Ladies and gentlemen, thank you for standing by. Welcome to the Lennox International Third Quarter 2011 Earnings Conference Call. At the request of your host, all lines are in a listen-only mode. There will be a question-and-answer session at the end of the presentation. As a reminder, this conference is being recorded. I’d 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 2011. I’m here today with Todd Bluedorn, CEO, and Bob Hau, CFO. Todd will review the key points on the quarter and year, and Bob will take you through the company’s financial performance and outlook. In the earnings release we issued this morning, we have included the necessary reconciliation of the financial metrics that will be discussed to GAAP measures. You can find a direct link to the webcast of today’s conference call on our corporate website at www.lennoxinternational.com. We will archive the webcast on that site and make it available for replay. I would like to remind everyone that in the course of this call to give you a better understanding of our operations, we will be making certain forward-looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Lennox International’s publicly available filings with the SEC. Lennox disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Now, let me turn to call over to CEO Todd Bluedorn.

Thanks, Steve. Good morning and thank you all for joining us. Let me take you through a few key points on the third quarter, and then Bob will discuss the financial results in detail and the outlook. Total company revenue was up 13% in the quarter including the Kysor/Warren acquisition. Excluding the acquisition and cost and currency, revenue was up 2%. We saw volume growth across all our equipment businesses, with commercial and refrigeration also benefiting from improved price and mix. Residential at favorable pricing also, but again, saw a mix down compared to a year ago. In our service business, residential revenue is down while commercial revenue was up for the quarter. EBIT margin at 7.4% was down 140 basis points. Margin was impacted primarily by higher raw and component commodity cost as well as lower mix. These were partially offset by a favorable price and a two-point improvement in SG&A as a percentage of sales. Adjusted EPS from continuing operations was $0.80 versus $0.83 in the third quarter a year ago. GAAP EPS from continuing operations is $0.64 versus $0.76 in the prior year quarter. Looking at each business in the third quarter, let me start with residential. The uncertain consumer environment continued in the third quarter as reflected in consumer confidence, which dropped from 59 in July to 45 in August and stayed there in September. However, weather helped in the quarter. In July, weather was both warmer than normal and warmer than last year. For the third quarter overall, cooling degree days were above normal, but in line with the third quarter last year. Residential revenue was up slightly at constant currency in the third quarter and segment margin was down 280 basis points to 7.7%. While volume and mix were up, the dynamics we have…

Thank you, Todd. Good morning, everyone. Let me provide you some additional commentary in the business segments for the quarter starting with residential heating and cooling. In the third quarter, revenue from residential heating and cooling was $374 million, up 1%. Buying was up 4% mixed with down 5% and price was up 1%. Currency had a one-point positive impact. Residential segment profit was $29 million compared to $39 million in the prior year quarter. Segment profit margin was 7.7% compared to 10.5% in the third quarter last year. Results were primarily impacted by lower mix and higher commodity cost with offsets from higher volume, price realization and lower SG&A. Turning to our commercial unit cooling business, in the third quarter, commercial revenue was $199 million, up 13%. Buying was up 3% and price and mix were up 7%. Currency had a three-point positive impact to revenue growth. Our North American commercial HVAC revenue was up mid-teens and Europe commercial HVAC revenue was up low double digits. Commercial segment profit was $29 million, up 15% from $25 million in the prior year quarter. Segment profit margin was 14.4%, up 30 basis points from 14.1% in the third quarter last year. Results were primarily impacted by higher volume, favorable price and mix and lower SG&A with an offset from higher commodity cost. Moving to our service experts business. In the third quarter, revenue was $145 million, down 4%. Volume was down 7% and price and mix were up 2%. Currency had a one-point positive impact. Segment profit was $5 million compared to $6 million in the prior year quarter and segment profit margin was 3.7% compared to 4.0% in the third quarter a year ago. Results were primarily impacted by lower residential volume with offsets from strong growth and commercial services…

Operator, before we go to Q&A, I’ve been informed that I got so excited about the stock repurchase plan that I misstated. So let me reread from my script the final sentence. Given the recent stock price and the company strong cash generation, we are increasing our share repurchase plans from more than $100 million to a target of a $120 million for the full year. So our target is now $120 million versus $100 million. Okay, operator, let’s go to Q&A please.

