't do any deals, it came very, of course we got it at the end of the year that we're going to de-lever.

So, let's go do a share buyback and lower our cost capital. I think the other thing that laid on top of it and are sort of brushed aside, it is when you look at the big assets that we would want in North America, the owners are pretty clear right now that they don't want to sell it and publicly said that.

And so, I think we have a window to go out and do what we do and still keep strategic flexibility as I suggested. But if there aren't big assets and we're de-levering, we should go do a share buyback and that's what we did..

Okay, great. And then just a quick follow-on to that.

I might have missed it but how are you financing the ASR, are you terming it out?.

We're going to do a term loan and also do a piece of it on our existing revolver..

Okay, great. Thanks guys..

Thanks..

Your next question comes from the line of Steve Tusa from JPMorgan. Please go ahead..

Hi, guys, good morning..

Hi, Steve..

Hi, Steve..

So, you keep mentioning these orders in commercial, can you give us some context around that, the North America commercial orders, how much were they up?.

We don't talk about that. I don't think I'll ever give that number publicly but the answer is we have when we look at our backlog and orders for fourth quarter, they support the revenue growth that sort of handed out, that we're going to have in fourth quarter in commercial..

Okay. On the refrigeration side, you've talked about a couple moving parts for next year.

How does the core -- is there anything outside of these charges that we should think about as far as the core performance is concerned? Will there be -- is there any chance of a snapback in the margins there in 2015? At least in second half?.

I think in second half, clearly, we'll have stronger margins, given that we won't have the year-over-year comp will be much better on the refrigerant in Australia. But I think I've been clear that operationally we think we've turned it around. Financially, we need to start posting results.

I'm not quite to the point where I'm going to predict a snap back in margins. I think we're going to grow margins next year but we have to deliver on the revenue, on the operational side. I'm confident we'll deliver but we need to continue to grow the top line..

Right.

Just turning to resi, so when you say pre-build, that means for the 80% of distribution you own, you'll build and then those guys will hold it and then ship it to dealers? So in Allied you're going to see more of a pre-buy? I'm just trying to -- maybe I'm an idiot, but pre-buy versus pre-build, you still own some factory direct to independent, so what's the dynamic in the Allied brand?.

Just pausing on how I publicly want to characterize but I'd be very straightforward. Even with our independent distributors, we're going to be doing significant pre-build that as we work with our independent distributors, we are working through arrangements of how much they take versus how much we hold.

And given our cost of capital and our ability to logistically handle it, we're going to hold a lot of it ourselves and then sell it to them during the year..

I see.

So you said the law allows you to build it and hold it at your -- for the Allied brand that ships direct to independents, you can hold that at your locations instead of having to ship it? Is that how the law works?.

Correct..

Okay. So you can mitigate that dynamic. How do you see -- you talked about mix good, mix better, just from a dollar perspective but price coming down at the fighting brand level.

How do you view that trajectory and the trend line there?.

I think that's going to ….

So for example, if 14 SEER is 15% to 20% higher than 13 SEER today, where do you think that ends when all is said and done next year in a normal weather year?.

I think what we'll be able to do is sort of a, I actually think the cost difference between the two units are 15% to 20%. And so therefore, I think we're going to be able to cover the cost increase with pricing, even when it starts to come down.

And then the question is going to be how much more than that are we going to be able to get as an industry is we try and mix up. But I think we'll cover the cost increase with pricing..

Right.

So you haven't seen any real -- I mean has anybody come out and acted irrationally in this environment where they're cutting their 14 SEER fighting brand to try and gain a little bit of share? Have you seen any of that?.

No, I don't. No one's gone to war with 14ths here. I mean, everyone still has 13ths here and that's sort of the battleground.

And quite frankly as we go into 2015, there's this variable, say just assume for a second everyone does what we do, which is they pre-build 13ths here and they have it, then I think you can argue 14th share margins as a percent don't go down. Right? Because we're all going to have 13 share that we're competing against with the entry level.

And I could argue that 15, depending on how much people pre-build could look a lot like 14 in terms of both the spread of the units of 13 and 14ths here and the margin percentages. So, I think we just more cards have to be turned over before I can be completely defended I think on how the year is going to break on that..

