Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Lennox International Second Quarter 2013 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.
Steve L. Harrison - VP, IR: Good morning. Thank you for joining us for this review of Lennox International's financial performance for the second quarter of 2013. I am here today with Chairman and CEO, Todd Bluedorn; and CFO, Joe Reitmeier. Todd will review key points on 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 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. The Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.
Now let me turn the call over to Chairman and CEO Todd Bluedorn.
Todd M. Bluedorn - Chairman and CEO, Lennox International: Thanks Steve. Good morning and thank you all for joining us. We continue to see strong momentum from our strategic initiatives and operational execution in the second quarter as the company set records for total segment profit and operating margin.
In the end market environment's still 25% to 30% below peak shipment levels for the industry.
For the company overall second quarter revenue was up 9% from the prior year quarter and total segment profit margin expense 200 basis points to a record 11.6%. Adjusted EPS from continuing operations was a record $1.31, up 34% and GAAP EPS from continuing operations was a record $1.26, up 31%.
The company's growth continuing to be led by our residential business with revenue up 16% in the second quarter driven by both replacement business and new construction. Residential profit was up 58%.
Despite weather being poor across the U.S. then in the second quarter last year replacement business revenue was up 17%. In addition to our market share gain initiatives we are seeing strong growth in replacement business as the market benefits from stabilization and unemployment and a general improvement in consumer confidence, home values, and existing home sales. Replacement accounts for more than 75% of our residential business.
We also continue to capitalize on growth in residential new construction with revenue up 13%. This is a traditional strength for Lennox and we continue to be well-positioned in this market with more than half of the top 50 builders using Lennox, many on an exclusive basis.
In addition to capturing price across our residential business, we also benefited from an improved product mix as replacements grew even faster than the new construction in the second quarter.
14 plus SEER shipments were up 4 points to 36% of corn product shipments in the quarter. The first increase in this measure for a second quarter since 2010. With minimum efficiency 13 SEER equipment shipments R-22 equipment continued to trend down.
In our commercial business revenue and profit were up 4% growth was led by North America commercial equipment and services while Europe remained soft and was down in the quarter.
Our Lennox national account service business was especially strong on the growth in the national wide services. In refrigeration profit was up 22% in the second quarter. Revenue was flat on the timing of national account businesses in North America and soft economic conditions in Europe. While growth was strong in South America and Asia Pacific.
South America revenue was up more than 20%, in Asia Pacific, Australia revenue was up high single digits as we continue to expand refrigerant sales in our wholesale business there. In China revenue was up more than 30%.
Before I turn it over to Joe let me update you on a couple of our strategic initiatives in residential we added 12 more Lennox PartsPlus stores to our distribution network in the second quarter, and are on track with plans to add a total of 28 of these wholesale stores this year.
We now have 127 PartsPlus stores and they continue to be one of the keys to the success we are seeing in our residential business.
Within these stores about three-quarter of the sales are HVAC equipment and one quarter of sales are parts and supplies. In commercial our new Raider product line of rooftops focused on the replacement market came out in March. This market is a sizable opportunity for Lennox since it has not been an area of our traditional focus for us compared to our success in plant replacement and commercial new construction.
While with Raider we now have the right product to sell in the segment of the market that prioritizes upfront cost and while it is early the launch is going well. With 27 commercial, regional, and local distribution centers at the end of the second quarter, we continue to invest in distribution to provide a high level of same day, next day delivery that customers require for emergency replacement. We are on track with our plants that have at least 32 commercial distribution centers in place by the end of 2013.
With a solid balance sheet, we are well-positioned to continue to make transformational investments in our businesses. From expanding our residential and commercial distribution networks to introducing new products to attack major market opportunities to continuing to lead the field in energy-efficiency and product innovation like our new 25 SEER air conditioners and heat pumps.