Thank you and we’ll go to Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Hi, good morning guys.

Hi, good morning guys.

Hi, Jeff.

Good morning, Jeff.

Good color on the initial thoughts on ’12 on cost savings and you made a comment, what you’ve announced thus far, are you contemplating additional actions that would get announced? And maybe just a comment on price cost as we’ve seen commodities dip down here.

Good color on the initial thoughts on ’12 on cost savings and you made a comment, what you’ve announced thus far, are you contemplating additional actions that would get announced? And maybe just a comment on price cost as we’ve seen commodities dip down here.

Well, let me first talk about commodities and then I’ll talk about the cost side of the equation. As you suggested in your comments, we’ve seen commodity prices have eased some from earlier this year but have been moving around quite a bit. And as you know, we systematically hedged copper and aluminum. Such at 12 months out, we’re already around 50% hedged. Effectively, this creates a six-month (inaudible) lag between spot prices when we start to see the impact on our P&L. Right now, our hedge positions on aluminum-copper are about 10% to 20% higher than a year ago. So, sort of where we stand out of what we already have hedged, it’s 10% to 20% higher than where stood in 2010 going into 2011. Steel is the other major commodity and while prices are down some, there’s still uncertainty. For us steel is priced on a one quarter lag, the CRU spot price with the discount applied off that. So, there’s lots of movement and uncertainty around commodities even now for next year. Regarding price over the years, we’ve been good about capturing price against commodity headwinds. And as our standard practice, we’ll update you with specific comments in December at the analyst day. And in terms of what we done on the cost side of the equation, we’ve reduced headcount at corporate and in the business units. We’ve moved some air handler production from our Marshalltown, Iowa facility to lower labor cost facility in South Carolina. South Carolina already had cheap metal capacity, so it made most sense to get it there more quickly for the savings. And directly answering your question, we continue to queue up more projects as we see how markets develop ahead of the 2012 selling season. So, we continue to build scenarios and we’ll adjust our cost structure as needed. Jeffrey Hammond – KeyBanc Capital Markets: Okay. But it seems like if you were kind of net headwind this year of 15 million on price cost that you would at least catch that up in the 12th. Just based on additional price actions and then stabilization in commodities?

Short answer is if commodities stayed where we’re at today, that’s a true statement. Jeffrey Hammond – KeyBanc Capital Markets: Okay. Okay, great. And then, can you just comment on Kysor/Warren? It seems like if you pull that out, the profitability is still pretty anemic there. Is that meeting expectations? And I think you have given some guidance into ’12 on accretion. How is that lining up versus plans?

We’re executing against our synergy plan and feel very good about the acquisition. We expect solid margin improvement as we exit this year and still expect $0.12 of accretion in 2012. Jeffrey Hammond – KeyBanc Capital Markets: Okay, great. And then, maybe just a couple of finer point questions. Where do you think inventories are at from your perspective and in your system? And if you can give us an ending share count for the quarter.

I let Bob get in on share account and make sure he has – do you know any share count?

(inaudible)

Okay, I’ll answer the first one. This is for the rest on the call, Jeff, because you know this. We’re 80% one step where we sell directly to dealers and then 20% we sell through independent distribution. But independent distribution, I think for the 20%, we sell our Allied brands, it’s pretty lean. I think independent distributors have been cautious given all the macroeconomic uncertainty. On our one step, we have minimal inventory with dealers. We think we stock the shelves. We just need some cold weather to set in to help drive furnace sales. But, when the weather changes and the market picks up, the inventory will flow very quickly through our channel. Jeffrey Hammond – KeyBanc Capital Markets: Okay.

And Jeff, we closed our third quarter about 51.6 million shares end the period. And as I mentioned in the script, full year, fully diluted will be at 53.5. Jeffrey Hammond – KeyBanc Capital Markets: Okay. Thanks guys.

Thanks, Jeff.

Thank you. We’ll go the line of Josh Pokrzywinski with MKM Partners. Please go ahead. Josh Pokrzywinski – MKM Partners: Hi. Good morning guys.

Hi, Josh.

Hi, Josh. Josh Pokrzywinski – MKM Partners: Just looking for an update. The last quarter, you gave some helpful commentary on kind of the incoming order rate, not the numbers specifically, but kind of the bio language on commercial orders and where backlog was. If we could get an update, that would be helpful.

Commercial and refrigeration had a strong Q3 as you saw the numbers. But we’ve seen a bit of a slowdown on orders as you’d expect given the macroeconomic environment and uncertainty. Europe and mainly in the U.S., Europe has been resilient and while we continue to watch for any softening, we haven’t seen it yet. The slower orders in commercial and refrigeration are in part while we lowered our revenue guidance range for the year.

Got you. And if we could shift over to the furnace expectations, I know the new product line, I guess, the fuller line this year was kind of a source of early optimism heading in the fourth quarter. I would imagine you’ve seen some dealer loading there at this point. Any kind of first update or first view on how that has trended versus early expectations? Or is it just too soon to tell?

I think that’s what you said. It’s too early to tell. I mean, only in the last week or so, as the weather started to turn cold in many parts of the country, as the weather continues to turn cold, we’ll have a better read of the furnace sell-through, because you’re right, I mean, dealers have bought it and I think our dealers are excited by it. But we’ll have to see how it sells through to really get a read on what it means for Q4. Josh Pokrzywinski – MKM Partners: Okay. And then, just one final one on R-22. Obviously, one of your competitors, similarly-sized competitors was out of that market this year and was looking to get back in next year. Any way calibrate how far above kind of normal share levels you’ve been on the low end, I guess, the 13 is your product that might be at risk next year should share kind of normalize with another competitor stepping in?

I don’t think we would be the ones who would lose share as train gets more aggressive on R-22. My guess is there’s others on the entry level who had more of a share gain at that position than we have. And R-22 play has been more with our Allied brands than with our Lennox brands. And so, I think that’s a segment of the market we’ll continue to compete and then do well. Josh Pokrzywinski – MKM Partners: All right. Understood. Thanks guys.

Thanks, Josh.

Thank you. And we’ll go to the line of Robert Barry with UBS. Please go ahead. Robert Barry – UBS: Hey, guys, good morning.

Hey, Robert.

Good morning, Robert. Robert Barry – UBS: Did you mention that price was a benefit of 1% in (inaudible)?

Just check our notes and make sure what we said. Short answer is yes. That’s what we said. Robert Barry – UBS: (inaudible) first a couple of quarters that had been backing higher than that? So, I was curious what happened there.

I think it was the timing of the price increases in terms of when we announced and what we’re seeing and how slow for P&L. Robert Barry – UBS: (inaudible) price increase would be less impactful.

No. I mean, I don’t think I have any color to show. The pressure on pricing really hasn’t changed quarter-to-quarter and just sort of the timing of when we sell to builders, when we sell to contractors, the size of the dealer that we’re selling to. So, net-net, I think we’re comfortable where pricing was for the quarter. Robert Barry – UBS: Okay. On commercial, it was like you had a pretty significant (inaudible). Could you just explain what is (inaudible)?

You’re breaking up on me, Robert. And so, I’ll attempt to answer the question and maybe get on another phone and call back. And I think the question was, “Why are we seeing such good price and price mix in commercial?” And I think it reflects a couple of things. It reflects the success that we’re seeing in our premium products, Energence and Strategos. It also has to do with the mix of national accounts that we have in any given quarter. And it reflects the pricing actions that we’ve taken earlier in the year. So, where in resi, we have pricing increases at the end of last year and our commercial business, we had some pretty significant price increases partway through first quarter and we at the time said in first quarter and second quarter that we start to see that price flow through second half of the year and we’re in fact seeing that.

And we’ll go to the line of Adam Samuelson with Goldman Sachs, please go ahead. Adam Samuelson – Goldman Sachs: Hi. Yes, good morning.

Hi, Adam. Adam Samuelson – Goldman Sachs: I wanted to ask on Kysor/Warren. The required revenue is a little bit higher than we had modeled. What was the underlying organic growth in that business in the quarter? I think you’ve seen Hoffman [ph] struggle as they’ve worked through the divestiture there and just wondering kind of how you look at share on the refrigeration side?

Yes, I don’t have the third quarter numbers for last year. That was back when I managed to walk on to – clearly, we’re seeing some good adjustments from their new product line and we continue to see future potential growth as they expand that into their full product spectrum. Adam Samuelson – Goldman Sachs: Okay. Okay. And then, in the commercial business, I think you talked about slowing it in US orders. I know it’s early for 2012 but you’ve seen some larger customers including Wal-Mart say their US CapEx is going to be down next year. How do you think about the environment for 2012 even at least at the high level?

I think it’s what I said earlier. There’s lots of moving pieces both in res and commercial and we’ll give guidance in December of what we’re saying. I think we’re doing the right things in terms of taking cost out for any scenario. We think we have the right product for winning accounts. We think we’re winning in the market place in commercial and refrigeration. As you well know, the Christmas selling season has a huge impact on our retail customers. And so, I think there are still some variables still to be played out for us to really have a clear view on 12 markets. Adam Samuelson – Goldman Sachs: Okay, that’s fair. And then just finally for me, the cut for CapEx for the year, what was the driver and so far maybe some of the longer-term programs that you’ve been investing in kind of maybe where was that cut coming from?

I think it’s more just the timing of implementation. It wasn’t an explicit cut to generate cash. It’s just sort of the timing of implementation of projects. Adam Samuelson – Goldman Sachs: Okay. All right. Thanks very much.

Thanks.

I think we’ll go to line of Rich Kwas with Wells Fargo Securities. Please go ahead. Rich Kwas – Wells Fargo Securities: Hi, guys. Good morning.

Hi, Rich. How are you? Rich Kwas – Wells Fargo Securities: Fine. As we think about 2012 just from a mixed standpoint on the resi side, R-22 at 20% this quarter flat with Q2, do you think that’s the high watermark? Given the competitive landscape right now, do you think that mix goes up meaningfully from here?

I would expect year-over-year comparison on the mix side to be less difficult in 2012 than what we saw in 2011. We’re approaching R-22. That’s going to be here for some time and we’re taking actions to compete there. As you said, it was about 20% of our revenue. Again, it’s early. I think it’s probably going to be greater next year than it was this year, but not to step up that we saw from ’10 to ’11. So I’m not sure where the high watermark, but it’s going to be crusting soon if I have to bet now. Rich Kwas – Wells Fargo Securities: Any sense that the economy getting better that kind of holds that growth? What’s the biggest trigger in terms of the mix on that front that you’re doing?

I think the biggest trigger, medium-term, it will be as you suggest the economy. It’s hard to imagine that in 2012 there will be a meaningful move in the economy to sort of change the dynamic we’ve seen. But I think it’s the economy changing. I think the closer we get to the efficiency changes in units, which is 2014, that that will help alleviate R-22 also. Rich Kwas – Wells Fargo Securities: Okay. And then on the commodity front, I think last quarter you talked about some price increases from overseas suppliers affecting your increase in the commodity headwind from last quarter. Where are you with that? Is that fully implemented and do you expect to see any more headwind on that front as you move out over the next few quarters?

For 2011, we sort of reiterated the guidance we gave in terms of the headwinds of commodities of $60 million to $65 million and then pricing at 50 and the material cost reduction at 25. And then the only guidance we’ve given so far on ’12 is what I said in the script that we’re gaining confidence in the engineering-led cost reduction programs and we’re confident that in 2012 we can get similar order of magnitude material cost reduction savings that we have had over the last few years. But again, I’ll state the obvious, commodity cost, they were out and continue to go down. That gives us obviously leverage over our supply base, and we’ll take advantage of it. Rich Kwas – Wells Fargo Securities: Okay. All right. Thank you.

And we’ll go to the line of Keith Hughes with SunTrust. Please go ahead. Keith Hughes – SunTrust Robinson Humphrey: Thank you. Give us some sort of feel on the margin difference between the dry shift units and a traditional 13 SEER with 410A versus the higher? Just any kind of number is really helpful.

The margin percentage isn’t so much different on a 13 SEER R-22 and a 13 SEER 410A. I think the big difference is the dollar value is lower. And then when you sell 410A, you often bring the air coil and the furnace with it. So, I think it’s both an unbundling of the system sell as well as the way the pricing of the R-22 unit has been positioned in the market by the low-end competitors. It’s sold at a dollar discount versus a 410A. Keith Hughes – SunTrust Robinson Humphrey: So, are you getting substantial less margin just selling the R-22 universe, the furnace and the other components?

If I understood the question, we miss out on – we sell our R-22 units. It sells for about...

About $1,800.

About $1,500, $1,800. Where if we sell 1410A system, it’s $5,000, $6,000 when we put the whole system in. Condensing unit to condensing unit, R-22 is a lower price than what the 410A is. Keith Hughes – SunTrust Robinson Humphrey: Because your revenue numbers in residential are not all that bad, but I would expect that the math you just gave me to be much worse because it is the margin is where you’re getting it. That’s where I’m confused.

Yes, it’s the margin where we’re getting it. Keith Hughes – SunTrust Robinson Humphrey: So, why are you getting hit so much more on the margin? It seems like we would see more hit on the revenue line.

The reason we’re getting hit on the margin is our furnaces (inaudible). We on a year-over-year basis are down significantly in margin mix because a year ago, it’s not only that we not have R-22 but we also had the $1,500 tax credit. And so, it’s a combination of the two. And so, a year ago, we were able to replace the 410A system, used $1,500 tax credit to sell off to our most premium furnace in an essence, say, you can get a furnace, premium furnace for half price. This year, we’re not getting the tag-along furnace and we’re certainly not getting as many premium furnaces. So, it’s a mix down on our furnace lines as well as a margin down on our R-22 conducting units. Keith Hughes – SunTrust Robinson Humphrey: Okay. So, going in to ’12, boring any changes to the economy and things to that nature, the mix as you read off between 14 SEER and above and dry shift, those are bases we’re going to stay about the same and maybe few points need a direction. But there’s nothing else out there that’s going to cause that to move down, correct?

I don’t think there are the structural changes that we saw from ’10 to ’11, at least not that we can see now, the $1,500 tax credit R-22. I think the changes will sort of be the incremental changes. There’s a $500 tax credit that goes away next year. We don’t think that will have the same impact as the 1,500 gone from 1,500 to 500. There’s the point that was made earlier that the fact that at least one large competitor who didn’t play this year in R-22, we’ll sort of focus on it. But I don’t think there’s the big structural changes or systematic shocks that we saw this year. Keith Hughes – SunTrust Robinson Humphrey: Okay. Thank you.

Okay.

Thank you. (Operator instructions) And we’ll go to the line of Steve Tusa with JP Morgan. Please go ahead. Steve Tusa – JP Morgan: Hi, good morning.

Hey, Steve.

Hi, Steve. Steve Cuso – JP Morgan: Just to follow on to the question about that competitor. I’m just curious to the mechanics of how one kind of re-enters or gets into the R-22 market. From your perspective, how easy is it to kind of flip the switch? I mean, is it a function of educating and putting right the incentive in place for the dealers? How hard is that to do? Because I presume you guys earlier in the year weren’t planning on being the big player on R-22, but you’ve clearly taken or at least stem some of the share that your light competitor did. So, I’m just curious as to strategically how easy that is.

I don’t want to play trains hand for them, but I think the way we thought about it what’s better stated. I think that you have to have the right channel to sell it or it helps to have the right channel to sell it. And so, premium dealers, high-end dealers aren’t trained or aren’t sort of skewed that direction you spent years, decades training them system sell, premium sell. That’s how we levered our Allied distribution network to do it. And so, like I said earlier, we’re 20% overall but in Allied it’s a much higher percentage. And so, we levered the distribution channel that’s focused on entry level product. I don’t know how much of that train has and whether they’re going to be able to make the switch. But my guess is they’ll find a way to sell R-22 into the market. Steve Tusa – JP Morgan: Right. So your Allied brand, how much was Allied up in the quarter?

Allied was up – what we’ve talked about was up double digits in condensing units and down low single digits overall in furnaces and that was both brands together. Steve Tusa – JP Morgan: What does this R-22 result this year kind of tell you guys about the value proposition that the industry continue to try and push towards higher SEER products? I assume you need to have a good feed through service experts, so you must have a good re-entry into the consumer behavior around compressor repairs in R-22. I mean, how worried are you guys about the dynamic that this is just forever kind of a value industry? And there may be some structural headwind even on the pent-up side as you push SEERS and equipment prices higher, system prices higher.

I don’t think it’s changed forever. I mean forever is a long time. For 30 years, this has been an industry where we’ve had multiple tiers and you’ve been able to differentiate around consumer requirements. Whether it’s historically been efficiency where it’s increasingly becoming controls and the quality of comfort that’s produced, I don’t think that’s changed. There’s lots of businesses where you continue to differentiate. I think what it’s thought us, I think it’s thought a lot of people that when you’re in the third or fourth year of a stark economic turndown and the consumer is as fragile as they are now, they’ll look to avoid spending money. But we’re still able to differentiate on the premium side, we’re still able to get money for premium product, and as the economy starts to heal, I think that we’ll even see more of that happening. So I don’t think the business is broken. I think it’s shifted down given the economic environment. But it’s incumbent upon us to innovate and differentiate so consumers want to spend the incremental money, because it will either save their operating costs or allow them to have a cooling experience that they like, and we think we can get paid for that. Steve Tusa – JP Morgan: Right. And clearly stuff is still breaking obviously. So it’s not as if there’s not this pool of aging units out there, it seems like, given that R-22 has jumped so much this year.

Right. Now there’s still pent-up demand being created and there’s still a bio wave coming, and when that bio wave comes, we think we’re going to be in a position, because the climate would have turned that we’re going to mix up like we always have. And it’s not like the industry has. Steve Tusa – JP Morgan: Right. And then any to calibrate expectations for the fourth quarter? It was a good quarter with the end of tax credit for some and anything you want to just let us know about how you see the fourth quarter right now, incremental weakness anywhere, any (inaudible) around the fourth quarter?

I mean it’s really too early to tell just on the stance. I mean we lowered our revenue guidance for the full year. That reflects, as I said earlier, some of the weak order rates we saw on commercial and refrigeration. On the resi side, we have to have the weather turn cold and see the sell-through. I mean we’ve done a good job sort of positioning independent distributors and then our dealers, and we just have to see how the weather shakes out. But again, as we all know, our resi business is a two-week lead time and up to 40% of the volumes in the month of December. So we still have a lot in front of us. Steve Tusa – JP Morgan: Sure. Okay. Thanks a lot.

Good. Thanks, Steve.

Thank you. And I’ll turn it back to Todd.

Okay. Thanks, everyone. I want to leave you with a couple of key points. Our commercial and refrigeration businesses have been sold, with good shipment growth and favorable price and mix. Residential has seen good shipment growth and favorable price, but mix continues to be down compared to a year ago. In response, the company has taken aggressive cost reduction measures and continues to engage in new productivity and growth initiatives for 2011 and 2012. The final point is that we will continue to use our strong balance sheet to grow the business as well as return cash to shareholders through a competitive dividend and share repurchases, including a target of $120 million in 2011. Thank you for joining us today.

Thank you 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.