Right.

Do you guys own any R22 inventory in your distribution channel? Is it all PartsPlus stuff? Do you all hold some R22?.

Yes..

Is it a material amount?.

What's the context of the question, I don't know where you are?.

Well, isn't price going to go up pretty dramatically there?.

We're not going to have a win fall like we had in Australia, if that's the question. I mean, we have some in the channel but we tend to buy it as we need it, we don't have big inventories, so we haven't pre-bought it..

Okay. Then one last question just on these -- you put me last here, so I'll pick up some more time. All these items in the quarter, I mean seem like your lawyers and accountants were pretty busy and it's just like a litany of different things that are not necessarily material, but it just seems like the magnitude of the amount here is interesting.

Is this just a normal true up you do every year? It just seems a little bit odd that all this stuff would come falling out at one time..

Are you talking of what items, you're talking about the items as we go?.

I mean, asbestos, warranty, environmental, legal charges, I'm not sure you guys covered all the bases on items this quarter..

Yes. I think the two things that we all with -- that were predominant in that number was one, the write-down of post-levy refrigerant that we had in Australia which was $800,000. And then also the environmental charge that we had to take for some of operations..

Right.

But then there's like as best as in, I mean, isn't legal contingency?.

I mean, I thought I think about it this way. I mean, it's about three, I think the number of items were longer than normal. So, point may point taken. I think the other point that I would make would be it was under 3 million of items. I don't think that's out of line where traditionally what we've done.

And the third thing is, there was no conscious attached to sort of clean the cabinets if you will. Things that came up in the quarter that we worked with or outside auditor and got comfortable that we are treating it the right way..

Okay. It's good time, clean the cabinets, I like that. Okay, thanks a lot..

I'm denying cleaning the cabs, yes..

No. It's, I mean I didn't necessarily say that but that's just a curious -- thanks, please speak it..

I think that's a phrase your associate road and you're noticing. I think that's where I got it..

I write all my stuff. So, you know..

Okay, thanks..

There's no ghost writing here, thanks..

Okay, right..

Your next question comes from the line of Walter Liptak from Global Hunter. Please go ahead..

All right, thanks guys. Looks like I get to be the last one..

Hi, Wal..

Looks like I get to be the last one. Wanted to ask about the revenue guidance that we're talking about for the fourth quarter and the acceleration from 4% up to something higher.

I think high single digit is what you're implying, and I wonder if you could talk about it? It's not clear to me as, could we be double digits in residential and low single digits in the other two? Or are they all high single digits for the fourth quarter?.

We don't, as you know don't give quarterly guidance. I don't think we're calling for double-digit growth in Res. I think we are calling for sort of continue momentum of high single-digits. And then I think from the -- of an explicit, we think commercial's going to do better. And we think maybe with less confidence, refrigeration is going to do better.

And I think that's sort of the three pieces..

Okay. Good. Thanks.

Then, on the pre-builds, presumably as 13 SEER product is held by the distribution channel, or in your case by you, what does pricing look like as we get further out? What's the expectation on when would you be releasing this product? Do you plan to use the entire 18 months or do you let the market dictate on how it goes out? Then, what happens to pricing as product goes into short supply?.

Yes. I mean, in terms of how it flows out is we want to be able to compete for the full time period and make sure we have the right product to compete at entry level. So, that's what the euphemism for saying if it's 18 months we won't be able to compete for 18 months.

On pricing, I guess I'll repeat what I said earlier, which is I think it's going to play out depending on what competitors do depending on what we do, depending on how much inventory others have, how much we have, how quickly it gets sold. So, I think there'll be multiple variables at play in place.

I think as we get closer to 2015, at the December meeting, I think we'll all have a better sense maybe on what others are doing. And so will have a better sense.

That I high level I think if everyone does the same thing we're doing and has the inventory of 13ths here for 2015, I might argue that '15 looks a lot like '14 in terms of how everybody competes.

And as we get to the end of the year, as we get -- I'm sorry, as we get closer to by 2016 and people feel they have to move it then maybe there's some pressure. But I think it will sort of be a natural play up..