Beyond investing in the business to drive growth, we also continue to return cash to shareholders. In the second quarter, we increased our dividend 20% and we purchased $33 million of stock toward our plan of $100 million in buybacks this year. We plan to continue to grow the dividend over time with earnings, as well as continue to repurchase stock. Currently, we have $338 million remaining under our existing repurchase authorization.
Now, I'll turn it over to Joe.
Joseph W. Reitmeier - EVP and CFO, Lennox International Inc.: Thank you, Todd. Good morning everyone. I'll provide some additional financial details and comments on the business segments for the quarter, starting with Residential Heating & Cooling. In the second quarter, revenue from Residential Heating & Cooling was $476 million, up 16%. Currency was neutral, volume was up 13% and combined price and mix was up 3% with both price up and mix up.
Residential profit in the second quarter was $ 66 million, up 58%. Segment profit margin was a second quarter record 13.9%, up 370 basis points from the prior year quarter. Residential results were positively impacted by higher volume, favorable price and mix, and lower material costs with partial offsets from higher SG&A and investments in our distribution expansion.
Commercial Heating & Cooling segment revenue in the second quarter was $230 million, up 4%. Currency was neutral, volume was up 3% and combined price and mix was up 1%. North America commercial equipment and service revenue was up high single digits in the quarter led by growth in the emergency replacement market and in Lennox National Account Services. Europe Commercial HVAC revenue was down high single digits at constant currency.
Commercial segment profit in the second quarter was a second quarter record, $35 million, up 4%. Segment profit margin was 15.1%, up 10 basis points from the prior year quarter and commercial results were positively impacted by higher volume, favorable price and mix, and lower material costs, with partial offsets from higher SG&A and investments and distribution expansion.
In our Refrigeration segment, revenue in the second quarter was $207 million, flat with the prior year quarter. Currency was neutral, volume was down 2%, and combined price and mix was up 2%. From a regional perspective in constant currency, South America was up more than 20%; Asia-Pacific was up high single digits; and North America and Europe were down mid-single digits.
Segment profit was a record $26 million, up 22% from the prior year quarter. Segment profit margin was a second quarter record 12.4%, up 220 basis points. Refrigeration results were positively impacted by favorable price and mix, and lower material costs with a partial offset from lower volume and higher SG&A.
Looking at special items after-tax in the second quarter, the Company had $1.6 million charge for restructuring activities, $500,000 for the net change in unrealized losses and open futures contracts and $100,000 for other items. SG&A was $151 million in second quarter, up from $131 million in the prior year quarter on higher selling expenses and higher incentive compensation expense.
Corporate expense was $21 million in the second quarter up from $15 million in the prior year quarter.
Cash from operations was $49 million in the second quarter, compared to $24 million in the prior year quarter. Capital spending was $11 million in the second quarter, compared to $10 million in the prior quarter and free cash flow in the quarter was $38 million, compared to $14 million in the second quarter a year ago.
Total debt was $537 million and our debt to EBITDA ratio was 1.7 ending the quarter within our targeted range of 1 to 2 times.
Cash and cash equivalents were $45 million at the end of June before I turn over to Q&A I'll review our updated outlook for 2013. We now expect North American residential HVAC shipments to be up high single digits for the industry for the full year, up from our prior assumption of low single-digit growth.
We still anticipate North America commercial unitary shipments to be up low single digits for the industry in 2013 and we continue to expect our Europe HVAC and refrigeration market shipments to be down low single digits for the full year.
Based on the company's first half performance and outlook on the second half our guidance for 2013 revenue growth is now 6% to 8% up from the prior year range of 3% to 6%. Foreign exchange is still expected to be neutral for the full year.
With residential product mix up slightly in the first half we no longer expect the $10 million of negative mix for the full year. We are now assuming $5 million of negative residential mix for 2013, with the rest of the summer still to go and in the transition in the beginning season.
We continue to be on track for approximately $30 million in material cost savings through a combination of sourcing initiatives and engineering led cost reductions. We expect about two-thirds of this benefit in the second half of the year. We now expect a $30 million benefit from price and lower commodity cost this year versus our prior assumption of $20 million. We expect about 45% of this benefit to be in the second half of the year.
For corporate expenses, we're increasing our guidance from $70 million to approximately $85 for the full year on higher incentive compensation for both our annual and long-term incentive programs to reflect the Company's financial performance for these periods. We are raising our 2013 guidance for adjusted EPS from continuing operations from a range of $3.25 to $3.55 to a new range of $3.45 to $3.75. GAAP EPS from continuing operations guidance incorporates the $0.07 difference in the first half and moves to a range of $3.38 to $3.68.
To wrap up with few other guidance points for 2013, we currently expect net interest expense of about $15 million for the full year. Our tax rate is still expected to be between 34% and 35% on a full year basis and our fully diluted share comp for 2013 overall is now expected to be approximately 51 million shares. Finally for capital expending, we continue to expect approximately $60 million in 2013.
With that, let's go to Q&A.
Operator: Sanjay Shrestha, Lazard Capital.
Aditya Satghare - Lazard Capital Markets: It's (Aditya Satghare) from Lazard Capital Markets. I've had two questions here. Could you elaborate on your Parts Plus strategy and how we should think about the total contribution of the expanded distribution channel into both overall growth and market share gain?
Todd M. Bluedorn - Chairman and CEO, Lennox International: When we initially launched this initiative, three or four years ago, we talked about sort of half the benefit of a $25 million 2013 savings from logistics costs and the balance $12.5 million, $13 million from share gains that we got from the distribution network. I think the way I'd calibrate it is on the logistics side, sort of the cost savings. I think we're tracking about where we thought we would be given – adjusting for the volume that we have, and I think on market share gains, we're probably actually doing even a little bit better. When I think about the momentum of our residential business and sort of the implied market share gains, I think a big driver of that is the Parts Plus business or the Parts Plus investments.
Aditya Satghare - Lazard Capital Markets: My second question was on mix. Could you kind of help us understand what kind of feedback you're getting from your distribution channel in terms of this mix (diversity) as you said, 14 plus we're going north of 35%. What sort of feedback are getting in terms of driving this mix shift here?
Todd M. Bluedorn - Chairman and CEO, Lennox International: I think – I'll even broaden the question a little bit and just talk about mix for the quarter in our resi business. I mean, one driver of the positive mix was add-on and replacement was stronger than new construction and it wasn't that new construction was down. It was AOR was so strong for us, up 17%, so that helped. Then the mix up within add-on and replacement where we mixed up in the share levels, I think that reflects sort of the strengthening of the American consumer and the consumer confidence in existing home values and some of the other metrics that we've talked about that – talking in business jargon, if people were managing for NPV, they'll make the investment in the higher share product in many locations in the country and then people were managing for cash flow, they resisted it. I also think, quite frankly, it's after two or three years of mix down, we were due for a quarter where the market started to change. Comps has got a little easier too I think.
Operator: Richard Kwas, Wells Fargo Securities.
Richard Kwas - Wells Fargo Securities: Could you just detail as the quarter played out what you saw, particularly in the replacement side? I know back in April, you said that Q2 got off to a pretty good start, but sounds like you got some incremental momentum as the quarter went on.
Todd M. Bluedorn - Chairman and CEO, Lennox International: It was pretty solid the entire time, Rich, to be honest with you. I mean it was the – in the quarter, it started at – overall, for the quarter while it was warm historically, it was down 10% in cooling degree days, and so it was cooler than it was a year ago. I think maybe the only way it sort of helped us at the end in June was the last week or two of June was warm even on a year-over-year basis. April-May was cooler, but we still had good momentum and so I think during the full quarter we saw it.
Richard Kwas - Wells Fargo Securities: Then Q3, as you mentioned some pretty warm weather here, I assume it's gotten off to a pretty good start. But any comments there would be helpful.
Todd M. Bluedorn - Chairman and CEO, Lennox International: Again, just to sort of calibrate a little bit on the weather, because it's all relative on a year-over-year basis and we had a really hot summer last year. So through mid-July, cooling degree days are actually down 15% in the U.S. and Canada, so actually cooler than a year ago which is hard to imagine but it's true. All that being said, we are off to a solid start in July in Residential and the momentum that we saw in second quarter has – broadly speaking, has continued in our Commercial business as we've seen some choppiness in shipment timing with grocery customers. We have pretty solid backlog and order rates in our commercial businesses, both refrigeration and commercial going into third quarter.
Richard Kwas - Wells Fargo Securities: Then just when you look at M&A in the balance sheet right now anything changed in the last few months whether it's properties that are out there or just the attractiveness of it at this point?
Todd M. Bluedorn - Chairman and CEO, Lennox International: I don't think anything's changed – it's just sort of the constant thing that we've said for several years now which is we'll invest in Kysor/Warren like acquisitions to build out our refrigeration business and commercial service business and those are sort of $100 million, $150 million deals like Kysor/Warren is sort of the way I'd think about it. And if a property opened in North America HVAC in the unitary business either residential or commercial, we think we could create value by consolidating the industry and if something opened up and valuations are right and we created some value by doing it, we would want to do that.
Operator: Jeffrey Hammond, KeyBanc Capital Markets.
Jeffrey Hammond - KeyBanc Capital Markets: Just, I mean great margin improvement in residential and refrigeration. I just wanted to get a better sense of how much of that you think is execution and mix and how much was maybe just a favorable variance on price cost and some of the deflation we are seeing?
Todd M. Bluedorn - Chairman and CEO, Lennox International: We spiked out on a full year basis that we are now calling for $30 million tailwind from pricing commodities and about half of that’s commodities. So sort of order of magnitude $15 million on a full year basis on lower commodities up from order of magnitude to $10 million that we were calling out before. So, there is some benefit from lower commodities, but I would tell you that really the driver of the quarter and the margin expansion across all our businesses was what we’re doing on material cost reduction both the design out which we sort of called out as increasingly important. As well as continue to move to within China and within Asia to lower cost sources. Positive mix up and price up and so you are going to define that whether that’s sustainable how you want to, but I would argue the mix up. In residential we launched the 25 SEER product along with icomfort Harmony which is new control system and we’re calling it the ultimate home comfort system and I think sort of having a pinnacle premium product helps with the mix up. And then our refrigeration business lots of good work on the cost side on sort of flat revenue globally really good work on the cost side. I think the margin expansion and then the final piece obviously is volume leverage that we've said all along that if we could get some volume flow across all across all our businesses including residential that we will grow SG&A at half the rate and sort of get some volume leverage and I think we saw good volume leverage in the quarter also.
Jeffrey Hammond - KeyBanc Capital Markets: And then, just on mix, I think you called our 36% for this quarter and maybe that was versus 32%, a year ago, can you give us a sense of what that was at peak and what you think normal should be?
Todd M. Bluedorn - Chairman and CEO, Lennox International: We’re going to the archives to see if we can.
Jeffrey Hammond - KeyBanc Capital Markets: And just maybe what you’re looking for that, can – did you say $85 million for corporate expense?
Todd M. Bluedorn - Chairman and CEO, Lennox International: Yes. In second quarter of 2010 as I quickly look back and I think that was the peak of sort of the mix up, second quarter of 2010, we were 45% and I think, well we've called out back in 2011 when mix went down, that we said 2012 would be worse, and then we called it – we're calling mix will be a little worse this year, but then I think it starts to go back up to the more historic levels of 40%, 45%.
Jeffrey Hammond - KeyBanc Capital Markets: Just final question. So, you mentioned Refrigeration and Commercial backlog – pretty good, I mean, should we see an acceleration in some of those growth rates into the second half?
Todd M. Bluedorn - Chairman and CEO, Lennox International: Not to parse the words too much. I think I meant to use the word solid. I don't know if I used the word good. I meant to say they were solid going into the third quarter. I think short answer is yes. I think what we've talked about was some national accounts pushing out to the second half of the year and that's still our sort of view on things.
Operator: Keith Hughes, SunTrust.
Keith Hughes - SunTrust Robinson Humphrey: Question on Commercial in Europe. It was up in the first quarter, down in the second. Is there any sort of trend you can read there or is this kind of volatile results you expect to see moving forward?
Todd M. Bluedorn - Chairman and CEO, Lennox International: I think no and unfair characterization. I don't think there's any major trend. I think sort of our sense is what others are sensing that, Europe's hit bottom and sort of bubbling back up, albeit at a slow pace. I think we have some large project business especially in Eastern Europe and some of that – the timing sort of got pushed out the second half of the year. We're not concerned about the European business, now that the markets have solidified a bit. So, I just think it's timing and we'll see better growth rate, we hope, second half of the year.
Keith Hughes - SunTrust Robinson Humphrey: The U.S. business Commercial business – North America did fantastic in the quarter. Was there some timing of shipments there or is that just a strong demand that should continue in the second half?
Todd M. Bluedorn - Chairman and CEO, Lennox International: I think it's solid demand. I also think we gained share. I think the investments that we're making on emergency replacement, both on now up to 27 distribution points on our way to 32 along with the new Raider product, I think, paid dividends during the first half of the year and I think that's where we saw the growth was in the emergency replacement business.
Operator: Robert Wertheimer, Vertical Research.
Robert Wertheimer - Vertical Research Partners: So great results. As I looking at it, right, you gained share and price and cost all at once, are you seeing the industry getting any more disciplined to the extent you're able to comment or do you think it's more that you're – as you mentioned on the cost out, et cetera, outpacing enable to keep sort of all three things going.
Todd M. Bluedorn - Chairman and CEO, Lennox International: I think the industry on price has always been reasonably disciplined. I mean I think it's a consolidated competitor-based with somewhat profit motives to ourselves and we've, I think, after sort of some shocks up and down and sideways around commodities that everyone understands that even if commodities may be trending down over the last five or six months, we're one sort of mill shutting down or copper spike up from it going back up. So when you announce price increases, you have to realize it, almost irregardless what happens with commodities and I think that's how we're behaving. My sense is that's how others are behaving.
Robert Wertheimer - Vertical Research Partners: I don't think you mentioned – within the revenue business, are you able to have a sense of planned replacement versus emergency replacement? You know you mentioned the mix was good. I assume that correlates. I'm just curious if that's been strong in the cooling degree days down. It sounds like people are doing more planned, but what's your entitlement?
Todd M. Bluedorn - Chairman and CEO, Lennox International: I do slightly different words. I think just very little planned replacement in residential. I mean there are some when people are selling homes that, they are told that they have to replace them. But we think 85%, 90% of units that are sold happen when the unit breaks that’s just the only way people are going to do it. I think some of the things that when I look at the quarter one quarter isn’t a trend. But we are encouraged by what we saw in the sense that weather, degree cooling days on a year-over-year basis was down 10% but our replacement revenue was up 17% and some of that was share gains. But a large part of that was market growth and the pre-conditions that we've talked about for pent-up demand over the years about stabilization and unemployment and consumer confidence and housing values and existing home values. I think a lot of those are heading in the right direction. The other metric that we've talked about is six quarters in a row with second quarter, the growth rate of residential equipment as a percentage has been greater than replacement parts as a percentage. And that was after a couple of years of it being just the opposite. So while one quarter is not a trend, in second quarter I think we saw some things move in the right direction in the add-on replacement market in North America vis-a-vis pent up demand.
Operator: Glenn Wortman, Sidoti & Company.
Glenn Wortman - Sidoti & Company: Just one question. Just had quite strong margin performance in residential in the quarter does this change at all your long term view for the margin potential of that business?
Todd M. Bluedorn - Chairman and CEO, Lennox International: I think you take it and then you move on Glenn. So I mean I think we said 12 to 14 for residential. I guess 2015 targets and someone just pointed to me 11 to 14 instead of 12 to 14 but 11 to 14 again we played out and see what happens, but I think, I'd underline what you said, we are very encouraged by the strong margin performance of our resi business and in second quarter.
Operator: Steve Tusa, JPMorgan.
Stephen Tusa - JPMorgan: Can you clarify how much the $30 million in favorable price cost is realized in the first half and versus the second half, and then, how are you positioned assuming kind of a stable environment for the carryover into the '14?
Todd M. Bluedorn - Chairman and CEO, Lennox International: We saw about 55% of the $30 million first half and we'll see the balance 45% second half. I think on the commodity side, we all know copper's trended down during the second half of the year. So, I think that helps us if it stays there as we go into 2014. I think steel's more complicated, steel prices have spiked up over the last month or so not for any demand reasons but on the supply side. So, I think as we get closer to 2014, when we give our guidance in December, we'll have a better view, but I think a big variable's going to be what steel does, at least on a commodity side.
Stephen Tusa - JPMorgan: On the new systems, can you maybe comment on the related revenue pull through from 410A? I mean, I would assume that, that's already kind of in the run rate, but was there anything interesting there from indoor versus outdoor units, that kind of thing?
Todd M. Bluedorn - Chairman and CEO, Lennox International: Are you about R22 or are you…?
Stephen Tusa - JPMorgan: Just the 410A and any benefits in the new systems obviously I assume that's in the run rate, but is there anything, was there any kind of benefit to revenues from that, what's kind of the new systems now the replacement is up?
Todd M. Bluedorn - Chairman and CEO, Lennox International: You mean the attachment rate, yeah, short answer is yeah, I mean the things that some of our competitors talk about, same thing we're seeing that when R22 – I'll sort of say it in the negative and get to the positive. Our 22% was down to about 10% of our second quarter sales, where it was about 15%, last year. So, our 22% trended down in the quarter, which is good news. Then, when that happens, obviously you're not just selling a condensing unit, you're selling an indoor unit and an outdoor unit at the same time and I think, obviously part of that that was a part of our 17% revenue up on the add-on and replacement also.
Stephen Tusa - JPMorgan: Just one last question, I guess, you guys talked about being interested in the resi, perhaps a resi acquisition if it's out there and it's reasonable. I mean, is the center view basically that, look you guys have all this footprint now set up and you can just kind of take the brand and whatever comes with that and run the volume through your distribution channel there, manufacturing, consolidation, obviously that's probably out there, I mean, maybe just talk about a couple of the positive things that could come that would make you guys the better equipped and maybe some others out there?
Todd M. Bluedorn - Chairman and CEO, Lennox International: I think the synergies would be less on distribution and consolidation. At least my sense, and certainly my experience in the industry is, you have to tread very lightly and so, you can imagine who we might – who the combination might be with, but all our competitors have very good distribution channels. So, I think we respect that and leverage that and work with the channels as they are. I think the more traditional synergies that you would see would be on the factory side, on material purchase side. I think investments in R&D and – not only in R&D, but, when we think about launching new products, really sort the expense isn't in the engineering. It's in tooling up your factories, and the ability to sort of tool up factories and our product, different brands through the same factory and run three shifts and sort of leverage all that investment. I think you could get cost out that way. Then I think there would be some SG&A, but I think on the distribution side, I'd view it as we run our Lennox products or our Lennox distribution channel and our Allied through our Allied channels and if we got additional brands, we'd run them through their channels.
Stephen Tusa - JPMorgan: Right, and the Parts Plus investment, that's leveling off now right? Is there a new investment there or that's pretty much where you want it to be?
Todd M. Bluedorn - Chairman and CEO, Lennox International: No, I think we're going to continue to go right. We've said that – I'm doing this now from memory. I don't have all – someone's pointing something to me. We ended the quarter at 127 and we're going to be at 136 by the end of the year and then we're targeting to be – by 2016, 215 I think is what we talked about in December. So, we think this continues to grow.
Operator: Josh Pokrzywinski, MKM Partners.
Josh Pokrzywinski - MKM Partners: Just a follow-up quickly on Steve's question. Thinking about your cost base and how you've tuned it over the past couple of years, I think low cost sourcing loan is probably something around the $100 million. How would you handicap Lennox's starting point on that, if you were to come across another property in the space? Do you view that as a good run rate for what you could do elsewhere? I presume you guys have characterized yourself as pretty close to best in class now, but were you just so far behind the curve? There was more to do or is that probably a good way to think about other properties in the space as well?
Todd M. Bluedorn - Chairman and CEO, Lennox International: I think (they'll have some) answers, as much as I'd like to try and say it the other way around, I think we lagged our competitors. I mean our larger international competitors, Carrier, Trane, even York. When you are doing business in China like they are, in Asia like they are, you just had a better sense of what the supply base will look like. So I think a lot of that was catching up, by the way that’s good because I think otherwise if everybody's going on a cost curve together you tend to go to your customers and I think we've got to keep a lot of that. But I think there are some opportunities around things that we've done on sourcing new compression in China or excuse me in Asia. Some of the things we've done in sourcing new motors in China. Depending on who you buy depending on are they suppliers who are either getting volume leverage with those suppliers or introducing them to those suppliers. So I think, I don’t know if we are best-in-class but I think we are pretty good at supply chain and I think depending on who we, but so are some of our competitors – accommodation was with.
Josh Pokrzywinski - MKM Partners: Then I guess on the sourcing do you feel like you guys have kind of capped out or reach critical mass at that point or is there a potential to continue making progress in 2014?
Todd M. Bluedorn - Chairman and CEO, Lennox International: I think the momentum continues. I mean I think what we find is that. As we've talked about we've evolved from sort of the obvious things have moved to China sourcing to designing our product costs and we are increasingly now sort of doing a little bit of both which is moving within China or Asia to different suppliers or moving west within China to lower cost sources. But continue to drive out, design our cost, really focusing on platform redesigns. So I think momentum continues into 2014 and 2015. I think it's now become a way of life here and we'll continue to do it.
Josh Pokrzywinski - MKM Partners: Then just one follow-up if I could help on package guidance a little bit. It does seem like historically you guys have gotten 55%, 60% of your earnings in the second half and that still seems to be the case here even at the high end. But I hear you talking about a lot of these tailwinds being much more back-end loaded, I mean are there anything – is there anything out there in the way of incentive comp or investment spending that you would look to accelerate at the high end of demand that would buffer some of that or how should we think about it?
Todd M. Bluedorn - Chairman and CEO, Lennox International: Yeah, I think that’s true, I think there are variable expenses that if revenue is strong or earnings is strong second half of the year relative to what we forecast there'll be some buffer. I also think the guidance and I don’t think I've ever raised guidance $0.20 since I have been here so I'm not going to be bashful about raising it $0.20. But that being said…
Josh Pokrzywinski - MKM Partners: You haven’t gotten very good tailwinds either?
Todd M. Bluedorn - Chairman and CEO, Lennox International: It’s fair enough, but and it all feels a bit fragile out there I'll be honest with you I mean we like what we see in second quarter, we like the momentum we’re getting, we like all that and we forecasted that and rolled that into our guidance. But when you think about the U.S. economy and you think about the global economy there is still lot of risk out there and there is still a fiscal situation in our country and in Europe that needs to be sorted out. It's uncertain what’s going to happen with China and the impact that will have on North America markets. So, there are still uncertainties, there is interest rates going up. So, while we’re confident its cautious confidence about the end-markets and I think that’s reflected in the guidance.
Operator: Nigel Coe, Morgan Stanley.
Mike - Morgan Stanley: It’s actually (Mike) standing for Nigel. I guess related to last question on the uncertainty, could you maybe comment on where you saw channel inventories kind of trend throughout the quarter and where it stands now?
Todd M. Bluedorn - Chairman and CEO, Lennox International: Yeah, I mean as you probably know I mean 80% of our product we sell through our own distribution network and so, they're fine, and on the independent, our Allied brands, we sell through independent, I think distributors, I would characterize as cautious, be optimistic. We had a strong quarter in our allied business, and so I think a lot of that inventory's probably sold through. So, I think I'd sort of characterize it, at least from our side, inventory's not an issue.
Mike - Morgan Stanley: Then on just capacity, vis-a-vis the strong growth from resi, are you seeing any bottlenecks at this point? What's your sense on capacity and the need to hire going forward?
Todd M. Bluedorn - Chairman and CEO, Lennox International: Yeah, I don't think – we surely haven't missed any deliveries because of capacity. Again in our business, given the huge seasonality of the res business, you have to place your bets in many ways, a couple of months earlier, as you build up inventory for the season, and so we sent strong signals to our supply base, that's the other constraint, that you've got to make sure you have all the right components and I think we planned right and our supply base supported us and we ramped up when we needed to, so I think we're sort of – manufacturing guys are almost ready to start thinking about furnaces – that's sort of how it works, as you get into July, August, you start to transition even though we're still selling a lot of air conditioners from a production view point, we're thinking about furnaces and so, I think we've done a good job managing supply chain in the market.
Operator: Walt Liptak, Global Hunter.
Walter Liptak - Global Hunter Securities: Thanks, with Global Hunter. Good quarter. Just two follow-up questions. One on the 14 plus, what was the number in the first quarter if you were at 36% this quarter?
Joseph W. Reitmeier - EVP and CFO, Lennox International Inc.: Our guys are again, going through the – they're going through the glasses to pull up the number. It was 42% in the first quarter, but again that's a little, it's a bit – not misleading, but the first quarter 14 plus number, matters less than the summer time, I mean summer time is where the big volume's at.
Walter Liptak - Global Hunter Securities: To just kind of see if I can drill down on the pricing to – with the price cost being more favorable, at what point, these are all price increases that I presume, that at what point does the industry start looking at commodities prices and maybe start to think about bringing prices down or even we're at this price level and we just go up from here?
Todd M. Bluedorn - Chairman and CEO, Lennox International: What experience of the industry has been is, when the commodities spike up, you can never raise price as fast enough to capture it, and so there's a year or two which we bled pretty hard and I assume our competitors did on negative commodity price relationship, and then as commodities start to trend down, you sort of keep the prices where they're at and sort of inch along a couple of points a year and then you gain it back, but over the full commodity cycle, you're sort of whole or maybe up 1% or 2% price versus commodity. So, I think that's what we're seeing now and so, we have no expectations that we're going to sort of lower price because copper's down today because we're cognizant that copper could spike up tomorrow and then it would take us 18 months to sort of drive price again through the system in a way that we could hang on to customers. So, I think you just sort of inch price along, commodities up go up or down and sometimes you're doing well, sometimes you're not doing well, but over the full cycle, you break about even and I think that's what we've done and what the industry has done.
Operator: We have no further questions.
Todd M. Bluedorn - Chairman and CEO, Lennox International: Great thanks. A few points to leave you all with. As you saw we raised our revenue and EPS guidance for the full year following the company's strong performance in the second quarter and July's off to a solid start. Looking ahead there is a long way to go for full HVAC recovery with industry shipments still 25% to 30% below peak levels. As markets continue to recover the company is strategically well-positioned to drive our financial performance to continuing new heights as we continue to execute on our key initiatives. I want to thank everyone for joining us.
Operator: Ladies and gentlemen that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.