Ladies and gentlemen, thank you for standing by. Welcome to the Lennox International Third Quarter 2016 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 third quarter of 2016. I'm 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. To give everyone time to ask questions during the Q&A, please limit yourself to a couple of questions or follow-ups and re-queue for any additional questions. In the earnings release we issued this morning, we have included the necessary reconciliation of the non-GAAP financial measures that will be discussed to GAAP measures. In addition all comparisons mentioned today are against the prior year quarter unless otherwise noted. You can find a direct link to the webcast of today's conference call on our website at www.lennoxinternational.com where we will also archive the webcast 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 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. The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Before I turn the call over to Todd, I would like to announce the date of our Annual Investment Community Meeting. The event will be held the morning of Wednesday, December 14 in New York City. Please mark your calendars, invitations and more details will follow. The meeting will also be webcast. Now let me turn the call over to Chairman and CEO, Todd Bluedorn.

Thanks Steve. Good morning everyone and thanks for joining us. Lennox International realized strong revenue growth in the third quarter at 6% led by 11% growth on our residential business and the company set new third quarter records for operating margin and profit. On a GAAP basis, operating income rose 24% to a third quarter record of 157 million. Non-operating margins expanded 220 basis points to a third quarter record 15.5%. Lennox International saw a strong margin expansion profit growth across all three of our businesses to set new third quarter highs for the company. Total segment profit rose 20% to a third quarter record $157 million, as total segment margin expanded 190 basis points to a third quarter record 15.6%. GAAP EPS from continuing operations was up 32% to a third quarter record of $2.33. Adjusted EPS from continuing operations was up 28% to third quarter record of $2.30. In our residential business, we set new third quarter records for sales, margin and profit. Segment profit was up 25% on the 11% revenue growth. Segment margin rose 230 basis points to 19.7%. Residential new construction revenue was up mid-teens and replacement revenue was up low double digits. Product mix was favorable with fewer low-end R22 dry charge and 13 SEER units sold than a year ago. This is partially offset by channel mix with new construction business continuing to grow faster than replacement business. We opened up 9 new Lennox PartsPlus stores in the third quarter and have opened 16 new stores year-to-date. The company now has a total of 202 stores open, and more than a quarter of our residential revenue flows to the stores. We're still planning a total of 213 stores by the end of 2016 and targeting 325 stores by the end of 2020. The…

Thank you, Todd, and good morning everyone. I'll provide some additional comments and financial details on the business segments for the quarter and full year starting with residential heating and cooling. In the third quarter, revenue from residential heating and cooling was a third quarter record $573 million which was up 11%. Volume was up 10% and pricing mix combined was up 1% on a revenue basis. Foreign exchange was neutral to revenue. Residential segment profit was a third quarter record $113 million and that was up 25%. Segment profit margin was a third quarter record 19.7% up 230 basis points. Segment profit was impacted by higher rent, higher volume, favorable price mix, lower material costs and higher factory productivity. Partial offsets included investments in SG&A, distribution expansion and other product costs. Now turning to our commercial heating and cooling business. Commercial revenue was $251 million in the third quarter which was up 2%. Volume was up 2% and pricing mix combined was flat on a revenue basis. Foreign exchange was neutral to revenue. North America commercial HVAC equipment and service revenue was up low single digits while European HVAC revenue was down low single digits. Commercial segment profit was a record $49 million and that was up 9%. Segment profit margin was a record 19.5% up 130 basis points. Segment profit was impacted by higher volume, lower material costs and lower freight costs. Partial offsets included factory productivity and other product costs and investments in SG&A. In our refrigeration segment revenues in the third quarter was $186 million and that was down 2%. Volume was down 1% and pricing mix combined was down 1% and foreign exchange was neutral to revenue. From a regional perspective, Todd addressed revenue growth and constant currency. On a reported basis South America was…

[Operator Instructions] We'll first go to the line of Jeff Hammond with KeyBanc Capital Market. Go ahead please.

Good morning, guys. Can you maybe just - incrementals continue to be strong. You bumped up your commodity number. How are you thinking about that into the fourth quarter and then just price cost into 2017? I know you announced some price increases here recently.

Yes, we think the momentum continues in fourth quarter. As we talked about before we had pretty good visibility to our commodity cost, and have hedged them out or have negotiated them out on the steel side. We saw a mix up in Resi in third quarter and we think that continues as we go in the fourth quarter. So fourth quarter setting up nicely from a margin viewpoint. For 2017 maybe I'll just answer more than you ask for - Jeff, I'll just talk about 2017 maybe a bit more broadly and cover the points you asked. We'll have the Analyst Day in December but just a couple of comments. Our end markets we had nice momentum this year and low to mid single-digit range of end market growth and while there are always risks, we don't see anything today that alters that ranges we're on 2017. In addition, we're winning in the marketplace in North America residential and commercial unitary markets, half a point or more market share gains and we think that continues as we go into '17. We've had nice material cost reduction this year, and we recently is in our current guidance raised that by another $5 million to $45 million. More typically, we're $30 million to $40 million of savings, and that's you should expect us to deliver next year. There's going to be a $5 million of benefit in 2017 from things we've announced already in Mexico. Specifically, on the question you asked for commodities, at this point, we expect copper and aluminum to be a tailwind, so a net benefit and steel will be a headwind. But prices have moved around. I mean, spot prices went for the coal rolled we buy, went spot prices - it's not all we pay, but spot prices went from about $5.25 to as high as $8.35 when we had the last call. But it's been coming back down, and now it's around $715, so down from $8.35 to $7.15. So for this headwind in steel, we think we can cover with price increases next year. We've already announced the price increase in Commercial of about 5% for next year. And as we get closer to the end of the year, we'll announce something similar in Resi. So the company has good momentum, and we expect another strong year in 2017.

Okay. And then just a quick follow-on, you said it's some softness in Europe and some of the international markets. Just talk about what's driving that and how you're thinking about that, prospectively?

In Europe, we have 40% or so of our business is what we call emerging markets, Eastern Europe, Middle East and North Africa, and so some of the headline risks, geopolitical risks in those markets are well known. And so we've had some drawback there. But overall in our core markets, France, Germany, things remain solid. And so we had a quarter where we dipped down, but we're still again, I think it's going to be a flattish market, slightly up as we go into 2017.

Thanks a lot.

We'll go next to the line of Steven Tusa with JPMorgan. Go ahead please.

Hi, guys good morning. I guess, wondering about price, you tweaked down price again this quarter. What's going on there? Is that just kind of they have the comps to play down? Maybe timing of price increases last year? I'm just curious as to why you guys are tweaking that down.

Overall, we still remain confident on price. I think it just reflects the issue or the fact that FX was less of a headwind than what we thought. So our ability to get price in Canada, we sort of came to a conclusion that when that FX has moved our way, it's hard to sort of pass that price on. And also, the commodity inputs, we continue to sort of release increasing positive news on commodities. On 14 SEER pricing, it's been expected or has been expected. And as I talked about with Jeff, we're sort of positioned to announce price increases for next year. So I wouldn't read too much into the price other than its hard when you have such a benefit from commodities and minimal headwind from FX to be too aggressive on price, and that's sort of what we're reflecting.

Got it. And what do you think the end market growth rate was in the third quarter for Resi? Because you said you took a little bit of share at 11%. What do you think the end market did?

I don't - we studied and try and specifically called that we gained share. I think what I said is, on a rolling 12-month basis and over a longer term, we're clearly gaining share. I'm not sure what their quarter is going to be. Again, it's whether you look at HARDI or whether you look at AHRI, there are sort of timing implications to both of those, so we'll see. I think we had a nice quarter.

Okay. And then anything about the heating season that's coming up in the fourth quarter that's unusual, whether it's last year's weather or regulations? You have some time these heating seasons can bump around a bit and anything unusual here in the fourth quarter to keep our minds on?

I think the only thing to keep everyone understand this last year, it was a warm fourth quarter. So if we have cooler weather or more normalized weather that should be a net positive, that's in our guide. We're off to a solid start. October's a shorter season. It's been warm, which we needed to now turn cold. But we're off to a nice start. And again, as if we can grow on a year-over-year basis, furnaces that has a positive mix impact, and again, that's in the guide, but that can help - that will help us in the fourth quarter also.

Sorry, then one more. You talked about backlog in Commercial in the past. How does the backlog look in your Commercial business?

I don't have that note in front of me. What I would say, though, is we were up low single digits in Commercial in Q3 and we had some headwind from Walmart. Walmart aside, our national account business was up double-digits and our non-national account business was up low single digits. And we expect that momentum to continue in fourth quarter. Not with Walmart, I think their travails are sort of well known but all these national account customers that we're winning are coming to fruition and we have some nice momentum as we go into Q4.

Thanks a lot guys.

Our next question will be from the line of Gautam Khanna with Cowen and Company. Go ahead please.

Yes, thanks. Good morning. I was wondering if you could talk a little bit more about your expectations for the Walmart mix next year. Is there a chance that actually improves? And when will you actually know?

We'll know a lot more as we get closer to 2017. And so we'll have to wait and see and it cuts across both our business or both our Commercial businesses both HVAC and Refrigeration. And they clearly announced on their earnings call, I believe it's their earnings call or at least on a call, that new stores were down pretty significantly. We understand that, what they're doing on. But they also announced that they were going to increase spending on CapEx for replacements, and we're still just working through with them all the details. So in December, we'll probably give a little bit more guide on what we expect for that mix of business.

Okay. And just at a high level, you gave some of the inputs for '17. Knowing what you know now with the commodity movements and the like, is there any reason that the 30% incremental framework off of what is a tough comp this year isn't in place for 2017? It sounds like many of the things you described support that 30% framework even next year.

I think plus or minus, I've said in the past that given sort of our over-delivery this year that we might have a drawback in the outlying years but still be on track for a three year 30%. I mean, where I sit today, plus or minus 30% drop through for 2017 feels pretty good.

And will you comment on '19 as well when the December guide comes around?

Yes, we will. I mean, if you play out where we are in our businesses, we're already well into the margin targets for 2018 already in 2017. So we'll touch those up in next or in December.

Thanks a lot, Todd.

We'll go next to the line of Tim Wojs with Baird. Go ahead.

Hi guys, good morning. I guess just on - I'm going to try to tie a couple of things together. I don't know if you'll answer it. But if volume trends into next year, there's not really any trend and you guys should expect to get some pricing to offset commodities, is the implication that revenue growth can accelerate in 2017?

I think it could. I mean in one way to think about it is our revenue grew 6% in third quarter that accelerated over the first half of the year. So I think when there's a more of an inflationary environment as long as the underlying demand stays in place, if we mix up, we price up and we gain volume, yes, it could. But I mean, there's a lot of cross occurrence going right now. I mean, I think that's most - our most comfortable answer for Residential. I think in the Commercial and Refrigeration end markets, there's moving pieces, including some large customers like Walmart, as well as just underlying demand. So that's a long song and dance to say I'm not going to directly answer your question other than to say, the tone of my comments for 2017 were to exhibit confidence, things are trending well, our end markets feel solid and we feel like we're gaining share.

Okay. And then just a bigger-picture question with just some of the stuff that's come out with the Montreal Protocol over the weekend, the transition away from HFCs, I mean, how do you see that impacting Lennox's business longer term?

For the broader audience, there was a conference, I think over - I think it was over the weekend in Rwanda. There was an extension of the Montreal Protocols. As you may recall, the Montreal Protocols initially had a drawdown for HCFCs, which was R-22, and 2020 was the end date. And it's basically out of our industry as of today as we sit today. And Rwanda was an extension to focus on HFC refrigerant, which is 410A, which is a major refrigerant in our product lines. I think the points I'd make was expected. We knew that we're very close to it. In fact, we're supportive of it. We think it's the right to do for the environment and quite frankly the right thing to do for our industry. We have options, technology in place that we're fine-tuning both with our refrigerant suppliers and our compressor suppliers. And then the third point is just the timing of the implementation although I'm not totally clear as we make sure we understand the total agreement as, this is really a decade off before it has any significant impact on our business. So this is mid-2020s. I think the draw down starts in 2019 overall but before it really starts to impact our businesses by mid-2020 so it’s a decade or so away and we'll be well positioned when it happens.

Okay. Thanks guys.

We'll now go to line of Ryan Merkel with William Blair. Please go ahead.

Thanks. Just want to go back to October. You said it was a good start, but was there any impact from the hurricane, any branch closures? Is it going to have any impact on October?

No. I mean there may have been a few branch closures but it won't have any impact on October. Certainly it won't have any impact on the quarter.

Right. Okay. And then new commercial construction was down in the quarter. Is there any end markets that stand out and any early thoughts on 2017?

No, nothing other than I said, I mean part of the driver I talked about Walmart, Walmart does a lot of new construction. So I think in some ways the Venn diagram overlap on my commentary on new construction. So the short answer was mainly for the biggest driver was the retail vertical. To go into 2017, we will true up the guidance but both our momentum, customers we’re winning, and sort of the call that says, we’re up low single digits this year and my commentary that as we stand now we’re pricing that continues in the next year. We'll true-up the guidance on specifically on some of sub- segments in December.

Okay. And just quickly, the pushed-out national account business in refrigeration, what caused that? Can you size it for us and does it hit in the fourth quarter, or is it next year?

I think some of it pushes into 2017. I think the point I would make would be, at least where we sit right now, we think refrigeration revenue will be up in fourth quarter and that’s after some decent comps last year fourth quarter and it was just some big business - a big piece of Walmart quite frankly that pushed out and some - and we don't see that until '17 or better stated or sort of pulled out the system maybe. And then some of the other national accounts got pushed from third to fourth quarter and we’ll see the benefit then. So I think the message I would leave you with is, at least right now we think we’re going to be up those digits or so on refrigeration revenue and again that's early in the quarter so that maybe move up or down.

Got it. Thank you.

We’ll go next to the line of Rich Kwas with Wells Fargo Securities. Go ahead please.

Good morning. This is Deepa Raghavan for Rich Kwas. North American non-residential outlook, you addressed this a little bit for your market. There is serious concern it's slowing down. You mentioned retail is slowing just given your Walmart exposure, but any other color you could share across other verticals, especially institutional or any other commercial verticals?

My sense where people are more concerned about non-commercial - non-Resi in the larger buildings for we don't play large institutional, large office buildings, large government facilities, we don't play there. I mean in our verticals so that continues to slug along, low single digits we've seen in the growth. So our non-national account business we said it was up low single digits outside of Walmart we were up nicely in national accounts. So we think the verticals that we plan building three-storey and below which is retail, which is convenience, which is grocery, which is a small medical, doc-in-a-box, which is K-12. We continue you think it feels pretty solid.

Okay. Your implied Q4 guidance range, $1.29, $1.49, just given your recent performance, it appears pretty conservative. Could you please talk to some of the concerns that you have especially to the lower end? Why would you think it could get to $1.30? We probably can appreciate some upside to it, but just curious what your puts and takes are.

I think you always had a range, we live in an uncertain world. There is always weather that's in the mix there. There is a pretty controversial presidential election going on and you’re never sure what’s going to shake out on that. I mean, look, we feel pretty I mean, my tone today supposed to reflect that it was intended to reflect confidence in the business, and we feel pretty good as we go into the year or as we go in the fourth quarter. We needed to get cold, and we need consumer confidence not to be too shaken by some of the crazy statements that are being made. But again, we feel pretty good in the fourth quarter.

All right, thank you very much.

Our next question will be from the line of Robert Barry with Susquehanna. Please go ahead.

Good morning. So 3Q revenue in Resi, was that ahead of your plan?

Yes. I mean, the hot weather helped.

Yes. How much do you think weather benefited the quarter?

This is a non-quantified answer, Robert, but...

Yes. I know it's hard to quantify but just...

I often said hot weather in the middle of a summer season could help, plus or minus, 5%, 10%. But I think if you take the average overall for the quarter because when you get into September as you're walking away from it, I'd say 3% or 4%, if I had to throw a dart.

Got you. Like three to four points of the growth.

Yes.

Got you. Okay. So maybe just following up on the last question, it sounds like with the midpoint of the revenue outlook unchanged despite this stronger result here, it's just maybe some added caution about the warm start to the quarter?

I also think it has to just do with the round on a four-year guide when you get to the end, right? So if you take three to seven and compare it to four to six, the four to six is actually a higher number than the three to seven, does that make sense just because of the realm what's underneath it.

I see. Okay. Do you think that the peak for price cost was in 2Q, or that happened this quarter?

I think it was probably the high point was Q2. I mean, just given the 100% drop through. I mean, we had a great drop through this quarter but wasn't 100%.

Yes. Given your commentary on price cost in the last few months and the fact that steel has come off, it almost sounds like if we snapped the line now, maybe price cost could even be a slight positive next year? Is that right?

I mean, if you include are you including material cost reductions or just commodities versus price?

I guess, however you want to say it, commodities versus price.

Well, if you include - if commodities versus price, I think we'll try to single that we can cover commodities with price even when it was at $8.35. And so now that it's come back, I think you can draw some conclusions so that it could positive, love to see in and material cost reduction is clearly up above and beyond that and Mexico's clearly above and beyond that.

Right, right. You referenced in an earlier question about the price outlook ticking down. I think you referenced pressure from the SEER 14 repricing. How much of a headwind is that? Is that most of the reduction?

No. I mean, I, let me say it let me restate my answer to that question in the way I meant to say it, which is sort of the tick down in our pricing guidance for the full year was really driven by the fact that commodities continue to be such a large benefit for us. We thought they would start to decrease second half of the year and that therefore, we'll be able to get more price. And then also specifically in Canada, we thought FX would be a significantly greater headwind than it's turned out to be, and we recently and we just reduced our FX headwind from $10 million to $5 million. So, when you have your costs going down, it's just harder to get price and so that's what it's reflecting. So net-net between commodities and price, we're getting $45 million of pricing and commodities. That's a pretty good number.

Got you. And maybe just lastly, the corporate line is ticking up. I guess it makes sense to invest a little more now given times are good. Could that be a nice tailwind next year? Would we expect that to kind of tick back down again in that corporate line?

Yes, I would - I'd expect it could tick down a little bit. Just a couple of things. It's investments we're making for growth and then it's when you have a nice year, a nice quarter, then it's incentive comp gets spiked up and then for the next, your zero baseline.

Right, make sense. Great, thanks congrats on the solid quarter guys.

We have a question from the line of Julian Mitchell from Credit Suisse. Please go ahead.

Thanks a lot. Yes, and this is more of a question I guess for next year in the medium term, but obviously a couple of your larger U.S. Resi HVAC competitors, there are some substantial changes going on in their production footprints in the next 18 months. I just wondered what you thought the impact of that might be on industry pricing. And obviously, you have been pretty far ahead in terms of migrating your cost base in a very efficient way. Do you think that if you see a change in industry competition, you may need an acceleration in those types of measures, or what you've enacted already should be sufficient?

I'll take the backend first. I mean, we've said – we've consistently said we're not done moving to Mexico, and we're not. And so we'll continue to - in your words, do it in an efficient way, in a thoughtful way, in a way that we don't miss customer orders. I assume the two things you're talking about is Goodman Daikin consolidating in Houston. I don't think that changes anything. I mean, we're - we do over half our Resi in Satio, South of where they are in Houston, and we'll take our cost position versus theirs. I'm not sure that helps their costs. I assume the other one is this. I watched Trump's speeches. So he's talked about carrier quite a bit moving to Mexico. So I'm well aware of that. No I don't think it will – I think they separate cost and price. I think the way I view it is let's see them executed. It's not too easy to move a factory, and their Indianapolis factory is well-run and would see they move it to Mexico and be successful at it. And if they do all that and do all that in 18 months, then they'll make more margins. I don't think they'll pass on a price, but we'll see if they can execute. And if they don't, we'll take advantage of it with share gains.

Very clear. And then my second question would just be circling back on the refrigeration segment. Obviously, it's been choppy organic trends this year quarter-to-quarter. When you think over all just medium-term growth rates, do you think of a low single digit rate is appropriate in terms of when you are thinking about your cost base? And also I think you talked about some SG&A increases in spending in refrigeration in Q3. Maybe give us some color as to where you are investing in that business as clearly there is a lot of pricing pressure.

I think we have to make significant investments or we have made significant investments in taking costs out of the business. So you may invest in SG&A, but then you drive costs and COGS other places, and that's what we've been doing. We also know that we have to make investments to serve our customers so e-commerce, online tools, things that we have to do to automate the business for our long-term market shares success. I think if you look sort of at a macro refrigeration for that markets we play at something equivalent to GDP over time. But I think there's chunkiness to our business. I mean, we have an overexposure quite frankly to Walmart, so that has some impact on any given quarter and we've especially in our Kysor/Warren business, I've talked how we're focusing on diversifying that, and we are. So I think there's some ups and downs in Refrigeration. But some of our larger Refrigeration competitors, like Dover, have talked about the pressures on the market maybe more as a macro comment, we're more concerned about the micro-winning customers, serving our customers. And if we do all that, I think we'll be fine with what the end markets are doing.

Great, thank you.

Our next question will be from the line of Joshua Pokrzywinski with Buckingham Research. Go ahead please.

Hi good morning guys. Todd, just in your earlier comments on look at share over a 12-month period, I'm wondering if you can break that out for us; how you guys have trended year to date. I think depending on whether or not you look at HARDI or HRI, it looks like, I guess just on the surface, maybe some underperformance. Is that just a year-to-date issue and if I do look back over the last two years, you feel like it's been more consistent, or anything that you can point out that would help to maybe bridge the difference?

I found the best and some of this day that you won't have, but we found the best way to look at share over time is rolling 12-month at HRI data, where you look at unit shipments. And so you take out price, you take out mix and you just look at unit shipments. And we're 12 months roll we're gaining share and we have for the last four or five years in Residential. In Commercial, we're flat to slightly down on a 12-month roll and that just reflects quite frankly the Walmart business, when you adjust for Walmart. We look good there also.

Got you. And I think, obviously, a lot of attention paid this quarter especially to the weather strength and maybe to some extent the weather weakness in 2Q. But if you had to roll it all up into I guess a non-scientific opinion, do you feel like, on net, having gone through all the season at this point that it was normal weather, just maybe a little asymmetric, or kind of a net tailwind?

I haven't…

If you want to be scientific, that's fine too.

No, I understand. I mean, I think net-net, it's like we'd rather have blistering heat in May, June and July than we would in July, August and early September, and I think that's the trade we made this year. All that being said, we'll take what we get, but if I model next year, I would think first half of the year, we have favorable comps. Third quarter, we have some headwind on a weather comp and we'll see how fourth quarter plays out.

Got you. And just one last one. More broadly, it doesn't sound like you are seeing any signs of this from a pricing perspective, but you guys have been consistent share winners really since you took over back in 2006, Todd. And I guess in that environment, especially with the industry margins here pretty high, what gives you the confidence that you don't see some of the repeats of what your competitors had done a cycle and two cycles ago in terms of ruining that margin environment through price maybe to reclaim some of that share, or do they try to reclaim share in other non-price ways?

I think it's an industry structure that's always allowed very higher margins. I mean, even in the last cycles, we weren't the margin leaders but from public documents carrier and train and Resi had high teens and unitary had similar margins. Over the long period of time, people talked about Goodman lowering prices and competing with price, but every time they sell the business, they show publicly that they have 15% operating margin so they don't know how to make money. So I mean, I don't as long as the industry structure's as it is, it's a handful of competitors selling to thousands of dealer contractor customers with consolidated supply base so we can leverage against each other, I think we continue to make good margins. Since I don't think price will be the way people will go, I think they'll try and innovate to compete against us, but I think we have made significant investments over a multiyear time period both on our product innovation and our support to the channel, think e-commerce, think LennoxPROs and the things we do online. We made significant investments in distribution over a multiyear period, and it continues. Those are investments that are hard to compete against, unless you want to do the same thing for a very long period of time and we'll see whether our competitors do that.

Got it, appreciate the color. Thanks guys.

We'll now go to the line of Shannon O'Callaghan with UBS. Go ahead please.

Good morning, guys. Maybe just on mix, the SEER shift and the Walmart stuff has been front and center. Anything else as we are thinking into 2017 that we should keep in mind in terms of mix when you look across the three businesses that's going to go either for you or against you?

Well, I think the one thing I'd think about is traditionally, what's happened is when you snap -and I think it's ties to the 14 SEER point, when you snap the line on the new minimum efficiency, you then sort of have a baseline that the premium players start to mix up from there. And I think we'll probably see some of that in '17 and beyond, all things being equal. So again, we've demonstrated that we know how to mix up in Resi, we know how to mix up in our quite frankly, in our other businesses, too, and I think it will continue in '17.

Okay. And then maybe just on this pension decision, what drove the choice to do that now and what are the mechanics from a cash flow and P&L standpoint as we look forward?

Yes. When you look the rationale behind it was once some of our tax initiatives afford us the opportunity to efficiently repatriate some cash from our international subsidiaries than we thought it was the prudent thing to do would be to contribute that to the pension plans in 2016. Along with that, we've had a continued effort to continue to de-risk our pension plan. So a combination of making that contribution along with the buyout that we announced as well will give us an effort, an opportunity to reduce our pension obligations and more effectively manage the asset liabilities going forward. So looking forward what the implications there are, our pension expense in 2016 was a little more than or just under $7 million, and we should get a little bit of a benefit as a result to making the contribution and reducing the obligation going forward. And we'll talk more about the implications of that going forward. But it should provide us a slight benefit in 2017 and beyond.

Then I'll jump in and maybe I'm the only one who has the tendency to get confused on these sort of things. I think we try to make it very clear in the press release but two actions taken, as Joe talked about. And the numbers both start with five, so it gets confusing. But one was independent of anything else was we paid down our pension with a $50 million contribution. The second item we did was we bought out people with lump-sum payments, two different actions that have two different P&L and balance sheet implications.

I mean, get it all under the rubric of derisking pension plans.

Yes. And then, Shannon, in the fourth quarter, you'll see an approximate $20 million non-cash net charge for the implication of the buyout program, that's in essence us expensing deferred losses on the pension plan.

Okay. All right, that helps. Thank you.

We have a question in queue from the line of Steven Tusa with JPMorgan. Go ahead please.

Hi guys. Just two quick follow-ups. Buyback appetite for next year, what is the current status now that you've rounded out the other program, what's the current view on buybacks?

Look, I'm going to tell you what you know, but I mean, we're not going to give a number right now. But what I would do is I'd model 2017 P&L. I'd model cash flow at 100% of net income. I would say that we're not going to de-lever and that we said we're going to be between 1.5 and 2 and so just lay it out and we'll have dividends grow with earnings. We'll do an acquisition if it makes sense, but it's been a while since we've done it. And in lieu of that, we'll do share buyback.

And one thing on to that, capital expenditures will probably be similar to what they were in 2016 as well.

Okay. And then when you guys reengineer a product and you make it smaller with less material, how do you account for that in the bridge? Is that part of the sourcing savings or does that come through in better core incremental margin because I assume that you don't give all those savings away obviously to the customers in price?

Typically, it's material cost reduction, and so we can measure...

Got it, so it's part of the initiatives?

Yes. If we can quantify it and see the target and shoot at them, we put it in MCR.

Got it. Sorry, one last one. You made some comments on non-res. Maybe if you could just talk about - do you think you have a good window to the applied area, or are you much more talking about what you are seeing in your unitary business when you talk about the different verticals or do many of these run together now with VRF, et cetera?

I was really - I may have stepped past what I should have said. Our visibility to what we do, and it's fine. I was just reacting to, I don't want to put words and I forget you asked the question. There's almost sort of breathless, non-res is trembling are you concerned? And so I assumed the question I heard there from others. And the verticals we play in, it's not trembling. And while we're always concerned, it's sort of holding up nicely.

Yes, okay. Awesome, thanks a lot.

And we'll go to the line of Walter Liptak with Seaport Global. Go ahead please.

I just got a couple of quick ones. On the sourcing engineering, you kind of touched on it with the last question, but as you think about that, what inning do you think we are with designing out costs and becoming more efficient on design of products?

Yes, I think we just continue to sort of do it. I mean, I joke with the team that I was at UTC for 15 years and sort of the cost reduction train never ever stop. I assume it continues to run even though I'm not there and so we've been at this six or seven years and it continues. I mean, we've gone much better at things like competition, analytics, our ability to model systems and quickly cut in changes where in the past, it might take a year or two a field trials. We're able to cut in changes in major components and subassemblies and new systems much quicker and look at different options. We're able to use software rather than hardware. We're able to use aluminum rather than copper. And so we're still - lots of material cost reductions still in front of us.

Okay. All right. That's great. So you haven't really called it out too much - answered quickly on the hurricane-related question, so I am reluctant to ask this, but I will anyways. What percentage of revenue is in those affected states and any thoughts on the flooding that's gone on down there? They are going to have to rebuild and there's going to be, I guess, insurance proceeds at some point. Maybe any thoughts on how that impacts 2017?

I understand the question. We haven't quantified it. So I haven't gone through and sort of asked the team in Coastal Florida and Coastal Carolina what was the impact, what's our best guess. I mean Florida is obviously a big market, Carolina is a big market. Some of it will flow through but I don't know - we're not sitting internally sort of counting all the sales, we’re going to get because of that. I think it will sort of rounding number but it's good question and you're second person to ask it, in December will have a better view on that and I think it's material will talk about it.

Okay. Fair enough. Thanks.

And we have no further questions in queue at this time.

Great thanks. A few points to leave you with. The company set new third quarter highs for margin and profit on strong revenue growth in the quarter. We are raising 2016 guidance for adjusted EPS based on the company's performance year-to-date and outlook. With continued momentum we remain focused on driving performance and closing out another record year with strong margin expansion and profit growth. Thank you all for joining us today.

Ladies and gentlemen that will conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.