The independents are probably not nearly as well capitalized as you are, so I imagine they'll burn through whatever inventory they hold pretty quickly.

But the other OEs, should we expect that they're going to hold 13 SEER inventory for their distributors as well?.

Yes. That's them, that but I would guess that others will do something similar to what we're doing but I don't know that for sure..

Good, okay, great. Okay, thank you..

Your next question comes from the line of Glenn Wortman from Sidoti Company. Please go ahead..

Yes. Good morning, guys..

Hi, Glenn..

Hi, Glenn..

Todd, you just mentioned potentially high single digits sales growth for Resi in 4Q, but I think it wouldn't be quite so strong.

If I remember correctly, it's a very tough comp from a year ago? I think a lot of sales got pulled forward in 4Q a year ago because of the cooler weather?.

I think, I still went back and better that back around with our guys and we think I think I'm doing this from memory, I think we should maybe 10 million got pulled forward. And so again we -- or got -- we still think giving the momentum we're seeing or we'll still going to have a good quarter..

Okay.

And then can you just give us an update on what percentage of your North America Commercial business is retail and break that down between new replacement and then longer term, how are you thinking about that side of the business as presumably more retail shifts online?.

High level big box retail, about half of what we do. And the mix in that business has really sort of swung where it used to be 70% 80% new construction. Now, it's probably I'm doing this from memory, 50% 60% for replacement. So, we're much more exposed to replacement than we were in the past.

I think the issue around shopping online versus going to stores, I think that continues to evolve overtime. I don't think that's a step function change in our business.

But I think strategically what you've seen with our emergency replacement initiative while we're done with our school initiative, as we continue to look at other vertical markets to diversify what we're doing with retail.

But there continues to be formats that win weather it's the dollar stores, whether it's the pharmacies you want to have everything, whether its convenient stores who want to have continue to grow their footprints.

And so, I think we'll continue to find other vehicles and other formats even within broadly speaking retail, maybe as not as much big box, maybe it's medium and small box, we still think that's a great end market for us..

Yes, thanks for taking my questions..

Thanks, Glenn..

Your next question comes from the line of Josh Pokrzywinski from Buckingham Research. Please go ahead..

Hi, good morning guys. Thanks for getting me on..

Hi, Josh. I think that's the worst I've heard your name..

I keep a tally. It's not the worst on my end, but pretty close. Two quick ones.

First, on 13 SEER next year, I guess next 18 months, should we expect less battleground pricing there just given that there's scarcity value in the unit that at some level, some people in industry are going to run out sooner than others? And that maybe the interest in fighting tooth and nail on the low end is a little less prominent next year?.

I'd like to think that's the case, I'm not sure it will be.

I don't -- I think the pressure that we feel there now, I don't see it getting better than that, because again, all it typically what it takes is sort of one guy that set the price umbrella and then you could change, and so I'd like to think maybe we could get more margin on that product because it's a scarce commodity.

But it's going to be kind of how many people -- I mean honest answer fro me, depending, there is variable, how many people build, what the weather next year, what's the overall demand is like, and I think all of that will feed into equation on what happens and we'll start to see..

Got you. I know you and I go back and forth on this at every analyst day, when you roll up the implied incremental margins and it seems like the discrete items add up to more than the total.

If I'm reading you right, into next year, you still have comparable tailwinds on some of these discrete cost benefits from sourcing or I guess value engineering? Presumably price cost should be favorable, and it sounds like investment dollars should start to flatten out or maybe taper a little bit.

Should we see 2015 as a year where maybe there's a little bit more upside to that 30% incremental margin than usual?.

We will wait till December..

Fair enough..

And we'll connect all the dots..

Got you. All right, thanks guys..

Good, thanks..

And at this time, there are no further questions..

Okay. Let me share my comments here; thanks for everyone's interests, a few points to leave you with; the company set new third quarter records for total segment margin and profit. And we're on track for strong growth and record profitability for the full year.

With our view on the company's strong market position and prospects we announced plans today for new $450 million accelerated share repurchase program, starting in October. We look forward to the last quarter of 2014 and on into 2015.

All of us at Lennox are focused on strong operational performance and driving total shareholder value over the long-term. Thank you for joining us today..

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect..